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Court of Appeal decision overturned in first procurement case to reach Supreme Court.

On 9 February 2011, the Supreme Court handed down its first procurement law judgment ([2011] UKSC 7). In this case (on appeal from [2009] EWCA Civ 490), a five-judge bench unanimously upheld an appeal allowing a local authority to rely on an exception (the ‘Teckal exception”) to the standard procurement procedure, overturning the previous Court of Appeal decision.

Background

On 9 June 2009, the Court of Appeal dismissed an appeal by Brent London Borough Council (“Brent”) after the High Court had ruled that it was in breach of the Public Contracts Regulations 2006 by abandoning a procurement procedure and directly awarding insurance contracts to London Authorities Mutual Limited (“LAML”).

Brent had abandoned its procurement of “combined and miscellaneous insurance” in order to award it to LAML, a mutual organisation it had established along with 9 other London boroughs specifically to provide insurance services to the boroughs and their affiliates with costs savings of at least 15% compared to commercial premiums. Risk Management Partners (“RMP”), which had participated in Brent’s abandoned procurement procedure, challenged the direct award and claimed damages alleging that Brent was in breach of the Regulations (as well as running a challenge that Brent had acted ultra vires in participating in LAML).

Brent attempted to rely on the Teckal exception, a principle established in European procurement case law which allows public authorities to deviate from the Regulations when contracting to ‘quasi-in-house’ providers. However, the High Court and Court of Appeal both previously held that in the circumstances, it was not possible for Brent to rely on this exception. Following the Court of Appeal decision on liability (but prior to any causation and quantum hearing), Brent and RMP subsequently settled.

Harrow London Borough Council (“Harrow”), an interested party before the Court of Appeal, was however granted permission to appeal to the Supreme Court. The Supreme Court’s decision is important in terms of determining other damages claims pending against other London authorities which had contracted with LAML and clarifying the application of the Teckal exception to bodies such as LAML in the future.

Supreme Court judgment

Neither the High Court nor Court of Appeal agreed that Brent could rely on the Teckal exception. RMP was also successful in arguing that Brent had acted ultra vires in setting up and participating in LAML, however this line of argument is not dealt with in this procurement update and has now been subject to legislative changes through the Local Democracy and Economic Development and Construction Act 2009.

For the Teckal exception to apply, both a ‘control test’ and a ‘function test’ must be met. Namely, the local authority must exercise over the body to which the contract is awarded (i.e. the quasi-in-house body) a control similar to that which it exercises over its own departments; and that body must carry out the essential part of its activities with the authority or authorities concerned.

The questions considered by the Supreme Court were; (1) does Teckal apply at all?; (2) if so, can it apply to contracts of insurance?; and (3) in order for it to apply, must the control exercised over the body by the authority be exercised individually, or can it be exercised collectively? In both of the previous judgments it was held that whilst the answer to the first two questions was affirmative, the control test was not satisfied as, by nature of the collective control over LAML exercised by all 10 London boroughs involved, no individual borough exercised sufficient control to satisfy the control test.

The Court of Appeal had been concerned that it is impossible for a person to insure himself, and when it came to claims made by individual boroughs, the nature of the relationship between the borough as insured and LAML was essentially one between independent third parties. Further, it was stated that it was difficult to see how LAML can operate effectively unless its Board had considerable freedom to manage its insurance business. The nature of the business and the possibly differing interests of different authorities and affiliates were antithetic to the necessary local authority control.

Today however, the Supreme Court unanimously overturned this decision and upheld the appeal. With regard to the control test both Lord Hope and Lord Rodger, who provided the more detailed judgments, considered the ‘control’ requirement to be satisfied. The authority exercised collective control over the strategic objectives and significant decisions of LAML, which was sufficient. It was stressed that the purpose of the Regulations is not to force public authorities to openly tender contracts, but instead to ensure private bidders have the opportunity to compete for such contracts where a public authority chooses to procure externally. As such, the rationale of the Teckal exception is that the Regulations have no relevance when contracts are awarded to in-house providers, or indeed to those providers closely connected that they should be regarded as such.

In this case, there was no reason in principle to distinguish between individual and collective control or between situations where the provider exists to serve the interests of one or multiple local authorities. Providing there is no private involvement, and that the service is designed exclusively for the performance of the boroughs’ public functions, the control test should be satisfied. The function test was also satisfied, since LAML existed only to serve the insurance needs of its members.

Comment

The Teckal exception therefore applies where a public authority obtains services either from its own resources, or from a source so closely connected with it that it should be regarded as being in-house. According to Lord Rodger, the argument that individual control by one borough over LAML was necessary was “really inconsistent with the European Court’s thinking.”

This outcome will clearly have far reaching implications on local authority projects similar to LAML in the future, as the scope for local authorities to innovate in such ways in order to achieve cost savings has now been clarified by the courts following on from the clarification by legislature in 2009.