Taking a risk

The London Borough of Harrow's decision to take the procurement aspects of the LAML case to the Supreme Court has paid off, with a ruling that will give a boost to shared services arrangements. Michael Green, who advised the council, explains why it matters.

After a four year battle for a definitive approach to local authorities’ collective procurement, Harrow London Borough Council has finally got its answer from the courts – and it is a positive one. The Supreme Court settled the ongoing saga of Harrow LBC (Brent LBC and LAML] v Risk Management Partners Ltd [2011] in a landmark judgment that reversed the rulings of the High Court and Court of Appeal before it. The ruling confirmed the extent to which public sector bodies need comply with EU Directives and Regulations when placing contracts for goods and services and held that LAML was exempt from these regulations.

The Supreme Court’s unanimous judgment ruled that a contract does not need to go out to tender if that contract is with an entity which is owned by the authority or a collection of authorities and concerned only with delivering services to the local authority members – notwithstanding the Public Procurement Regulations 2006.

This ruling is significant since it permits authorities to avoid procurement laws altogether, subject to certain conditions. Further, the judgment stated that the contracting authority can be one of several members of the entity/company and so for these purposes, collective control will suffice and no one authority need have a controlling interest.

Facts of the case

Harrow London Borough, acting in collaboration with a number of other local authorities, had established and capitalised a mutual insurance company (LAML). The mutual was formed in an attempt to reduce the cost of the authorities’ insurance premiums and pool risk management strategies to try and improve on claims records. Harrow then awarded insurance contracts to the newly formed mutual without running any procurement exercise.

The respondent, Risk Management Partners, brought proceedings against Brent LBC, one of the other founder authorities, to which Harrow were joined. RMP claimed no local government act powers existed to form a mutual such as this (the Vires case) and that it had to put such contracts for insurance out to the market to tender (the Procurement case). RMP contended, among other things, that this constituted a breach of the Public Procurement Regulations 2006 that require that large contracts for goods or services should be subjected to competitive tender.

The High Court and Court of Appeal found in favour of Risk Management Partners in 2009 in a widely-debated ruling which led to the government enacting fresh legislation to deal with the Vires issue by granting specific legislative power to public sector bodies to form and participate in mutual insurance companies (section 34 of the Local Democracy, Economic Development and Construction Act 2009). This has not yet been brought into force, however, and we may have to wait for the Localism Bill to introduce the new general power of competence for local authorities.

Shortly before the case came before the Supreme Court, Brent settled with Risk Management Partners leaving Harrow to forge ahead. With the new legislation pending, allowing the LAML model in future, Harrow proceeded with the Procurement appeal only.

Issues

Harrow LBC contended that it fell out with the Regulations due to the Teckal exemption, established by the EU case of Teckal srl v. Comune di Viano and Azienda Gas-Acqua Consorziale (AGAC) di Reggio Emilia (C-107/98) [1999] ECR I-8121 heard in the European Court of Justice and several subsequent ECJ cases which supported Harrow’s position. The Teckal exemption means that in specific circumstances, a public body can award a contract to another entity without having to run a procurement exercise.

The Supreme Court considered five main issues: whether the Teckal exemption applied to the UK Public Procurement Regulations 2006; whether it applied to contracts of insurance; whether an authority would need to exercise control over the separate entity by itself or whether collective control was sufficient (this was at the heart of the case); whether on the facts Harrow had exercised such control to meet the first Teckal condition; and whether the entity, in this case LAML (the Mutual) performed the main part of its functions in carrying out the services placed with it for its members. The Court also ruled that a referral to the ECJ for determination was not required as the ECJ case law is sufficiently clear on the points in issue already.

Harrow contended that Teckal and other ECJ case law permitted local authorities cooperating to provide themselves with, in this case, insurance coverage to exclude themselves from the obligations conferred by the EU Procurement Directive and the Public Procurement Regulations 2006. Previously in both the High Court and the Court of Appeal, it was held that the Teckal exemption did apply to the UK procurement regulations and insurance contracts, but that the LAML arrangement had failed to pass the control test, with the lower courts deciding that collectively control was not sufficient and in fact there was insufficient control by each individual member to fall within the Teckal exemption. The Supreme Court disagreed with this view unanimously agreeing that the arrangement in this case did satisfy the Teckal test.

Lord Hope stated that there was nothing to suggest that the UK regulations departed from the EU Directive on procurement; and also that the exemption did apply to contracts of insurance. On the contentious issue of the control test, Lord Hope explained that a contracting authority can exercise control over the contractor alone or together with other authorities and that the LAML arrangement did allow local authorities to have collective control over the mutual. He went on to then hold on the facts that LAML fit within this exemption and its function was only to serve its members.

The ruling provides certainty on how the Procurement Regulations will be applied, or not, where a local authority or group of authorities are carrying out their functions through a separate body which is concerned only with providing its authority members with a service. The Supreme Court decided that the EU directive on procurement was never intended to protect the private sector and this ruling could now pave the way for public sector bodies to join together and deliver shared services in a wider context.

Ramifications

At a time when local authorities are struggling to implement the government public sector spending cuts and need to look at ways to save money fast, this judgment offers hope for the public sector as a whole as its facts are not limited only to insurance. This offers authorities the opportunity to avoid running what can be costly and time-consuming procurement exercises to deliver their services.

The judgment may also advance the ability of public sector bodies to cooperate and deliver shared services without the need to run formal procurement exercises in many spheres, providing the statutory powers exist to permit the same; and subject to the authority observing the rules laid down in Teckal and other cases – including this one.

Michael Green is a partner at law firm Weightmans LLP and represented Harrow LBC and LAML throughout the case. He can be contacted by email at This email address is being protected from spambots. You need JavaScript enabled to view it..