Out-Law News 4 min. read
10 Jun 2009, 8:00 am
Yesterday’s ruling comes despite the fact that stated Government policy is for authorities to join together to share the provision of services. The case was taken by Risk Management Partners (RMP) against one of the authorities, Brent.
Ten London local authorities joined together to form London Authorities Mutual Ltd (LAML) to provide insurance in relation to property, terrorism and liability risks. It began operating in 2007.
RMP had participated in the original tender process for the provision of insurance in seven categories to Brent. The authority then said that it would be giving its business in six categories to LAML, which had not participated in the tendering process.
RMP sued, claiming that Brent had acted beyond the powers granted to it by Parliament, and that it had acted in breach of public procurement regulations.
The Court of Appeal has said that Brent has acted beyond the authority given to it by the Local Government Acts of 1972 and 2000, and that its behaviour did breach procurement rules.
LAML said that it would immediately cease its underwriting activities. Chairman Nathan Elvery said that the ruling undermined Government policy.
"Central government's strategy for local government is to deliver efficiencies and savings through innovation, shared working and utilising its enhanced powers," he said. "This judgment takes us back to the late eighties and there will be enhanced nervousness about the extent of local authorities' powers – the very thing the introduction of wellbeing powers were intended to resolve."
The Court's ruling, though, explicitly said that Government policy was not its business. Lord Justice Hughes said in his ruling that: "I have reached these conclusions without recourse to the various explanatory notes and ministerial guidance to which we were referred. Those … cannot relieve the court of its duty itself to construe legislation."
Lord Justice Moore-Bick agreed. "I have reservations about the extent to which an Explanatory Memorandum published by a minister or government department can properly be used as an aid to the interpretation of the legislation to which it refers … it is an important constitutional principle … that the judiciary, not the executive, decide the meaning and effect of legislation," he said in his ruling.
Brent had relied on provisions in local government legislation that gave councils powers to act when the aim was to promote the "well-being" of the area. The Court of Appeal said, though, that this did not extend to what was a money-saving exercise.
"While the setting up of a company may, subject to limitations, come within the well-being power, I doubt whether participation in an insurance company with a view to seeking cheaper insurance premiums, circumscribed as it would be by those limitations, does so," said Lord Justice Pill in his ruling.
"I am not persuaded that participation in an insurance enterprise which involves giving guarantees to the company and assuming what could be very substantial liabilities to other local authorities comes within the well-being power. That power does not extend to a power to enter into the complex and somewhat speculative attempt to save money which is the mainspring of the LAML arrangement," he said.
Brent had argued that it was exempt from some of the demands of procurement legislation because it had control over LAML, according to a precedent set by the European Court of Justice in a case involving a company called Teckal.
A 'Teckal exception' exists where a company is controlled by a local authority. It exempts that authority from some of the demands of procurement law on the basis that the authority is effectively asking itself to carry out work on its own behalf.
The Court of Appeal, though, said that Brent did not exercise enough control over LAML to benefit from that exemption.
"The power of a majority of participating members to call a general meeting, taken with the power to direct the Board by special resolution by a 75% majority, even taken with other factors relied on by [Brent], does not amount to control over LAML as contemplated in [the] Teckal [case]," said Lord Justice Pill in his ruling.
"Having regard both to its structure and to the nature of its operations … I do not think that LAML can be regarded as effectively a department of each of the participating local authorities and for those reasons I do not think that the Teckal exception can be relied on to excuse a failure to comply with the Regulations," said Lord Justice Moore-Bick in his judgment.
Ruth Smith, an expert in procurement law at Pinsent Masons, the law firm behind OUT-LAW.COM, said that the ruling will be a blow for councils planning similar ventures to LAML.
"This ruling will dismay all those local authorities that had been hoping to make significant efficiency savings using a similar business model," she said. "Although the Court of Appeal recognises that English law permits use of the Teckal exception, it is also clear that English courts will take a narrow interpretation to when the exception will apply."
LAML's Elvery said that the ruling leaves local in doubt about the extent of their powers, and said that Government should clarify exactly what they can and cannot do in the realms of shared services and procurement.
"Contrary to assurances we have received from central government that the well-being powers were sufficient for our purposes, it is now time for them to do what they said they would do and urgently clarify the powers that are available to local authorities. It is important that the uncertainties that this judgment has introduced are eradicated once and for all," he said.
