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High Court ruling on the establishment of a local
government mutual insurance company and associated procurement
issues
3 June 2008
In R (on the application of Risk Management Partners Ltd) v
Brent London Borough Council and others, the High Court has
issued a very significant judgment concerning the powers of Local
Authorities to establish mutual insurance companies, the direct
award of contracts to in-house companies and liability and delay in
relation to an action for breach of the Public Contracts
Regulations 2006 (the “Regulations”). In a judgment that was handed
down in two parts, the High Court considered, in the first part,
whether Local Authorities had the power to establish a mutual
insurance company to provide insurance services to its members. In
the second part of its judgment it considered whether the direct
award of a contract to that company without complying with the
requirements of the Regulations was permissible pursuant to the
exemption first laid down by the ECJ in Teckal (Case C-107/98)
(the “Teckal Exemption”).
Background
In February 2007 Brent London Borough Council (the “Council”)
issued an invitation to tender for an insurance services contract
(divided into seven lots). In response to the Council’s invitation
Risk Management Partners (RMP) tendered for the services and its
bid appeared to be the most financially advantageous offer received
by the Council. However, prior to award of the contract the Council
abandoned the award procedure for six of the lots and instead
directly awarded the contract to London Authorities Mutual Limited
(LAML) of which the Council was a participating member, but which
had taken no part in the tender process. RMP proceeded to bring a
claim against the Council on two distinct grounds:
- The Council’s participation in LAML was outside its powers
granted by Parliament or, in the alternative, was not duly
authorised; and
- The Council’s award of the contract was in breach of the
requirements of the Public Contracts Regulations 2006
Right to participate in LAML
With regard to (1), the Court held that, for the purposes of
section 111 of the Local Government Act 1972, although the
obtaining of insurance was clearly incidental to the functions of a
Local Authority the provision of insurance to others was not. In
becoming a participating member of LAML, the Council became
involved in the provision of insurance and was effectively giving
financial assistance to LAML to do what the Council could not
lawfully do. This fell outside the scope of section 111 of the
Local Government Act 1972. An insurance contract was also held to
fall outside the scope of section 1 of the Local Government
(Contracts) Act 1997.
The Court also ruled on the use of the so-called “well-being”
power in section 2 of the Local Government Act 2000. The Court
found that the Council in its decision making process had failed to
consider that participation in LAML was likely to promote the
economic, social or environmental well-being of its area as
provided for under section 2. The minutes of the relevant Executive
meeting of the Council and the resolution passed at that meeting
did not mention this consideration at all. The length of that
meeting, and the substantial business transacted at it, also
suggested that the Council failed to properly consider this
consideration as a basis for its decision. The well-being power did
not authorise the Council to do whatever it considered likely to
promote its own economic well-being. The Council, therefore, could
not justify its actions simply by reason of the fact that it
expected to save money on insurance premiums by becoming a member
of LAML.
However, the Court ruled that this did not entail that no local
authority had the right to participate in a company such as LAML. A
Local Authority could enter into an insurance contract with such a
company and could provide financial assistance to the company
pursuant to section 2 of the Local Government Act 2000. In the
present case, the Council had simply failed to demonstrate that it
was properly acting pursuant to the well being power provided for
in section 2.
Breach of procurement rules
The second part of RMP’s claim was that the Council had breached
the Regulations, in particular its duties to act in a
non-discriminatory and transparent way, its obligation to comply
with the procurement procedures, its obligation to award contracts
to the most economically advantageous or lowest price bid, and its
obligation to issue a contract award notice. The Council did not
deny that it had not complied with the requirements of the
Regulations as it sought to rely upon the Teckal Exemption as a
justification for not following the requirements for set out in the
Regulations. The Teckal Exemption provides that a formal tender
procedure is not necessary, even where two contracting entities are
legally distinct from each other, where the following two
conditions are satisfied:
- The public authority (or authorities) exercises over the other
contracting party a control which is similar to that which it
exercises over its own departments; and
- The other contracting party must carry out the essential part
of its activities with the controlling public authority or
authorities
The Court did not agree with RMP’s argument that the Teckal
Exemption was not part of English law. It confirmed (albeit
with some hesitation) that the Teckal Exemption for
in-house awards was indeed part of English Law and was applicable
to contracts of insurance.
The Judge re-iterated various principles that derived from
previous case law and highlighted that Teckal was to be
restrictively applied and that participation by private interests
in such a company was incompatible with the exemption. Also, mere
shareholding or participation in a company, although indicative,
was not sufficient in demonstrating the required amount of control
necessary.
The Judge carried out a detailed analysis as to whether the
first condition was satisfied in the present case. He ignored the
regulatory requirements imposed on LAML as these would equally
apply to a truly in-house insurer that was not separately
incorporated. He considered, in some detail, whether the
relationship between the Council and LAML was a relationship where
the Council exercises a control similar to that which it exercises
over its own internal departments. After consideration of LAML’s
constitution he reviewed how the day-to-day management of the
company was carried out and considered that its management was
handled relatively independently. It seems to have been
acknowledged by the participant members of LAML that they did not
have insurance expertise and accordingly they had employed a
private management company to run the company for them. The Judge
decided that the involvement of a private company, employed to
manage LAML, pointed against the Council being able to demonstrate
the first condition of the Teckal Exemption. The
participating members of the company held the power to give
directions to the board who could in turn give directions to the
managing company but they were not really involved in the general
administration of the business at all.
Most importantly, the contractual provisions contained in the
Articles of Association and other documents suggested a degree of
independence that was inconsistent with the first condition. One
example considered by the Judge was that the participating members
of LAML were to be excluded from the Board’s consideration of their
insurance claims. Another was that the Articles conferred power on
the Board to terminate the membership of any participating member
if, in its judgment, it deemed such continuing membership to be
undesirable. The Judge also considered that the insurance policy
terms were typical of those issued by wholly independent insurers
to their insured and were of normal commercial form, therefore were
inconsistent with the requirements of the first condition of the
exemption.
Unfortunately, as the Judge concluded that the first condition
of Teckal had not been satisfied, he did not consider the
application of the second condition. Public authorities are
therefore forced to refer to previous case law in ensuring
compliance with this condition of the exemption. It is worth
remembering that in the Tragsa case (Case C-295/05) it was
deemed sufficient that 90% of the company’s activities were carried
out with its controlling public authorities.
The Judge also considered liability and damages under section
47(1(a) of the Regulations. The Regulations state that proceedings
must generally be brought within three months from the date when
grounds for the bringing of proceedings first arose. The Judge held
that these grounds first arose on the date that the Council first
breached the Regulations which was the date upon which the Council
awarded the contract to LAML and not when RMP first became aware
that the Council may have breached its duties under the
Regulations. On this basis, as RMP commenced proceedings within the
specified time limit, it followed that RMP would be entitled to
damages for the Council’s breach of the Regulations.
Conclusion
This case serves as a reminder to public authorities of the
nature of the well being power and the need to ensure that
decisions are not ultra vires and that a full and clear decision
making process is gone through. However, it has confirmed that
public authorities are, at least in principle, authorised to
establish companies such as LAML.
The case also re-emphasises the importance of ensuring that
where a public authority seeks to establish a
Teckal–compliant company, the contractual documents
reflect the degree of control that is necessary in order for the
first condition of Teckal to be satisfied. From a
contracting authority perspective it is positive to note that the
High Court has confirmed that the Teckal exemption is
alive and part of English law. However, the case may raise concerns
for contracting authorities as it is one of the first cases in
which damages under the Regulations have been awarded. The Council
and LAML have both sought and obtained leave to appeal the
judgment.
For more information or advice, please contact Sharon
Jones.
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