Practical Law

PLC Public Sector reports:

Following its highly publicised dispute with its former managing director, Mrs Christine Laird,  which resulted in a financial loss to Cheltenham Borough Council of some £2 million, the Audit Commission has published a report in the public interest under section 8 of the Audit Commission Act 1998. 

Although it is unlikely that many local authorities will ever have to deal with a case of the same nature and magnitude, the recommendations that have been made in the public interest report following the auditor’s review of the Council’s decision-making process contain some timely reminders for local authorities on good governance and decision-making in relation to the taking of legal proceedings.

For our reporting of the High Court decision on the Council’s claim for damages, see Legal update, Answers to pre-employment medical questionnaire were not misrepresentations. 

It was of course not unreasonable for the Council to go to court to seek recovery of its substantial financial loss given its fiduciary responsibility to the local tax payer.  However, the message from the auditor’s review of the Council’s decision-making process is that the Council’s governance system, its structures, processes and controls failed not only when it decided initially to take legal action against Mrs Laird but subsequently when it decided to continue to pursue its claim in the High Court. The report’s specific conclusions are that:

• The Council’s constitution lacked clarity about who within the Council should make decisions.  The ambiguity over who was making decisions was exacerbated by a local election resulting in a change to  the political administration (with newer members less able to question the decision-making process) and the fact that in 2005 a new borough solicitor was appointed.  Although the new borough solicitor had indicated that he would seek endorsement from the Council’s  Staff & Support Services Committee (S&SSC) before taking any key litigation steps, some officers and members interpreted the situation to mean that the borough solicitor was driving the process with members believing they were just being briefed on the progress of the litigation.
• Given the major nature of the litigation, the Council should have put in place appropriate project management processes so that there was appropriate accountability. A separate Instructing Officer should have been appointed to commission the legal advice or work from the in-house legal team who would prepare a litigation scoping document setting out the objectives, approach, timetable and team’s responsibilities.
• The Council failed to address the issue of financial authority.  The Council’s scheme of delegation authorised the borough solicitor to issue court proceedings in the Council’s name without any financial limits.  However as the litigation costs increased, there was no senior person or body to effectively  control the Council’s spiralling costs by formally approving expenditure above a certain threshold.
• There were flaws in the decision-making process, which meant that some potentially crucial decisions were not addressed while others were considered too late in the litigation process. The Council failed to recognise that the issue it was managing had changed from an employment dispute to litigation for the recovery of damages so no one within the Council considered whether it was more appropriate for the matter to be removed from the remit of the S&SSC and referred to Cabinet.  Although there were certain procedural and notification requirements affecting key decisions made by the Cabinet, these did not apply to committees such as the S&SSC which meant that the Council missed opportunities to take or reaffirm decisions that by default amounted to decisions to continue.
• Despite the financial and reputational significance of its claim, the Council focused on developing a legal case and did not apply wider project and risk management processes to the litigation. A project plan, containing written objectives, a project risk register and formal project reporting, would have resolved the problem of poor communication between officers and members. Although there was a clear consensus amongst members about the Council’s original objective in taking legal action, the Council never set out (initially or subsequently) the range of options that were available to deliver its fiduciary duty objective, so that the first time the Council considered those options was just days before the High Court hearing. Without a project plan, the Council had no exit strategy  which is why it did not consider the possibility of setting the litigation until it was too late.
• Precautions that the Council took in managing the committee process (such as distributing written reports at meetings but collecting them back) had the unintended consequence of limiting the opportunity for members to be fully informed and involved. In addition, there was poor communication between officers and members.  Although members had concerns about the litigation, they did not feel they were given the opportunity to influence decisions until the very end, since they were usually only being briefed verbally and asked to note progress whereas officers believed that members had every opportunity to express their views and influence decisions.

The following tips for local authorities taking a decision to commence major legal proceedings can be distilled from the public interest report:

• Local government constitutions should be reviewed to make clear that the decision-making powers of officers are clear and that there is clarity within the constitution as to the financial authority for decisions. 
• Proper reporting processes for taking forward, and reporting back on, decisions must be in place.  Chairs and Vice-Chairs of committee meetings should always receive sufficient briefings on crucial matters.
• A financial limit on officers taking delegated decisions should be imposed under the scheme of delegation.  Requiring a more senior person or body to formally approve expenditure above a certain threshold acts as an effective brake on a single officer approving significant expenditure. 
• If the decision to litigate has financial and reputational ramifications for an authority, procedures should be in place to assess all the relevant options that are relevant to the decision and for the decision to be reassessed at a later stage. 
• Those taking the decision should ensure that they have taken account of, and given proper weight to, all relevant factors, which may be service needs, legal issues, financial implications and reputational risk.
• A proper analysis of the legal risks of the litigation should be carried out when litigation is contemplated and the risks regularly reviewed at different stages of the process. A budget for the legal action should be prepared and likely costs should be monitored to ensure there is an awareness of the financial ramifications of pressing on with the litigation.
• Written reports to committee meetings must be clear on the decision that is required from members.  Where decisions are required or officers seek endorsement or support from members for their decisions, specific recommendations should be made in the report.
• Consideration should be given to whether the case requires a formally appointed Instructing Officer and a written scoping document.

The following PLC Public Sector materials may also assist local authorities contemplating litigation:

• Practice note, Decision-making by public bodies: avoiding legal challenge.
• Practice note, Early determination: an overview of the various ways in which an action can be determined early without the need for a full trial. 
• Practice note, Overview of ADR processes and comparisons with litigation.