6 August 2009 | David Gollancz and Nicola Sewell

How much control do local authorities need over a third-party for a contract to be exempt from procurement rules?

THE CASE

The London Borough of Brent (Brent) ran a competition for insurance services for which Risk Management Partners (RMP) tendered. Having received tenders, Brent abandoned the procurement and awarded the contract directly to the London Authorities Mutual Limited (LAML), a company set up by councils to enable them to obtain and provide each other with insurance, which had not participated in the aborted procurement.

RMP brought an action against Brent for a breach of the Public Contracts Regulations 2006. Brent argued the Teckal exception justified the award of the contract to LAML without competition. (This holds that the award of a contract by a public authority to another legal entity is outside the scope of the procurement rules where (1) the authority exercises similar control over that entity as it does over its own departments and (2) the entity carries out the essential part of its activities with the authority which controls it.)

The High Court found Teckal did not apply, and Brent appealed. The issue was whether the local authority members of LAML had the requisite control to meet the first part of the Teckal test. The Court of Appeal summarised case law on Teckal and confirmed the following: Teckal applies under national law; to contracts to supply services as well as to concessions; there has been no weakening in the requirements for its application; the burden of proof is with the person asserting it applies; private sector participation excludes its application; the control over the entity may be exercised together with other authorities.

Also: ownership of the entity tends to indicate the necessary control; control requires a power of decisive influence over the entity's strategic objectives and significant decisions; the second part is satisfied if the essential part of the entity's activities are carried out with the authority which controls it. The Court of Appeal found against the authorities. The LAML board had wide powers and discretion to manage its affairs, including the ability to remove local authority members. The power of a majority of members to call a general meeting and to direct the board by 75 per cent majority was insufficient to establish control.

WHAT THIS MEANS

The courts will continue to apply Teckal strictly, examining whether there really is sufficient control over the other entity. They are likely to look at both legal control, through contracts and any constitutional documents, and the reality of the arrangement. Decisive influence over strategic objectives and significant decisions is a stringent test and the authority asserting it must prove it exists. The nature of insurance meant that LAML could never come under Teckal, as insurance must be supplied by a third party. Authorities will need to be careful when setting up vehicles for other shared services as they will be unlikely to come under the Teckal exception where the vehicle has any operational independence.

By David Gollancz, partner, and Nicola Sewell, trainee solicitor, Field Fisher Waterhouse