In our e-mail last week, we covered the January 2014 report in the public interest published by the Wales Audit Office (WAO) into the indemnity for a libel counterclaim that Carmarthenshire County Council provided to its chief executive (see Legal update, Welsh Audit Office rules council indemnity and pension pay supplement for chief executive unlawful). That report, which was issued under section 22 of the Public Audit (Wales) Act 2004 (2004 Act), noted that the Executive Board of the council had acted unlawfully in agreeing that it would indemnify its chief executive for the bringing of a libel counterclaim against an individual blogger who had sued the council and its chief executive for libel.
Following publication of the report, the council is required under section 25 of the 2004 Act to consider the appointed auditor’s report at a full meeting of the council (scheduled for 27 February 2014) in order to decide whether it will accept the report’s recommendations and the action that it will take in response. However, prior to that meeting, the council has taken the unusual step of publishing not only the legal advice that it received, but also its correspondence with the appointed auditor, as evidence of the fact that the WAO was notified of the council’s intention to provide the indemnity before it took the decision and that it had kept the WAO fully informed of the legal advice that it received, together with all the developments of the libel case as it progressed in the court.
Facts
According to the auditor’s report, the council had considered the indemnity for the chief executive matter as a matter of “exempt urgent business”. The item did not appear on the published agenda for the meeting and the chief executive did not declare an interest or leave the room when the matter was discussed. Therefore, the auditor was satisfied that the chief executive had participated in the decision-making process whilst having a disqualifying personal and pecuniary interest in the matter. For more information on the requirement to disclose personal and pecuniary interests, see Practice note, Local government: general principles of conduct for members and the consequences of a breach of conduct.
In addition to these failings in governance arrangements, the auditor was satisfied that the council was not authorised by statute to grant an indemnity in respect of bringing a claim or counterclaim for defamation under Article 6(3) of the Local Authorities (Indemnities for Members and Officers) (Wales) 2006 Order (SI 2006/249) (2006 Order) and it could not rely on the incidental powers contained in section 111 of the Local Government Act 1972. For more information on section 111, which empowers a local authority to do anything that is calculated to facilitate, or is conducive or incidental to, the discharge of any of its functions, see Practice note, Local government: statutory powers and duties and their proper exercise.
In the absence of statutory power to grant the indemnity, the auditor recommended that the council should rescind what he concluded to be an unlawful decision, and withdraw the indemnity. His report noted that although he had received submissions from the council, which sought to justify its decision on the indemnity, these did not alter his view on the lawfulness of the decision and his conclusion that the payments made were an item of account that were contrary to law.
So what does the 2006 Order say?
The 2006 Order is intended to remedy the injustice that would otherwise occur if a member incurred personal liability for legal costs defending an allegation of a breach of a local authority’s code of conduct, particularly if the allegation was based on a misunderstanding of the law or was otherwise unsustainable. However, Article 6 of the Order makes clear that an indemnity cannot be given to a member or an officer in relation to:
- Criminal acts.
- Any other intentional wrongdoing (other than criminal acts).
- Fraud
- Recklessness.
- The bringing of (but not defending) any action in defamation.
The legal advice to the auditor was that it was not possible for the council to rely on the incidental powers contained in section 111 of the LGA 1972 to extend or avoid the limitations in the express powers contained in the 2006 Order. That advice conflicted with the legal advice the council had received in 2008 which, based on the explanatory note to the 2006 order and the then draft guidance issued by the Welsh Government was that:
- The 2006 order did not have the effect the auditor was advocating.
- It was arguable that the power referred to in section 111 of the LGA 1972 continued to exist to enable local authorities in Wales to fund defamation proceedings but that such a power should only be exercised in “exceptional circumstances”. Indeed the High Court in R (Comininos) v Bedford Borough Council [2003] EWHC 121 had indicated that there may be circumstances in which it is lawful for an indemnity to be granted to a council employee in order to bring a defamation claim against a third party under section 111 of the LGA 1972 although the judge observed that “common sense should warn all but the most litigious authorities from doing so”.
Following the WAO’s investigation, the council obtained a further legal opinion in November 2013. That legal advice confirmed the 2008 legal advice as correct and that the executive board’s decision of 23 January 2012 to grant the chief executive an indemnity in relation to his proposed libel counterclaim, was lawful. However, the auditor in his report commented that the 2008 legal advice the council received was expressed in very cautious terms, stating that:
- It would be extremely rare for a decision to grant an indemnity to fund defamation proceedings to be reasonable and that the existence of the power was merely arguable.
- Case law suggested that common sense should warn all but the most litigious authorities from funding defamation proceedings.
It will be interesting to see what decision the council comes to at the extraordinary council meeting later this month following its debate on the auditor’s report. However, the auditor’s report is a reminder for local authority officers of the importance of ensuring that the reports they prepare for decision-makers contain all the relevant information and considerations that those members will need. The auditor was critical that the cautious and reserved terms of the 2008 legal opinion was not reflected in the report to the Executive Board. Instead the report represented that advice in unequivocal terms that the indemnity could be granted but only in exceptional circumstances (although these were not defined).