The Localism Bill was introduced on 13 December 2010 and has just had its second reading. Its aim is to implement the Government's policy of giving more power to local authorities. One measure intended to achieve this aim is the grant of a "general power of competence" to local authorities. The Government hopes that this will give them the confidence to be innovative in their delivery of public services. This should, in turn, give the private sector comfort that contractual arrangements with local authorities will be less susceptible to challenge on the basis that a local authority has acted beyond the scope of its powers (ultra vires).

Key points

  • The Government hopes that the new power will actively encourage innovation, which is regarded as particularly important at a time of budget cuts. The intention is to shift the emphasis from a conservative approach to local authority powers to a permissive one, where local authorities can do anything unless it is specifically prohibited.
  • Although the granting of the new power may make it more difficult to challenge local authorities on the basis that they have acted ultra vires, they are still subject to general public law obligations and other grounds of challenge (such as procedural unfairness and irrationality) will remain available.

Local authorities and ultra vires

The role of the ultra vires doctrine is to enable the courts to check that public authorities do not exceed their powers. As creatures of statute, local authorities can only act in accordance with their statutory powers. Confidence about the scope of those powers is therefore essential for ensuring that local authorities are able to do what they need to do, including entering into contracts with those in the private sector. There is a widely-held view that the potential of local authorities to seek innovative ways of delivering their services has been curtailed because of concerns that their powers are currently not drawn widely enough.

This is despite the existence of broad statutory powers, including those granted by section 111 Local Government Act 1972 (LGA 1972) (which allows local authorities to do anything which is incidental to their functions) and section 2 Local Government Act 2000 (LGA 2000) (which gives local authorities a power to do anything which they consider likely to promote or improve the economic, social or environmental well-being of any part of their area).

Lack of confidence in the scope of existing powers has been fuelled by a line of cases in which the courts have struck down contracts entered into by local authorities, on the basis that they were ultra vires. In 2009 the Court of Appeal in Brent London Council v Risk Management Partners held that the Council acted ultra vires when it obtained insurance cover from a mutual insurer in which it was a participating member. The well-being powers in section 2 LGA 2000 did not cover the obtaining of insurance by participation in a mutual.

The ultra vires doctrine has also been used by local authorities in an attempt to avoid their contractual liabilities when things go wrong – see the infamous case of Credit Suisse v Allerdale Borough Council. In that case, the local authority set up a company to develop a swimming pool and timeshare flats and acted as guarantor in respect of the company's borrowings. Sales of the flats were poor and the company got into difficulty. In order to try and avoid meeting its obligations under the guarantee, the local authority (successfully) argued that the contract was void as it had never had the power to enter into it.

Understandably, these cases and others like them have had an impact on private sector contractors considering entering into agreements with the public sector. Cautious lawyers in many local authorities have been wary of relying on the general powers in case of costly legal challenges. The Government's research shows that only a small number of authorities have used the power of well-being as a power of first resort; many have not used it at all.

The general power of competence

Clauses 1 to 7 of the Bill provide for a general power of competence for local authorities in England. Schedule 1 repeals the well-being powers in the LGA 2000 in so far as they relate to England. The effect of this will be that local authorities can essentially act in the same way as an individual. This means that no action – except raising taxes - will be any longer "beyond the powers" of local government in England, unless the local authority is prevented from taking that action by the common law, specific legislation or statutory guidance.

Time will tell whether, as the Bill's promoter Eric Pickles stated on presenting it for second reading, this is the "single most important item in the Bill." In particular, its impact may prove to be limited by the grant of a wide power to the Secretary of State to exclude local authorities' ability to do specified things under the general power, or to provide conditions under which the power can be used.