The Court of Appeal has upheld an injunction granted to a supplier of insurance services to prevent the London Borough of Brent from awarding insurance contracts to a limited company owned by Brent and various other local authorities. Brent will have to pay damages to the supplier once the full trial has taken place; the amount of damages will be based on (although not necessarily equal to) the amount of profit the supplier has lost through not being awarded the contract.

Facts

The London Borough of Brent ran a procurement process for “combined and miscellaneous insurance”. Risk Management Partners (RMP) submitted a bid that was the most economically advantageous of the offers received. However, Brent decided to abandon the procurement process without making any award and instead awarded the contract to a company called London Authorities Mutual Limited (LAM). Brent was a shareholder in LAM along with several other local authorities who, between them, owned the entire issued share capital of LAM.

Legal action

RMP was clearly disgruntled that, having made the best offer, it still lost the contract. It made not one but two claims against Brent. The first claim was a judicial review action in which RMP argued that, by taking a shareholding in LAM, Brent had acted outside of the powers conferred on it by section 2 of the Local Government Act 2000 (this is the section that gives a local authority power to do anything that is likely to achieve the “promotion of well-being” of the relevant area). The High Court agreed that, in taking a shareholding in LAM, Brent was acting outside of the section 2 power.

RMP also brought a claim under the Public Contracts Regulations 2006 (regulations) for an injunction to prevent the award to LAM, arguing that the insurance contract was within the scope of the regulations and therefore that a competitive award process ought to have been followed accordingly.

Brent pulled two possible defences out of the hat. In the first place, it argued that this was a so-called “in-house” contract and therefore it was not a “public contract” for the purposes of the regulations (RMP countered this with the argument that the “in-house” contracts exception was a creation of European law and did not apply in a UK case). Brent’s second line of defence was an argument that more than three months had elapsed since RMP first became aware of the intention to award the contract to LAM, and therefore RMP was out of time with its claim, since regulation 47(7) required claims to be brought within three months.

Judgment of the Court of Appeal

The court had to decide whether the contract was an “in-house” contract or not and whether RMP’s claim was in fact out of time. The judgment considered the European case law, which established the “in-house contracts” exemption. The Teckal case established that a contract will only be a “public contract” for the purpose of the regulations if it is between two separate persons, and put forward a test for assessing this:

  1. the public authority (ie, Brent) must exercise over the other contracting party (ie, LAM) a control which is similar to that which it exercises over its own departments, and
  2. the other contracting authority (ie, LAM) must carry out the essential part of its activities with the controlling local authority or authorities.

Further case law gave more guidance on the sorts of situations where contracts would and would not be viewed by the court as “in-house” awards. The Stadt Halle case established that any private sector shareholding would take a contract outside of the Teckal exemption, since there would not be the requisite degree of control. Parking Brixen established that, to come within the exemption, the local authority would need “a power of decisive influence over both strategic objectives and significant decisions”. The court decided that this case law of the European court was indeed binding upon the English court and that the exemption did therefore, potentially at least, apply. However, when the court looked carefully at the day-to-day operation of LAM, it became clear that Brent and the other local authorities did not have the necessary degree of control for the exemption to apply. Management of LAM was actually contracted out to a private company whose employees had the necessary expertise to manage insurance contracts. While the local authority shareholders sat on the board of LAM, in practice they had little control over day-to-day management and no expertise in the insurance field. The Court of Appeal decided that this was an insufficient degree of control to sit within the Teckal exemption and therefore that the contract was a “public contract” that should have been opened up to tender in accordance with the regulations. Brent had therefore been in breach and RMP had grounds to challenge.

Brent was therefore now totally reliant on its second line of defence, namely, that RMP was “out of time” in bringing the claim later than three months from when RMP first became aware that Brent was planning to abandon the procurement and award to LAM. Unfortunately for Brent, however, this argument didn’t wash with the court, which decided that the three months had started to run on the date that the breach of the regulations took place; this was the date on which Brent awarded the contract to LAM. With that date as the starting date, RMP was within the three-month time period and therefore the claim for an injunction succeeded.

Comment

So far there have been few cases in which a supplier is successful in obtaining an injunction. However, the regulations, since they came into force in January 2006, have provided suppliers with a much clearer route towards challenging procurement processes and it is likely that we will see more of these sorts of challenges in the future. The case also demonstrates the narrowness of the “in-house contract” exemption. Any local authority seeking to rely on it should seek legal advice at an early stage to check that the proposed contract falls very clearly within the scope of the Teckal case.