UK: In-House Procurement Not Covered By EU Rules

On 9 February 2011, the Supreme Court issued its judgment in the Brent London Borough Council case, overturning the Court of Appeal on the application of the Teckal exemption for "in-house" procurement.

The Supreme Court held that the European Court of Justice's (ECJ) exemption for in-house contracts in its Teckal judgment did apply to the award of contracts by London local authorities for primary insurance services to a body which was owned, financed and set up by the local authorities for the sole purpose of providing such services to the local authorities.

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Background

The case centred on whether the Public Contracts Regulations 2006 (the 2006 Regulations) applied to a local government shared service vehicle. In 2006 and 2007 various London local authorities set up a shared service vehicle called the London Authorities Mutual Limited (LAML).

Under LAML the authorities agreed mutually to insure each other against various classes of risk. The purpose was to reduce the cost of insurance premiums for each authority and improve the standard of risk management generally.

Prior to joining LAML, Brent London Borough Council (Brent) had issued an invitation to tender for the provision of insurance for which Risk Management Partners (RMP) submitted a tender. However, when Brent LBC became a participating member of LAML, it abandoned the procurement procedure. RMP challenged this decision claiming a breach of the 2006 Regulations.

The High Court allowed RMP's claim, ruling that Brent had breached the 2006 Regulations and dismissed its defence that the award of the contract to LAML could be regarded as an in-house award. Brent appealed and its appeal was dismissed by the Court of Appeal. Brent and RMP have subsequently settled the claim for damages.

However, Harrow London Borough Council, another member of LAML, appealed to the Supreme Court on the issue of principle relating to the application of the 2006 Regulations.

Teckal

The Supreme Court's decision centred on a principle laid down by the European Court of Justice (ECJ) in Teckal srl v Comune de Viano (C107/98) (the "Teckal exemption").

The Teckal exemption provides that, in certain circumstances, the award of a contract by one public body to another separate legal person will not require competitive tender.

The Teckal exemption comprises both a 'control test' and a 'function test'. Firstly, the local authority must exercise control over the person to whom the contract is proposed to be awarded which is similar to that which it exercises over its own departments. Secondly that person must carry out the essential part of its activities with the controlling local authority or authorities.

Supreme Court judgment

The appeal to the Supreme Court concerned three questions in principle:

  1. Does the Teckal exemption apply to the 2006 Regulations at all?
  2. Does the Teckal exemption apply to contracts of insurance?
  3. For the Teckal exemption to apply, must the control which the contracting authority exercises over the contractor be exercised by that authority individually or is it sufficient that it could be exercised collectively, together with other local authorities?

In relation to the first question, the Supreme Court confirmed that the Teckal exemption does apply in English law to the 2006 Regulations.

In response to the second question, the Supreme Court held that the Teckal exemption is available in respect of contracts of insurance. It did not matter that insurance was not a service that the local authority could provide for itself.

In relation to the third question, the Supreme Court held that Directive 2004/18/EC (the "Directive) (which is implemented by the 2006 Regulations) is not intended to protect the commercial sector by forcing public authorities to obtain the services which they need on the commercial market. Rather, its purpose is to ensure that, if public authorities do decide to obtain the services which they need from outside bodies, proper procedures are followed to ensure that potential providers have an opportunity to compete for the work.

The control test

Looking at the control test in more detail, the Supreme Court considered the ECJ case law on the Teckal exemption and concluded that individual control was not necessary. The Supreme Court concluded that it is "irrelevant for the application of the Teckal control test that any single authority does not exert the necessary degree of control by itself. If, taken overall, the control of the body by the authorities that established and finance the body is enough to satisfy the control test, this will be an indication that the body exists to carry out the purposes of the controlling local authorities and so is not to be regarded as an outside body in relation to any of them." Therefore, the argument that individual control is needed is inconsistent with the ECJ's thinking on the rights of local authorities to cooperate.

Applying the control test to this case, the Supreme Court concluded that the participating local authority members of LAML did exercise collective control over LAML that was sufficient to satisfy the Teckal control test. It emphasised certain factors in particular that demonstrated the requisite control:

  • the participating members of LAML appointed all but 2 of a maximum of 11 directors of the LAML board;
  • the participating members had 1 vote each at general meetings;
  • LAML could only offer such insurance as the participating members had agreed at general meetings;
  • the Court of Appeal was wrong to conclude that the nature of LAML's business and the possibly differing interests of different authorities were antithetic to the necessary local authority control. There was collective control over strategic objectives and significant decisions by the participating members at all times;
  • the participating members controlled a service which was designed exclusively for the performance of their public functions. No private interests whatsoever were involved.

The function test

The Supreme Court concluded briefly that the function test is designed to ensure that the Directive always applies unless, in substance, the body concerned only trades with the local authority or authorities, i.e. it is not market-orientated.

Applying this principle to the facts of the case, the Supreme Court held that the Teckal function test was satisfied. It noted that there was no private involvement at all in LAML and that LAML existed only to serve the insurance needs of its members. Finally, the Supreme Court noted that all major contracts for the provision of goods and services to LAML were put out for public tender in accordance with the 2006 Regulations, including its reinsurance contracts.

At a time when budgets are being cut significantly and there is a greater use of shared services by local authorities, this judgment is likely to be welcomed by local authorities.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 11/02/2011.

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