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High Court ruling on the establishment of a local
government mutual insurance company and associated procurement
issues
3 June 2008
In R (on the application of Risk Management Partners Ltd) v
Brent London Borough Council and others, the High Court has
issued a very significant judgment concerning the powers of Local
Authorities to establish mutual insurance companies, the direct
award of contracts to in-house companies and liability and delay in
relation to an action for breach of the Public Contracts
Regulations 2006 (the “Regulations”). The second part of the
judgment is extremely relevant for trusts that may be contemplating
setting up a joint venture company with other public bodies, with
the intention that the company will provide services to the trust
and the other public bodies as members of that company. Such
arrangements fall within the shared services agenda which has been
prioritised by central government as the essential tool for
generating further efficiencies. In this case, the High Court
considered whether the direct award of a contract to a mutual
insurance company to provide insurance services to its members
without complying with the requirements of the Regulations was
permissible pursuant to the exemption first laid down by the ECJ in
Teckal (Case C-107/98) (the “Teckal Exemption”).
Background
In February 2007 Brent London Borough Council (the “Council”)
issued an invitation to tender for an insurance services contract
(divided into seven lots). In response to the Council’s invitation
Risk Management Partners (RMP) tendered for the services and its
bid appeared to be the most financially advantageous offer received
by the Council. However, prior to award of the contract the Council
abandoned the award procedure for six of the lots and instead
directly awarded the contract to London Authorities Mutual Limited
(LAML) of which the Council was a participating member, but which
had taken no part in the tender process.
Breach of procurement rules
The second part of RMP’s claim was that the Council had breached
the Public Contracts Regulations 2006, in particular its duties to
act in a non-discriminatory and transparent way, its obligation to
comply with the procurement procedures, its obligation to award
contracts to the most economically advantageous or lowest price
bid, and its obligation to issue a contract award notice. The
Council did not deny that it had not complied with the requirements
of the Regulations as it sought to rely upon the Teckal
Exemption as a justification for not following the
requirements for set out in the Regulations. The Teckal
Exemption provides that a formal tender procedure is not
necessary, even where two contracting entities are legally distinct
from each other, where the following two conditions are
satisfied:
- The public authority (or authorities) exercises over the other
contracting party a control which is similar to that which it
exercises over its own departments; and
- The other contracting party must carry out the essential part
of its activities with the controlling public authority or
authorities
The Court did not agree with RMP’s argument that the Teckal
Exemption was not part of English law. It confirmed (albeit
with some hesitation) that the Teckal Exemption for in-house awards
was indeed part of English Law and was applicable to contracts of
insurance.
The Judge re-iterated various principles that derived from
previous case law and highlighted that Teckal was to be
restrictively applied and that participation by private interests
in such a company was incompatible with the exemption. Also, mere
shareholding or participation in a company, although indicative,
was not sufficient in demonstrating the required amount of control
necessary.
The Judge carried out a detailed analysis as to whether the
first condition was satisfied in the present case. He ignored the
regulatory requirements imposed on LAML as these would equally
apply to a truly in-house insurer that was not separately
incorporated. He considered, in some detail, whether the
relationship between the Council and LAML was a relationship where
the Council exercises a control similar to that which it exercises
over its own internal departments. After consideration of LAML’s
constitution he reviewed how the day-to-day management of the
company was carried out and considered that its management was
handled relatively independently. It seems to have been
acknowledged by the participant members of LAML that they did not
have insurance expertise and accordingly they had employed a
private management company to run the company for them. The Judge
decided that the involvement of a private company, employed to
manage LAML, pointed against the Council being able to demonstrate
the first condition of the Teckal Exemption. The participating
members of the company held the power to give directions to the
board who could in turn give directions to the managing company but
they were not really involved in the general administration of the
business at all.
Most importantly, the contractual provisions contained in the
articles of Association and other documents suggested a degree of
independence that was inconsistent with the first condition. One
example considered by the Judge was that the participating members
of LAML were to be excluded from the Board’s consideration of their
insurance claims. Another was that the Articles conferred power on
the Board to terminate the membership of any participating member
if, in its judgment, it deemed such continuing membership to be
undesirable. The Judge also considered that the insurance policy
terms were typical of those issued by wholly independent insurers
to their insured and were of normal commercial form, therefore were
inconsistent with the requirements of the first condition of the
exemption.
Unfortunately, as the Judge concluded that the first condition
of Teckal had not been satisfied, he did not consider the
application of the second condition. Public authorities are
therefore forced to refer to previous case law in ensuring
compliance with this condition of the exemption. It is worth
remembering that in the Tragsa case (Case C-295/05) it was
deemed sufficient that 90% of the company’s activities were carried
out with its controlling public authorities.
The Judge also considered liability and damages under section
47(1(a) of the Regulations. The Regulations state that proceedings
must generally be brought within three months from the date when
grounds for the bringing of proceedings first arose. The Judge held
that these grounds first arose on the date that the Council first
breached the Regulations which was the date upon which the Council
awarded the contract to LAML and not when RMP first became aware
that the Council may have breached its duties under the
Regulations. On this basis, as RMP commenced proceedings within the
specified time limit it followed that RMP would be entitled to
damages for the Council’s breach of the Regulations.
Conclusion
This case re-emphasises the importance of ensuring that where a
public authority seeks to establish a Teckal–compliant
company, the contractual documents reflect the degree of control
that is necessary in order for the first condition of
Teckal to be satisfied. From a contracting authority
perspective it is positive to note that the High Court has
confirmed that the Teckal exemption is alive and part of
English law. However, the case may raise concerns for contracting
authorities as it is one of the first cases in which damages under
the Regulations have been awarded. The Council and LAML have both
sought and obtained leave to appeal the judgment.
For more information or advice, please contact Sharon
Jones.
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