In a particularly long-running legal saga the Supreme Court (ie. the House of Lords) finally overturned a previous Court of Appeal finding with respect to whether or not a group of London public authorities could directly appoint London Authorities Mutual Limited – an entity owned, financed and established by the same authorities – without going out to tender as per the public procurement (OJEU) rules.

Along the way this case has entered into discussion of many issues beyond procurement but before the Supreme Court it effectively boiled down to whether or not the in-house exemption applied, as per the European caselaw following the infamous Teckal case. Teckal states that a contract is exempt from the need to follow the OJEU rules where:

  • the public contracting authority exercises over the distinct entity (to which it awards the contract) a control which is similar to that which it exercises over its own departments; and  
  • that distinct entity carries out the essential part of its activities with the local authority or authorities which control it.  

The above are known as the “control” and “function” tests. The Supreme Court observed in the first test that the participating members collectively controlled a service designed exclusively for the performance of their public functions. No outside interests were involved as had been the case in another EU case, Stadt Halle. The Court considered it sufficient to establish collective control and unnecessary to establish individual control by each authority in respect of its contracts (as most obviously set out in the EU case of Carbotermo).

As regards the function test, it was noted that the main object of LAML was to provide insurance to participating members and it did not do anything else, and there was no private involvement in at all apart from 2 directors (out of 11 total) which were FSA regulatory requirements anyway.