David Gollancz, Partner, Field Fisher Waterhouse LLP:
On 9 June 2009, two judgments were handed down on the application of the procurement rules to co-operation between contracting authorities for apparently commercial purposes.
One was the decision of the European Court of Justice (ECJ) in Commission v Federal Republic of Germany (Stadtreinigung Hamburg), and the other, the judgment of the Court of Appeal in Brent London Borough Council v Risk Management Partners (RMP).
In Stadtreinigung Hamburg the ECJ decided that an arrangement between the City of Hamburg and various other municipalities for the treatment of waste by Hamburg on behalf of those authorities fell outside the procurement rules because it was in substance non-commercial inter-municipal co-operation. By contrast, in RMP, where the local authorities (unlike their German counterparts) sought to rely on Teckal, the Court of Appeal found that the procurement rules did apply to the local authorities’ mutual insurance arrangements.
Whilst, superficially, the factual situations in Stadtreinigung Hamburg and RMP seem similar, the results were strikingly different. The ECJ’s approach in Stadtreinigung Hamburg appears to be a common sense response to arrangements which could not reasonably be seen as coming within the procurement rules or undermining its objectives of the free movement of services and the opening up of competition between Member States. The ECJ did not set out a test as such in Stadtreinigung Hamburg, but several principles can be derived from the judgment. It is interesting to apply these to RMP to see whether the Court of Appeal might have decided RMP differently had it had the benefit of the ECJ’s judgment in Hamburg before handing down its own judgment.
1. A Public Interest Task
It emerges from Stadtreinigung Hamburg that where co-operation between public bodies is solely to perform a task in the public interest, it will not conflict with the objectives of free movement of services and the opening up of markets to competition. Stadtreinigung Hamburg related to waste disposal, which is a public service which in this case the local authorities were legally obliged to perform. Although obtaining insurance cover is not in itself a public service it is almost certainly necessary in order for a local authority to perform its functions in the public interest. Not to be insured is a theoretical possibility but may pose an unacceptable risk to council tax payers and third parties. On this basis, Brent, like the four authorities in Stadtreinigung Hamburg, could be said to be performing a public interest task in setting up running and insuring with LAML.
2. Use of Own Resources
It is an established principle that contracting authorities have the right to use internal resources to perform their obligations without running a procurement exercise. The ECJ considered that the authorities in Stadtreinigung Hamburg were simply using their own resources in co-operation with each other. Each authority could have performed their waste disposal functions on their own. By contrast, in RMP, the Court of Appeal found that, since it is not possible to insure yourself (the phrase “self-insuring” sometimes used of central government, simply means “bearing one’s own risks”, whereas the essence of insurance is that risks are transferred to the insurer in exchange for a premium, such that there is necessarily a conflict of interest between insured and insurer) it is hard to argue that LAML was simply a body which facilitated co-operation between authorities using their own resources. Each member authority could not have insured itself. On this basis the provision of cover by LAML to Brent could not be said to be the performance of a function using Brent’s own resources.
3. No Commercial Contractual Relationship
The ECJ concluded that the arrangement between the authorities in Stadtreinigung Hamburg was essentially not a contract but a non-commercial agreement to co-operate. No risk or payment transferred between the parties, the only money involved was as reimbursement of fees paid to the operator who was not a party to the contract, and the parties were not contractually bound to perform any obligations. From what we know about the insurance contract in RMP, it appears that normal commercial contractual terms, as would be found in any insurance contract, governed the relationship between the members and LAML. A premium was paid by a member and in return it could make claims for insured risks. Insured parties had an obligation to minimise losses and LAML had the right to reject a claim where the member had not complied with its obligations as set out in the insurance policy. No liability could be admitted or settled without LAML’s consent and LAML could cancel the insurance due to non-payment. These terms suggest there was a genuine contractual relationship with reciprocal rights and obligations and not merely an administrative relationship.
Conclusions
It appears then that the Court of Appeal’s judgment in RMP is consistent with the ECJ’s in Stadtreinigung Hamburg after all. Brent is unlikely to have succeeded with a claim that LAML was simply a vehicle for inter-municipal co-operation.
However, the ECJ’s judgment:
- does provide a good guide on how to interpret the application (or not) of the procurement rules when public authorities share services;
- is a welcome recognition that shared services may fall outside the procurement rules; and
- another rebuff for the European Commission in its attempts to expand the ambit of the procurement rules.