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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 Councils 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 RMPs 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:

  1. 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
  2. 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 RMPs 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 LAMLs 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 Boards 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 companys 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 Councils 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.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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