UK: Local Authority Contracts - What The Private Sector Needs To Know

Last Updated: 13 November 2007
Article by Owen Willcox

The public sector has radically changed its approach to procuring goods and services from third-party suppliers. There are now huge opportunities for the private sector to work with local authorities to improve the delivery of public services. But to succeed in this any private sector organisation needs to understand, and respond positively to, the context in which local authorities operate and, in particular, to understand the criteria against which value for money in the public sector is judged.

The outsourcing of any local authority function will, very likely, be subject to the public procurement rules which apply to contracts where the value exceeds certain financial thresholds. (An authority cannot avoid the application of the rules simply by dividing a contract into several smaller lots.)

Generally these rules require the proposed contract to be advertised in accordance with a statutory procedure to include prescribed time limits. Even where the public procurement rules do not apply a certain degree of advertising may still be required because local authorities are required to pay due regard to the principles of transparency and non-discrimination set out in the EC Treaty.

Best value

The Local Government Act 1999 (LGA) introduced a regime for improving service delivery through ‘best value’. It requires local authorities to "secure continuous service improvements in the way their functions are exercised having regard to a combination of economy, efficiency and effectiveness". This, indeed, is the definition of value for money in public sector services.

The broad principles for conducting best value reviews are the four Cs – challenge, compare, consult and compete – but authorities may also focus reviews on priority areas. The need for a review may arise for several reasons, including:

  • to improve performance;
  • to decide if a service is still needed;
  • to decide if a new service is required;
  • to establish if costs are comparatively high; or,
  • to establish if there is an opportunity to deliver services in common with other authorities.

Local authorities are required to monitor their own performance against indicators set nationally and locally as well as to subject themselves to external scrutiny by the Audit Commission. The Secretary of State reserves the power to intervene if a local authority fails to meet minimum best-value performance standards, and local authority services cannot be retained in-house unless the council can demonstrate that to do so will truly deliver best value.

Private sector contractors providing services to the public sector are subject to the same challenge. So, if a private sector organisation is planning to embark upon a long-term service contract with a local authority, it needs to be alert to several best-value issues. Most significantly, the project or supply agreement will require the private sector supplier to help the contracting authority to meet its obligations under the LGA. This will include:

  • assisting the local authority in preparing its best-value performance plans;
  • assisting the local authority in best-value reviews;
  • providing any relevant information required by the authority or external inspectorate in relation to the performance of the service;
  • participating in performance and benchmarking exercises;
  • undertaking customer satisfaction surveys at least once every twelve months; and,
  • providing an annual service report setting out details of performance and service delivery over the previous twelve months and providing proposals for continuous service improvement over the coming twelve.

Ultra vires and statutory powers

Local authorities are statutory corporations and owe their existence to legislation. The doctrine of ultra vires (meaning ‘beyond the powers’) is intended to ensure that local authorities act within their statutory functions; in order to act they must first identify a statutory power that grants them the right to act.

In practice it is accepted that it is not possible, or indeed necessary, to identify a separate power for every activity undertaken or proposed to be undertaken, and so local authorities are permitted to do things which are not otherwise prohibited and which are calculated to facilitate, or are conducive or incidental to, the performance of a function.

The ultra vires doctrine is also concerned with how a power has been exercised; it must be exercised lawfully, for proper purposes and in accordance with the bounds of public law or else the authority may be challenged in the courts by judicial review. However, in determining whether a decision is lawful or unlawful the courts are only concerned with the process or manner in which it was arrived at, not whether it was right or wrong. In judicial review proceedings the courts do not seek to substitute their own decisions for those of the authority.

Under the Local Government (Contracts) Act 1997 every statutory provision under which a local authority exercises a function also confers power on the authority to enter into a contract with another person for the provision of assets or services, or both, for the purposes of, or in connection with, the discharge of that function. Where certain conditions are satisfied, major contracts may be "certified" so that they cannot be challenged in private law proceedings. Furthermore, if judicial review proceedings should set aside a contract as being unlawful, the local authority must pay damages to the contractor (and/or the financier).

The Local Government Act 2000 contains a number of powers of ‘community well-being’, including a power to do anything which the local authority considers is likely to achieve the promotion or improvement of the economic, social and environmental well-being (either separately or in combination) of its area.

So, in short, it is very important for a private sector entity contracting with a local authority to be clear that the authority is acting within its powers in entering into the contract because if a local authority enters into an ultra vires transaction any agreements it makes will be unenforceable and of no legal effect.


A code of practice covering workforce matters in local authority service contracts was published in 2003 in response to trade union concern about inadequate protection for employees transferring from public to private sector employers as a result of the outsourcing of services.

The effect of the code is that the TUPE Regulations apply in all situations where there is a public to private transfer of employees unless there are exceptional reasons. In addition, transferred staff must continue to have access to the local government pension scheme or be offered an alternative occupational pension scheme of good quality under which they can carry on earning pension benefits throughout their future service. Arrangements must also be made for dealing with the accrued benefits of staff. These requirements go beyond those of the TUPE Regulations.

Of particular significance is what the code has to say about new staff joining an already outsourced workforce. They too must be afforded terms and conditions comparable to those enjoyed by the employees who transferred originally. This requirement is designed to ensure that an outsourced operation does not end up with what the official guidance calls "a two tier workforce" in which ex-local authority employees on protected terms and conditions work alongside new joiners doing the same work but on less favourable terms.

The code is self-enforced by local authorities and subject to external audit, which means that local authorities must:

  • include it in the service specification and conditions for all new contracts or re-tenders;
  • refer to it in advertisements for new contracts under which staff would be transferred as well as in the associated tender documentation; and,
  • monitor compliance with the conditions set out in the code and confirm that all their best-value contracts comply with it.

Freedom of information

The Freedom of Information Act (FOIA), which came into force in 2005, introduced the ‘right to know’; ie, the public right to request information held by public bodies.

The FOIA also sets out an exemption from that right if the information requested is a trade secret or if its release is likely to prejudice commercial interests. However, this is a qualified exemption in that the local authority can refuse to provide the information only if it believes the public interest in withholding outweighs the public interest in disclosing. A further exemption from the right to know covers information provided in confidence, the disclosure of which would give rise to an actionable breach of confidence.

Local authorities have been advised by the Lord Chancellor that they should refuse to include contractual terms which attempt to restrict disclosure of information beyond the restrictions permitted by the Act. In other words, local authorities cannot ‘contract out’ of their FOIA obligations. Unless an exemption under the FOIA applies a local authority is obliged to disclose information regardless of the terms of any contract.

This means that private sector contractors tendering to local authorities, or providing information to them for any other purpose, should be alert to the possibility that their information could find its way into the public domain. When tendering, private sector contractors are advised to analyse the information they provide to the local authority under the tender and identify which parts of that information they consider to be confidential, commercially sensitive or which for some other reason should be protected from disclosure. The information so identified can then be appended as a schedule to the tender specifying the nature of the information, the reasons it should not be disclosed and giving a time-limit for how long protection from disclosure should last. This recognises that whilst, say, pricing information might be confidential at the time the tender is submitted, it may lose that necessary quality of confidence over time.

In addition, to protect its position, the contractor should seek to place certain contractual obligations upon the local authority. These might include an obligation on the local authority to notify the contractor if an FOIA request is received, to consult with the contractor in that case, to have regard to the contractor’s views on the potential impacts of disclosure and to notify the private contractor of the local authority’s decision on whether to disclose.

Private contractors are not obliged to assist a local authority with an FOIA request unless the contract explicitly requires it. The Office of Government Commerce precedent FOIA clauses include a contractual obligation on the contractor to assist with requests but private contractors should be aware that this goes beyond the statutory remit of the Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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