David Gollancz, 11KBW:
In this post, David looks back at the passage of the Brent v Risk Management Partners case through the courts and considers the implications of the recent Supreme Court judgment.
The background
In November 2006, Brent Council, along with several other London Boroughs, decided to establish an insurance mutual (London Authorities Mutual Limited (LAML)), primarily in order to reduce their insurance premiums. Brent, like the other councils, was to provide a guarantee and substantial capital contributions.
There was some concern as to whether LAML would be operational in time to deal with Brent’s next policy renewals, so at the same time as proceeding with the establishment of LAML, the Council invited tenders to provide insurance services, in compliance with the Public Contracts Regulations 2006 (PCR). Risk Management Partners (RMP) was one of the bidders. In the event, progress in setting up LAML meant that Brent decided that it would not need these services and it abandoned the procurement. RMP applied for judicial review, on the grounds that Brent had acted ultra vires in participating in setting up LAML and providing the financial guarantee.
Previous court decisions
The High Court and, subsequently, the Court of Appeal, agreed with RMP. The Court of Appeal found that:
- Participation in LAML was ultra vires; and
- It had been a breach of the PCR to conclude contracts of insurance with LAML without a competitive procurement, because the Teckal principle did not apply.
The questions before the Court of Appeal were:
- Does the Teckal principle apply to the PCR?
- If so, is the exemption applicable where the contract is for insurance?
- If so, to satisfy the Teckal “control test”, must the contracting authority exercise a control over the legally distinct entity which is similar to that which it exercises over its own departments, or is it sufficient that control is exercised by the contracting authorities collectively?
- If it is sufficient that the contracting authorities exercise that control collectively, is that requirement satisfied in this case?
- Is the Teckal “function test” also satisfied in this case?
- Is a reference to the Court of Justice required on the insurance or control issues?
The court found that the PCR do support the application of the Teckal principle and, in keeping with existing case law, that multiple authorities exercising collective control satisfies the requirement for control. However it found that a contract for insurance was by its nature one where the requisite control must be excluded. The interests of the insured and the insurer are by definition opposed, and in LAML the insured authority was excluded from participation in decisions about its own claims.
The ruling on vires was not further appealed because the Local Democracy, Economic Development and Construction Act 2009 introduced an express power for local authorities to form or enter into insurance mutuals. Hence the Court of Appeal’s judgment, so far as it concerns the well being power under s2 Local Government Act 2000 and the “incidental activities” power under s111 Local Government Act 1972, remains good law – although the Localism Bill may transform the powers of local authorities so as to supersede the judgment.
The Supreme Court decision
Brent settled following the Court of Appeal judgment but Harrow, which had joined in as an interested party, continued the appeal to the Supreme Court on the procurement issues. On the procurement issue, the Supreme Court unanimously allowed the appeal, and held that the local authorities were entitled to rely on the Teckal principle when dealing with LAML. No reference to the ECJ was required.
By coincidence, the ECJ gave its judgment in Commission v Germany on the same day that the Court of Appeal gave its judgment in LAML. Germany was not a Teckal case but many commentators remarked that, had the Court of Appeal been able to take account of the ECJ’s approach to inter-authority co-operation in that case, it might have come to a different conclusion in LAML itself. The judgments in the Supreme Court suggest that they may well be right.
The Supreme Court has decided the following five issues:
First, upholding the Court of Appeal, that the PCR do support the Teckal principle.
Secondly, that there is nothing in the intrinsic nature of insurance contracts which means that Teckal cannot apply in such cases.
Thirdly, again upholding the Court below, that the first Teckal principle (control by the contracting authority similar to that which it would have over its own departments) can be satisfied in all cases by joint or collective control by a number of authorities, of which the particular contracting authority may be only one. It is notable that the Supreme Court cited Asemfo, where an authority could rely on Teckal despite having only a 0.25% share in the share capital of the company concerned, without appearing to suggest that this depended upon some of that company’s rather unusual features. However LAML did not itself involve nominal shareholdings, so it may be unwise to read too much into this.
Fourthly, reversing the Court of Appeal, the control requirement of Teckal was satisfied on the facts. The Court does not appear to have been much exercised by the fact that that an authority would not participate in decision-making about its own claims under the insurance, and other similar points. Nor, more importantly for the wider use of Teckal, did it regard as an impediment the fact that much of the day-to-day running of LAML would be left to the Board, and that the directors strictly owed their duties to the company itself, rather than to the authorities which appointed them. The fact that the participating contracting authorities together held all the shares and had all the votes at general meetings (certainly when coupled with their power by a 75% majority to direct the Board by special resolution) appears to have been regarded as enough. It was key that there was power for the authorities to give directions on strategic matters and important issues of policy, and on that basis the precise decision-making procedure was not material.
The thrust of this judgment is that, if local authorities are genuinely engaged in an exercise in co-operation to obtain a service from their own resources, in a way that is not market-oriented, the courts should be slow to impose the requirements of procurement law upon them. Lord Hope said (paragraph 52):
“The reasoning in [Germany] shows how far we have travelled since the court issued its judgment in Teckal. . . There is now a much clearer focus on the purpose of the Community rules on public procurement so as not to inhibit public authorities from co-operating with other public authorities for the purpose of carrying out some of their public service tasks . . . So long as no private interests are involved, they are acting solely in the public interest in the carrying out of their public service tasks and they are not contriving to circumvent the rules on public procurement . . the conditions are likely to be satisfied.”
Fifthly, the second limb of Teckal (that the company should do the essential part of its business with the contracting authorities) was also satisfied: LAML was not market-oriented.
A note of caution
Having said all that, it is important to note that the Supreme Court judgment is a reaffirmation and application of Teckal, not an extension. In particular, the importance of purely public ownership and the absence of profit-driven or market-oriented activities is not at all diminished.