Practical Law

For the latest position on Teckal in the UK following the Supreme Court decsion in LAML see David’s latest post.

The continuing innovation in local government service delivery encouraged by the current Government means that the “in-house” procurement exemption established in Teckal is becoming more and more important.

The Teckal exemption applies where a contracting authority (the cases all involve local and regional government bodies but it seems safe to extend the principle) contracts with a legally distinct entity – usually this will be a company that the authority has set up, either on its own or in concert with others (see below),– to provide services.  The conditions for the exemption are that:

• The service provider carries out the principal part of its activities with the authority.
• The authority exercises the same kind of control over the service provider as it does over its own departments.
• There is no private sector ownership of the service provider nor any intention that there should be any.

Where these conditions are met, the arrangement will not be treated as a contract for the purposes of the procurement regime, rather it will be deemed to be an in-house administrative arrangement.

The Risk Management Partners v LB Brent judgment earlier this year (see Legal Update) was the first UK case to consider the Teckal exemption in detail. It set out an excellent survey of the cases from Teckal to the present, and made some very helpful comments on the principle – it’s highly recommended reading.

Two of the key points confirmed by the judgement were that:

• The Teckal in-house exemption applies in English law.  That may seem obvious, but it was questioned on the basis of drafting differences in the Directive and the Regulations.
• An authority does not have to hold all of the share capital in the proposed service provider.  It can do this together with other public authorities, In such circumstances it is not necessary to show that it alone has the power of decisive influence over both strategic objectives and significant decisions of the company, but that the authorities together exercise this control.

This second point is important in the context of shared services.  It will mean that a group of local authorities can get together and set up a company – an ordinary private law company limited by shares – to run, for example, their municipal car parks, or leisure centres, or perhaps to sell surplus land.  Provided that the shares are all owned by the authorities and that the board of directors is controlled by them, it is likely that the company will qualify for the exemption.  That means that those authorities can contract with it to provide the services in question without going through a public procurement exercise. This principle was also confirmed by the ECJ last week (see Legal Update).

Note however that in Risk Management Partners v LB Brent, Brent were unsuccessful in claiming the Teckal exemption.  This was because a private company had been appointed to run the day-to-day activities of the service provider on behalf of the local authorities.  This appointment, along with certain other contractual provisions inconsistent with Teckal requirements, was taken as indicative that the authorities did not exercise a sufficient level of control over the company for the Teckal requirements to be satisfied.

Local authorities will need to be aware therefore that they will not simply be able to rely on ownership to fall within the requirements of Teckal. They will also need to review the proposed management arrangements of the service provider prior to awarding it a contract and ensure that the requisite (that is complete!) control is retained.

Note too that the fact that such contracts are not treated as contracts for the purposes of procurement law does not appear to stop them being contracts for English law purposes – so they will be enforceable (including by third parties under the Contracts (Rights of Third Parties) Act 1999) in the same way as other contracts.