UK: High Court Ruling On The Establishment Of A Local Government Mutual Insurance Company And Associated Procurement Issues

Last Updated: 9 June 2008
Article by Steven Brunning and Sharon Jones

In R (on the application of Risk Management Partners Ltd) v Brent London Borough Council and others, the High Court has issued a very significant judgment concerning the powers of Local Authorities to establish mutual insurance companies, the direct award of contracts to in-house companies and liability and delay in relation to an action for breach of the Public Contracts Regulations 2006 (the "Regulations"). In a judgment that was handed down in two parts, the High Court considered, in the first part, whether Local Authorities had the power to establish a mutual insurance company to provide insurance services to its members. In the second part of its judgment it considered whether the direct award of a contract to that company without complying with the requirements of the Regulations was permissible pursuant to the exemption first laid down by the ECJ in Teckal (Case C-107/98) (the "Teckal Exemption").

Background

In February 2007 Brent London Borough Council (the "Council") issued an invitation to tender for an insurance services contract (divided into seven lots). In response to the Council's invitation Risk Management Partners (RMP) tendered for the services and its bid appeared to be the most financially advantageous offer received by the Council. However, prior to award of the contract the Council abandoned the award procedure for six of the lots and instead directly awarded the contract to London Authorities Mutual Limited (LAML) of which the Council was a participating member, but which had taken no part in the tender process. RMP proceeded to bring a claim against the Council on two distinct grounds:

  1. The Council's participation in LAML was outside its powers granted by Parliament or, in the alternative, was not duly authorised; and

  2. The Council's award of the contract was in breach of the requirements of the Public Contracts Regulations 2006

Right to participate in LAML

With regard to (1), the Court held that, for the purposes of section 111 of the Local Government Act 1972, although the obtaining of insurance was clearly incidental to the functions of a Local Authority the provision of insurance to others was not. In becoming a participating member of LAML, the Council became involved in the provision of insurance and was effectively giving financial assistance to LAML to do what the Council could not lawfully do. This fell outside the scope of section 111 of the Local Government Act 1972. An insurance contract was also held to fall outside the scope of section 1 of the Local Government (Contracts) Act 1997.

The Court also ruled on the use of the so-called "well-being" power in section 2 of the Local Government Act 2000. The Court found that the Council in its decision making process had failed to consider that participation in LAML was likely to promote the economic, social or environmental well-being of its area as provided for under section 2. The minutes of the relevant Executive meeting of the Council and the resolution passed at that meeting did not mention this consideration at all. The length of that meeting, and the substantial business transacted at it, also suggested that the Council failed to properly consider this consideration as a basis for its decision. The well-being power did not authorise the Council to do whatever it considered likely to promote its own economic well-being. The Council, therefore, could not justify its actions simply by reason of the fact that it expected to save money on insurance premiums by becoming a member of LAML.

However, the Court ruled that this did not entail that no local authority had the right to participate in a company such as LAML. A Local Authority could enter into an insurance contract with such a company and could provide financial assistance to the company pursuant to section 2 of the Local Government Act 2000. In the present case, the Council had simply failed to demonstrate that it was properly acting pursuant to the well being power provided for in section 2.

Breach of procurement rules

The second part of RMP's claim was that the Council had breached the Regulations, in particular its duties to act in a non-discriminatory and transparent way, its obligation to comply with the procurement procedures, its obligation to award contracts to the most economically advantageous or lowest price bid, and its obligation to issue a contract award notice. The Council did not deny that it had not complied with the requirements of the Regulations as it sought to rely upon the Teckal Exemption as a justification for not following the requirements for set out in the Regulations. The Teckal Exemption provides that a formal tender procedure is not necessary, even where two contracting entities are legally distinct from each other, where the following two conditions are satisfied:

  1. The public authority (or authorities) exercises over the other contracting party a control which is similar to that which it exercises over its own departments; and

  2. The other contracting party must carry out the essential part of its activities with the controlling public authority or authorities

The Court did not agree with RMP's argument that the Teckal Exemption was not part of English law. It confirmed (albeit with some hesitation) that the Teckal Exemption for in-house awards was indeed part of English Law and was applicable to contracts of insurance.

The Judge re-iterated various principles that derived from previous case law and highlighted that Teckal was to be restrictively applied and that participation by private interests in such a company was incompatible with the exemption. Also, mere shareholding or participation in a company, although indicative, was not sufficient in demonstrating the required amount of control necessary.

The Judge carried out a detailed analysis as to whether the first condition was satisfied in the present case. He ignored the regulatory requirements imposed on LAML as these would equally apply to a truly in-house insurer that was not separately incorporated. He considered, in some detail, whether the relationship between the Council and LAML was a relationship where the Council exercises a control similar to that which it exercises over its own internal departments. After consideration of LAML's constitution he reviewed how the day-to-day management of the company was carried out and considered that its management was handled relatively independently. It seems to have been acknowledged by the participant members of LAML that they did not have insurance expertise and accordingly they had employed a private management company to run the company for them. The Judge decided that the involvement of a private company, employed to manage LAML, pointed against the Council being able to demonstrate the first condition of the Teckal Exemption. The participating members of the company held the power to give directions to the board who could in turn give directions to the managing company but they were not really involved in the general administration of the business at all.

Most importantly, the contractual provisions contained in the Articles of Association and other documents suggested a degree of independence that was inconsistent with the first condition. One example considered by the Judge was that the participating members of LAML were to be excluded from the Board's consideration of their insurance claims. Another was that the Articles conferred power on the Board to terminate the membership of any participating member if, in its judgment, it deemed such continuing membership to be undesirable. The Judge also considered that the insurance policy terms were typical of those issued by wholly independent insurers to their insured and were of normal commercial form, therefore were inconsistent with the requirements of the first condition of the exemption.

Unfortunately, as the Judge concluded that the first condition of Teckal had not been satisfied, he did not consider the application of the second condition. Public authorities are therefore forced to refer to previous case law in ensuring compliance with this condition of the exemption. It is worth remembering that in the Tragsa case (Case C-295/05) it was deemed sufficient that 90% of the company's activities were carried out with its controlling public authorities.

The Judge also considered liability and damages under section 47(1(a) of the Regulations. The Regulations state that proceedings must generally be brought within three months from the date when grounds for the bringing of proceedings first arose. The Judge held that these grounds first arose on the date that the Council first breached the Regulations which was the date upon which the Council awarded the contract to LAML and not when RMP first became aware that the Council may have breached its duties under the Regulations. On this basis, as RMP commenced proceedings within the specified time limit, it followed that RMP would be entitled to damages for the Council's breach of the Regulations.

Conclusion

This case serves as a reminder to public authorities of the nature of the well being power and the need to ensure that decisions are not ultra vires and that a full and clear decision making process is gone through. However, it has confirmed that public authorities are, at least in principle, authorised to establish companies such as LAML.

The case also re-emphasises the importance of ensuring that where a public authority seeks to establish a Teckal–compliant company, the contractual documents reflect the degree of control that is necessary in order for the first condition of Teckal to be satisfied. From a contracting authority perspective it is positive to note that the High Court has confirmed that the Teckal exemption is alive and part of English law. However, the case may raise concerns for contracting authorities as it is one of the first cases in which damages under the Regulations have been awarded. The Council and LAML have both sought and obtained leave to appeal the judgment.

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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