Confidence boost

In the challenging landscape of public procurement law, the Supreme Court has recently provided welcome clarity to local authorities that are contemplating new entities to share the delivery of services. The application of procurement regulations to 'in house' procurement has been explained. The matter was recently considered by the Supreme Court, in its first judgment on public procurement, in the case of Brent LBC and Harrow LBC v Risk Management Partners Ltd [2011] UKSC.

Brent LBC had decided to participate in establishing a new mutual insurance company, London Authorities Mutual Ltd (LAML). It was to be run for the benefit of participating London authorities in order to achieve costs savings and improved risk management.

Despite having issued an invitation to tender for the insurance contract, Brent decided to dispense with the procurement exercise mid way and instead unilaterally directly awarded the contract to LAML.

A rival insurance intermediary, Risk Management Partners (RMP), which had been involved in the aborted procurement process, challenged Brent's awareness of the contract to LAML and contended that Brent had breached the Public Contracts Regulations 2006.

The argument

Brent argued that it had not acted unlawfully since the contract fell within the 'Teckal exemption' and therefore the 2006 regulations did not apply. The Teckal exemption is the principle laid down by the European Court of Justice (ECJ) in Teckal srl v Comune de Viano (C107/98). The case held that there is no 'contract' for the purposes of the EU Procurement Directive where the contracting authority is formally dealing with a legally distinct person but:

• exercises control over that person and that control is similar to that which it exercises over its own departments (the 'control test'); and
• the person carries out the essential part of its activities with the controlling authority (the 'function test').

The High Court allowed the claim and the Court of Appeal dismissed the appeal by Brent. The Court of Appeal held that while arrangements between participating authorities could in principle come within the Teckal exemption, in this case the control test was not met. LAML could not be regarded as a department of each of the participating local authorities. This was because the board required considerable freedom to manage its insurance business effectively. Further, the interests of various authorities were likely to differ and affiliates and the nature of its business meant that there could not be the necessary local authority control to satisfy the Teckel exemption.

The decision

By the time the case reached the Supreme Court, Brent and RMP had settled their claim. Harrow had pressed ahead and the Supreme Court considered the issue of whether the 2006 regulations applied to the LAML contract and the scope of the Teckel exemption. The key issue was whether the control test was met. The Supreme Court allowed Harrow's appeal holding that:

• The Teckel exemption could in principle apply to the 2006 regulations and to contracts where insurance was the subject matter.
• The control test was met and that it was sufficient for control to be exercised by the local authorities 'collectively'. As the participating authorities had collective control over strategic objectives and significant decisions, the Teckal control test was satisfied.

The Supreme Court placed reliance on the ECJ decision in Coditel Brabant SA v Commune d'Uccle (Case C-324/07), which made clear that the test would be satisfied where control was exercised by the authorities collectively rather than individually.

'Collective control is enough,' said Lord Hope, adding: 'Public authorities [are] not require[d] to follow any particular legal form in order to take advantage of it. So long as no private interests are involved, they are acting solely in the public interest in the carrying out of their public service tasks and they are not contriving to circumvent the rules on public procurement, the conditions are likely to be satisfied.'

• The function test was also met since the only purpose of LAML was to serve the insurance needs of its members.

The implications

This ruling ought to give greater confidence to public authorities seeking to enter into public service sharing arrangements. The application of the Teckal exemption to such arrangements will facilitate the operation of such entities.

The Supreme Court makes clear that procurement law is only pertinent where a contracting authority 'seeks offers' in relation to certain public contracts. It does not apply where the contracting authority actually obtains the services from either 'in house' resources or from a separate entity which is either controlled by it or collectively controlled by other authorities in a share service arrangement.

The upshot is that the purpose of the procurement regulations is not to interfere with non-commercial arrangements between public authorities and to require them to seek services from the marketplace in circumstances where they want to provide those services through cooperation between themselves. The key is that they must be acting in the public interest and carrying out public service tasks and that no private interests are involved.