Brent LBC v RMP
On 9 June 2009, the Court of Appeal handed down its judgment in Brent LBC v Risk Management Partners, upholding the insurance provider's claim for damages for breach of the procurement rules.
Risk Management Partners (RMP) had participated in an insurance services tender procedure initiated by Brent LBC (Brent) in December 2006. In January 2007, Brent became a member of LAML, a mutual insurance company established by a number of London Borough councils. In March 2007, RMP was told that the contract had been awarded to LAML. LAML had not participated in the tender.
The Teckal exemption
Brent argued that the procurement regulations did not apply in this case. It sought to rely on the European Court of Justice (ECJ) case of Teckal SrL v AGAC (Case C-107/98). This case carves out from the regulations agreements which can be considered "in-house" administrative arrangements. For the Teckal exemption to be successful, two conditions must be satisfied; firstly, the contracting authority must exercise a degree of control over the other party similar to that which it exercises over its own departments and, secondly, the party that is awarded the contract must carry out the essential part of its activities for the contracting authority.
The Court of Appeal confirmed that the Teckal exemption does apply under English and Welsh law and was willing to accept that the second condition of Teckal was satisfied in this case. It did not matter that LAML's articles of association permitted it to provide third party services as it was not intended to do anything other than provide services to its members.
In relation to the first control condition, the court stated that local authorities are free to carry out their functions using a body with separate legal personality. And they can do so in cooperation with other public bodies provided that together they retain the requisite degree of control over the service provider. This requires a power of decisive influence over both strategic objectives and significant decisions of the controlled entity. The assessment of this test is based both on a review of the relevant constitutional documents and the way in which the arrangements work in practice.
The court found that LAML enjoyed a significant degree of operational independence. This was illustrated by:
- the extensive powers of the board of LAML (including powers to terminate the membership of a participating member and to establish, collect, manage and redistribute capital contributions and premiums of local authority members); t
- he duties owed by the board to LAML;
- the nature of the insurance relationship (which requires a transfer of risk between the parties) and its overall regulation by the Financial Services Authority; t
- he differing interests of the various authorities; and
- the arrangements made with the management company.
This operational independence meant that Brent lacked the degree of control over LAML required by the exemption.
Brent argued that RMP's claim, brought on 6 June 2007, was out of time. Under the procurement regulations, claims should be brought promptly and not later than three months after "the grounds to make the claim first arose". Brent submitted that these grounds arose in November 2006 when it resolved to approve participation in LAML or, at the latest, on 18 January 2007 when it became a member of LAML.
The court rejected this argument. Although there was an apprehended breach in November 2006, this did not materialise into an actual breach until 7 March 2007, when Brent abandoned the tender process.
Until that point, RMP had not sustained the damage which was the basis of its claim. RMP could (and possibly should) have made an application for interim relief earlier, but this did not mean that time begins to run from the moment of an apprehended breach for a damages claim.
Grounds for bringing anticipatory proceedings arise when there is sufficient evidence of an intention not to comply with procedure. In all other cases grounds arise only when the contracting authority fails to comply with that procedure. The court also stated that, given that Brent issued an invitation to tender in February 2007, they should not be allowed to defeat the proceedings on the basis of delay and the period for bringing an action would, in any event, be extended in the circumstances.
In his one-page judgment agreeing with the other judges, Lord Justice Hughes helpfully added: "note, however, that any failure by a contracting authority to comply with any step in the required procedure involves an actual breach and it is accordingly not open to a putative claimant to await the last in a series of actual breaches and to contend that time runs only from then."
The court also confirmed the first instance judge's ruling that Brent had acted 'ultra vires' in entering into the contract with LAML. This part of the ruling is the subject of another Wragge & Co alert: Promoting well-being – caution rules again.
Brent's appeal was dismissed in its entirety.
Commission v Germany
Coincidently, the ECJ handed down its judgment in the case of Commission v Germany on the same day. This was another dispute involving inter-authority cooperation. In this case, the City of Hamburg waste disposal services (Hamburg RDS) facility, contracted with four other neighbouring local authorities (Landkreise) to make available waste disposal capacity for a 20-year period. Hamburg RDS was to contract with a third party to build and operate the waste treatment plant (the 'Rugenberger Damm'), though the case concerned only the arrangements between the Landkreise and Hamburg RDS.
Hamburg RDS had offered the other municipalities the waste disposal capacity by letter of 30 November 1994. This was accepted on 6 January 1995 and the contract with them was not concluded until 18 December 1995. At this time, work on the Rugenberger Damm plant was still at the planning stage.
The Commission challenged the Federal Republic of Germany over the contract between Hamburg RDS and the Landkreise, arguing that a call for tender should have been issued. The Commission claimed that the Teckal exemption conditions were not fulfilled, since none of the contracting bodies concerned exercised any power over the management of Hamburg RDS.
FRG argued that the contract was an internal cooperation measure between state bodies covered by the Hamburg Metropolitan region. On this basis, the Hamburg RDS should not be regarded as a service provider, but as a public body offering administrative assistance to neighbouring local authorities in return for reimbursement of its operating costs.
In his opinion given in February, the Advocate General concluded that the Commission's submissions were correct on the basis that the Teckal test was not met.
However, the ECJ disagreed and sided with Germany. The ECJ relied on the Coditel case (Case C-324/07) to support its ruling. (In that case, the ECJ found that the transfer by a Brussels commune of the cable TV management concession to an inter-communal cooperative met the Teckal test even though the control exercised by individual members could not be said to be decisive in its decision making.)
The ECJ in Commission v Germany noted that the cooperation related solely to public service tasks applicable to the municipalities with no private participation and that this arrangement did not prejudice the award of any private contracts for the build and operation of the plant.
Citing Coditel, it confirmed that authorities may carry out public interest tasks in cooperation with other public authorities and the procurement rules do not prescribe any particular legal vehicle through which this cooperation must be carried out.
The ECJ also relied on the fact that the contract was the culmination of inter-municipal cooperation and commitments, with a view to enabling the construction and operation of the waste facility for their mutual use on a shared capacity basis. In the circumstances, it held that there was no reason for the court to consider whether the Teckal exemption was fulfilled.
The use by public bodies of shared service vehicles to pool services, rationalise costs and improve efficiency is increasingly fashionable. In public procurement policy terms, these arrangements should not trigger the need for a competitive tender process. If public bodies can keep certain services in-house, they should be able to cooperate in doing so without offering the service up to the market.
However, public sector shared service vehicles often have wider aspirations and seek to enter the vast public sector markets in competition and sometimes in cooperation with private contractors and service providers. The more they do so, the more difficult it is to argue that the services in question are being kept within the family of government.
Recognising the fine line between public sector cooperation and market activity, the ECJ in Teckal and subsequent case law has formulated certain tests which need to be met in order to satisfy the in-house exemption.
The second limb of the test ensures that if the shared services vehicle undertakes any private sector activity it will cease to be treated as an in-house provider. Equally, any private sector participation in the control or ownership of the vehicle will take it outside the first limb, which is the control test.
The evolving EC case law has made it clear, however, that assuming the absence of such private participation, a shared services vehicle jointly controlled by multiple public bodies can still be considered within the in-house exemption. This is so even though the direct control exercised by individual bodies is diluted by the sometimes conflicting interests of the other controlling bodies. The latest ECJ cases such as Coditel indicate that provided there is collective decisive influence over the provider and its remit is confined to the joint public service, the degree of individual control required by the Teckal exemption can be quite tenuous.
Just as the ECJ was becoming increasingly tolerant to the pooling of public services, the Court of Appeal appears to have put on the brakes.
In the case of LAML, where the jointly-owned provider (as insurer) necessarily exercises operational independence (over the insured) and the interests of some of the controlling public bodies (with some making large insurance claims) could diverge, the Teckal control test was not considered to be met.
There will be other UK shared services where there are conflicting interests and significant risk transfer. Indeed, in any case where there are multiple controlling bodies, the chances are that the executive body of the shared service provider will exercise significant operational independence.
Following Brent, it may be more difficult to justify multiple body pooled service arrangements in the absence of a tender process, even where there is no element of private participation. Public bodies may be wise to choose a structure which ensures that the operational independence of the shared services vehicles is constrained by the direct influence of member bodies.
However, on the day the Court of Appeal was championing a strict interpretation of the public procurement rules, the ECJ was again intent on introducing greater flexibility.
Commission v Germany opens up the possibility of pooling public service functions, regardless of legal structure and without having to satisfy the Teckal thresholds.
It may be that, in reality, this case was more about central purchasing than shared services. Although it is difficult to work out exactly what was happening, in essence it appeared that the municipalities were cooperating over the buying of waste management services from the plant operator, via Hamburg RDS. Indeed, payments were to be made directly by each municipality to the plant operator and Hamburg RDS was not to be responsible in the event that the plant was non-operational or where there was insufficient capacity for the other parties.
Brent v LBC was also quite fact specific and may be over-turned if it is appealed. The higher UK courts will no doubt have other opportunities to rule on similar issues in light of Commission v Germany. Ultimately, the ECJ enjoys supremacy in the legal hierarchy.
UK public bodies, alarmed by Brent, should therefore be reassured by Commission v Germany. Provided the pooled functions are limited to non-commercial public services, no private stakes are involved and the appointment of any private provider for the services in question is subject to competitive tender, then there should be flexibility as to the cooperation structure used.
Finally, the statements on the delay test in Brent provide some guidance on this difficult area. The case illustrates how claims can, in certain circumstances, be brought much later than the initial anticipatory breach. However, it does not permit claimants to wait until they have finally been eliminated from a tender before bringing a claim based on a much earlier actual breach.