Case review - Brent London Borough Council and others v Risk Management Partners Limited

First Supreme Court procurement judgment - public authorities can give work to bodies they have established collectively without a tender

On 9 February 2011 the Supreme Court confirmed that consortia of local authorities are entitled to set up their own entities to provide the goods and services they need without being obliged to offer these contracts for tender by the private sector. This reversed the previous decisions made by the High Court and the Court of Appeal, both of which held this practice breached the Public Contracts Regulations 2006 ("the 2006 Regulations").

Background

A group of London local authorities set up a mutual insurance company called London Authorities Mutual Limited ("LAML"). Risk Management Partnership Limited ("RMP") had previously been asked to tender for the insurance contract of Brent Borough Council, before they cancelled the tendering process. RMP brought the original case against Brent and the other members of LAML on two counts: (a) they lacked the legal authority to establish a mutual insurance company and (b) they could not enter into an insurance contract with LAML without first going through a tender process under the 2006 Regulations.

The first point has subsequently been resolved by the introduction of new legislation granting local authorities this power. The findings of the High Court and the Court of Appeal that local authorities could not use such a body to provide their insurance without using a competitive tender raised the question of whether local authorities would be able to use this power.

Court decision

The 2006 Regulations apply to "Contracts for pecuniary interest concluded in writing between economic operators and one or more contracting authorities and having as their object the execution of works, the supply of goods or the provision of services". Whether this applied to the agreements between the London authorities and LAML centred on whether LAML was a separate economic operator.

The Court was considering the ‘Teckal’ exemption from the 2006 Regulations. This is not in the Regulations but comes from the ECJ case of that name. Broadly, if the entity is not deemed separate from the Contracting Authority, then the Regulations do not apply. The questions for the Court are whether sufficient control is exercised over the body, and whether it is carrying out essential functions of the Authority.

The Court of Appeal ruled that LAML had an autonomous administration and the ‘Teckal’ exemption did not apply. Decisions at board level were made by majority vote, excluding any authority whose insurance was being considered. As the authorities might have very different interests and an individual authority did not control the terms on which it would receive insurance, the Court of Appeal deemed LAML to be outside of the control of the authorities. The Supreme Court disagreed, citing the case of Coditel. This confirmed that local authorities may exercise control as a consortium and where decisions were taken collectively the manner of decision making was immaterial. The fact that major decisions had to be taken at board level, and a board meeting was only quorate if the majority of directors present were member directors (ie representatives of one of the authorities) was therefore sufficient to establish control.

The test for function is whether 'the undertaking carries out the essential part of its activities with all the authorities in the consortium". As LAML provided insurance to all the authorities this test was satisfied. The Supreme Court did not regard the fact the functions were collective as failing the test. In fact provided the collective co-operation is in pursuit of objectives in the public interest, then it is not relevant that the function could not be carried out by one authority acting individually.

What this decision means

This decision gives public authorities and bodies greater freedom to collectively establish their own entities to carry out works and provide services, rather than offering these contracts for tender in the private sector. Pooling their resources in this manner may offer a more straightforward and economical option for many authorities requiring works to be undertaken or services to be provided.

This exemption from the application of the regulations does have limitations. The case of Stadt Halle made it clear that where there is the involvement of private capital in a body, even on a minority share basis, the control test would fail. Private financial investment would introduce a 'pecuniary' profit-making interest on the private entity's part which would contrast too greatly with the interests of the authorities involved for the entity to be completely under their control. Authorities could not offer a contract to an existing PPP entity therefore without first going through a proper tender process.

The function test may also defeat the exemption. If, for example, authorities wanted to set up a company which would provide loans as and when required to its members, the test might be defeated unless all the members proceeded to borrow money.

This case is likely to raise the stakes for businesses targeting public authorities as potential clients for works, supply and services contracts. Aside from the tendering process itself, companies may find themselves having to pitch the concept of working with the private sector as a more efficient, effective and financially beneficial alternative to working with other authorities.

Lawyers