On 9 February 2011, the United Kingdom Supreme Court delivered a unanimous ruling in Brent London Borough Council v Risk Management Partners Limited [2011] UKSC. The Law Lords overruled the Court of Appeal and held that the London Boroughs, which established London Authorities Mutual Limited (LAML) to meet their insurance needs, could do so without infringing procurement law.

This judgment acknowledges the direction that European Union case law has taken since the judgment of the Court of Justice in the European Union (CJEU) of July 1999 in Teckal (C-107/98) on the in-house exemption. Teckal established the rule that where a public body enters into a service contract with a body over which it exercises decisive control and which provides the essential part of its services back to the parent body, this contract is not subject to the procurement rules. This has been expanded in subsequent case law to cover services provided by "shared service" bodies controlled collectively by public bodies.

The timing of the Court of Appeal ruling in the LAML case of 9 June 2009 was unfortunate in that it was too late to take account of the CJEU ruling in Commission v Germany C-480/06 of the same date. The Supreme Court was, however, clearly influenced by this ruling.

At a time when austerity measures are needed by public bodies, the Supreme Court's ruling is welcome. It should remove much of the uncertainty around the legality under procurement law of shared service vehicles and other mechanisms such as joint committees used by public bodies to pool their resources and functions, with a view to delivering public services more efficiently and at a lower cost.

There are two clear and useful messages which may be taken from the Supreme Court's ruling. First, the purpose of EU public procurement law is not to inhibit public authorities from cooperating with other public authorities for the purposes of carrying out their public service tasks. In doing so, public authorities are permitted to collaborate on a collective basis and this does not have to follow any particular legal form.

The conditions for the Teckal exemption are likely to be satisfied provided that:

  • no private interests are involved,
  • the public authorities are acting solely in the public interest in the carrying out of the public service tasks and
  • are not contriving to circumvent the public procurement rules.

The second point is that the Supreme Court confirms that the collective exercise of decisive influence over a shared service body is generally established where the authorities hold together all of the share capital in that body. Where decisions of such a body are taken collectively the procedure used for the taking of those decisions is immaterial. It is only in exceptional cases that the Teckal control test would fail to be met. For example, as found in Carbotermo C-340/04, where the control exercised by the public shareholders was insufficient to enable the giving of directions on strategic matters or important issues of policy to the Board of the shared service body.

This point was central to overruling the Court of Appeal. The Supreme Court rejected the notion that voting rights of the LAML membership and special resolution procedures under UK company law were insufficient to give the members collective control over strategic matters. The fact that members were not able to participate in the consideration of their own insurance claims was a matter of detail which did not detract from the overall picture of collective control exercised by the London Boroughs.

The Supreme Court rejected the argument that the LAML administration was relatively independent and concluded that the collective control of strategic objectives and significant decisions was with its participating members at all times. Given also that it controlled a service designed exclusively for the performance of public functions and no private interests whatever were involved, the Supreme Court held that the Teckal control test was satisfied.

What are the implications of the Supreme Court ruling?

While the ruling turned ultimately on the facts, the two key points above should facilitate informal public service pooling arrangements and create greater legal certainty over more formal shared service structures.

The Supreme Court ruling confirms that, further to Teckal and Commission v Germany, non-commercial cooperation arrangements between public authorities designed to share costs and pool public service tasks fall outside the procurement rules. This point is based on the notion that public procurement law applies to purchasing from the market. So, where the cooperation does not interfere with the market and is confined to the participating authorities, there should be no need to go out to tender. Indeed, there is authority in other UK case law (Chandler, R v Secretary of State [2009] EWCA Civ 1011) that the provision of public interest services by one public body to another at cost does not constitute a procurement.

On the flip side, any move by one public body to use its resources to offer a public service to other authorities "for profit" should fall outside the Teckal exemption and be subject to the procurement rules. This may be a difficult test to apply, given that most public bodies are non-profit making and will reinvest surpluses for the public benefit. But the key to the Teckal exemption is that it is about non commercial cooperation between public bodies. It implies the use of each other's resources, rather than one public provider offering the public market its services. The pooling of resources to achieve cost efficiencies - typically between geographically proximate bodies such as local authorities or hospitals and involving specialisation (for example, one to provider HR, another legal and another IT) - fit most comfortably within the Commission v Germany mould.

The ruling also means that where a more formal shared service vehicle structure is to be used, public authorities can enter into such arrangements with greater confidence that they will be within the Teckal exemption. In particular, after the Court of Appeal ruling in LAML, there was unease that UK limited liability companies were unsuitable shared service vehicles. This was on the basis that the duties owed by directors and the independence of Boards under UK company law could mean the degree of control exercised by shareholders in the normal way was insufficiently "hard" to satisfy the Teckal test. This concern no longer arises following the Supreme Court ruling.

However, as a cautionary note, the ruling does not change the position that where private interests are involved the Teckal exemption is unlikely to apply to contracts with public bodies. The shared service vehicles can of course go out to tender to appoint service providers under procurement law. However, if the rationale for the shared service entity is to buy in and leverage the expertise of a particular private sector partner (e.g. in return for equity in the entity) then this will continue to be difficult to square with the rules in the absence of a procurement process. In effect, the presence of a private sector partner - or indeed third party (private or public) customers - carries the consequence that the vehicle is a market facing entity with commercial objectives. As such, it is likely to trigger the need to ensure a fair and competitive tender process.

This development will be welcomed not only by local authorities, but also by housing associations, NHS entities and central government bodies. These will all be seeking to maximise the opportunities of cooperation without having to go through a costly and time consuming tender procedure.