In Brent LBC and others v Risk Management Partners Ltd, the Supreme Court ruled that local authorities in London did not infringe public procurement law when they purchased insurance services directly from a company which they jointly owned and controlled. Overturning a Court of Appeal judgment, the Supreme Court considered that the local authorities were not required to award the insurance services pursuant to competitive tendering but could instead rely on the derogation for "in-house" contracts. The judgment is important because it gives public authorities greater leeway to cooperate and reduce costs by setting up joint vehicles for the provision of shared services.
Background: the Teckal exemption for in-house services
In principle, whenever a public authority intends to award a valuable contract for works, goods or services, it is required by the Public Contracts Regulations 2006 to hold an advertised, competitive tendering procedure. However, in the Teckal case in 1999, the European Court of Justice ("ECJ") ruled that a public body is exempt from the requirement to invite tenders when it procures works, goods or services from a separate entity which meets two conditions:
- the contracting authority exercises over the providing entity a control which is similar to that which the authority exercises over its own departments ("the control condition"); and
- the providing entity "carries out the essential part of its activities with the contracting authority" ("the function condition").
This exemption (known as the "Teckal" or "in-house" exemption) has been refined and clarified in a number of subsequent rulings by the ECJ and domestic courts. For example, the ECJ has ruled that the exemption cannot apply if a private sector party holds any shareholding – even a minority participation - in the service provider.
Facts of the Brent case and the ruling at first instance
In 2007, a number of local authorities in London, including the London Borough Council of Brent, awarded contracts for insurance to a mutual insurance company called London Authorities Mutual Limited (LAML), without competitive tendering. LAML was wholly owned by the local authorities, having been set up by them for the purpose of providing them with insurance services.
A third party insurance company, Risk Management Partners Ltd ("RMP"), complained to the High Court that Brent had breached the 2006 Regulations by failing to award the contract pursuant to a competitive tender. Brent counter-argued that it was not required to comply with the 2006 Regulations, because the contract with LAML amounted to an in-house award within the Teckal exemption.
The High Court noted that, under LAML's Memorandum and Articles of Association, LAML's Board has the power to appoint independent managers of the company's business. The local authorities owning LAML lacked experience in managing an insurance company and therefore contracted out its management to a private company. While LAML's members had power to give directions to the Board, which could in turn give directions to the managers, the High Court considered that the Board was unlikely in practice to interfere in the general administration of LAML's business. Overall, the evidence indicated that the administration of LAML was relatively independent.
In the light of all of these factors, the High Court concluded that the local authorities did not exercise a sufficient level of control over LAML for the first Teckal condition to be satisfied. Consequently, the insurance contract should have been put out to tender under the 2006 Regulations and RMP was entitled to an award of damages.
On appeal, the Court of Appeal upheld the ruling of the High Court. Brent and other local authorities then lodged an appeal against the Court of Appeal's ruling before the Supreme Court.
The Supreme Court ruling
On 9th February, the Supreme Court overturned the earlier rulings of the High Court and Court of Appeal. The Supreme Court found that arrangements with LAML did fall within the Teckal exemption and so did not have to be put out to tender under the 2006 Regulations.
The Supreme Court considered that the local authority members collectively exercised sufficient control over LAML. This collective control was evidenced by the following factors:
- The participating members appointed all but two of the 11 directors on LML's Board, including the Chairman.
- The participating members held all of the voting rights at general meetings.
- LAML's Board was subject to direction by the participating members in general meeting, so long as they achieved a 75% majority.
- LAML could only offer insurance which the participating members had agreed at general meetings.
The Supreme Court ruled that the Court of Appeal was wrong to conclude that the control condition was not met because the member authorities might have differing interests in relation to individual claims. The members nonetheless exercised collective control over LAML's strategic objectives and decisions. The participating members controlled a service which was designed exclusively for the performance of their public functions. No private interests were involved.
The Supreme Court also concluded that the function condition was satisfied in this case, since LAML existed only to provide insurance to its local authority members and their affiliates. LAML did not compete with other insurance suppliers for business in the open market.
Local authorities and other public bodies will welcome the Supreme Court's judgment. It removes the uncertainty caused by the very strict interpretation of the Teckal test adopted by the High Court and Court of Appeal in the same case. The Supreme Court has established that public authorities can co-operate in order to obtain shared services directly from a jointly-controlled service provider, without holding a competitive tender, provided the service provider has no private sector participants and exists only to service its public sector shareholders. Recourse to such shared service centres by public bodies is cost-effective and looks set to become increasingly common, particularly as public sector budgets continue to be squeezed.