I am afraid that my social circle does not include many amoebae. However, this is undoubtedly my failing, since it appears that this remarkable one-cell life-form can not only change shape at will but can also split its cell to create a whole new amoeba. How clever is that?

I don't know if Lord Justice Stanley Burnton drew any inspiration from the learned amoeba, but he has certainly managed to produce two Administrative Court judgments from one set of circumstances. This was the participation by the London Borough of Brent and other authorities in a mutual insurance company (London Authorities Mutual Limited – LAML), designed to provide insurance for the council and other participating ­authorities instead of the commercial insurance arrangements with which the councils were unhappy. On 22 April 2008 in R (Risk Management Partners) v Brent London Borough Council and others [2008] EWHC 692 (Admin), he gave judgment on whether the councils had the legal power to do as they did. And on 16 May 2008 he ruled that Brent had breached procurement law in its ­ decision to abandon the contract award procedure (where Risk Management Partners Limited – RMP – appeared to have submitted the most financially advantageous tender) to award a contract for insurance to LAML which had taken no part in the public procurement exercise (Risk Management Partners v London Borough of Brent and others [2008] EWHC 1094). This note looks at both decisions in turn.

Legal powersTo the key question, can a local authority provide its own insurance by creating and participating in an ­ insurance company, Lord Justice Stanley Burnton gave a highly qualified and tentative ‘yes’.

Brent’s participation had ­ considerable financial implications for the ­ public purse, including the ­ provision of a financial guarantee of up to £1 million, a further guarantee to pay on demand to LAML sums up to £609,500, as well as an urgent cleared capital payment of £160,500 to enable LAML to operate. In addition, Brent paid premiums totalling £520,328 for terrorism, liability, ­ property and contents insurance. On ­ 1 April 2007, Brent and Harrow became ­ participating members of LAML. Ten other authorities ­subsequently became LAML members and provided the capital and ­ guarantees needed for FSA authorisation.

The court considered some key local authority legal powers, including section 111 of the Local Government Act 1972 (power for authorities to do anything incidental to any of its ­ primary functions) and broad primary powers in part 1 of the Local Government Act 2000 for authorities to promote or improve the economic, social or environmental well -being of their areas (well-being).

Section 111 was not available, since while taking insurance is clearly ­incidental to the functions of a local authority, the provision of insurance to others is not. And as for the well-being power, the court considered that an authority’s own financial well -being is not the same as that of its area. In any event, Brent appeared not to have framed its decision with the well-being power in mind. Nevertheless, the court did give a cautious green light to the fact that participation in LAML could potentially be empowered by well-being, provided the decision was properly taken in the light of all relevant statutory considerations.

Although the court acknowledged the width of the well-being power, it did seem to construe it rather ­ narrowly. In particular, given that a local authority can in many ways be regarded as a trustee for its area, a reasonable measure to reduce its costs and release monies for other functions might arguably be said to fall within well-being.

Public interest limitsThe normal public law constraints of reasonableness, in consonance with proper statutory purpose and the ­ fiduciary duty, should be sufficient to ensure that a power used in such a way was kept strictly within public interest limits. While the judge rather engagingly described himself as ­‘probably no more than the judge ­rapporteur for the Court of Appeal’, it will be interesting to see what that court makes of the powers issue when it gets there. In these proceedings, RMP was claiming damages against Brent for alleged breach of the Public Contracts Regulations 2006 for awarding ­contracts of insurance to LAML ­outside the tender process in which RMP had participated. RMP alleged a large number of breaches, including failure to act transparently and without discrimination, failure to afford equal treatment, and failure to award the proposed contract to the lowest or most economically advantageous tender.

Brent sought to rely on the Teckal principle, which was established in the decision of the European Court of Justice (ECJ) in Teckal Srl v. Comune de Viano and Azienda Gas-Acqua Consorziale (AGAC) di Reggio Emilia C-107/98 [1999] ECR I-8121. This essentially covers situations where the entity, which is the ‘contractor’ in the proposed arrangement, can be ­ regarded in law as substantially ­ controlled by the same public ­authority or public authority group as the authority which is seeking to make the arrangement, to a similar degree as if it were one of the public ­authority’s departments. For the Teckal exemption to be effective there are two key conditions:1 The public authority must exercise over the other contracting party a control which is similar to that which it exercises over its own departments;2 The other contracting party must carry out the essential part of its activities with the controlling local authority or authorities.

However, Brent failed to persuade the Administrative Court that Teckal would cover its situation. Having ­ considered the relevant case law authorities, Lord Justice Stanley Burnton derived the following ­ propositions:

  • The Teckal exemption is to be strictly interpreted (Stadt Halle v Arbeitsgemeinschaft Thermische Restabfall-und Energieverwertungsaniage TREA Leuna: C-26/03[2005] ECR I-1, paragraph 46);
  • It is for the public authority (in this case Brent) to establish that it applies;
  • Participation by private interests in a company is incompatible with the Teckal exemption (Stadt Halle, ­ paragraph 50);
  • The assessment of the control of a company for the purposes of the first condition for the application of the exemption must take account of all the legislative provisions and relevant circumstances (Parking Brixen Gmbh, Case C-458/03 at paragraph 65);
  • In this connection, the public authority must have a power of ­decisive influence over both strategic objectives and significant decisions of the company in question (Parking Brixen.);
  • The fact that the contracting authority holds, alone or together with other public authorities, all of the share capital in a successful tenderer tends to indicate, without being ­ decisive, that that contracting ­ authority exercises over that company a control similar to that which it ­ exercises over its own departments (Carbotermo SpA v Comune di Busto Arsizio, C-340/04 at paragraph 37).

Lord Justice Stanley Burnton also took the view that, where a company is owned by a number of authorities, it will normally be impossible for any one of them to have a decisive influence on the strategic objectives of the company. Consequently, Brent would not need to show that it alone had the power of decisive influence over both strategic objectives and significant decisions of LAML in relation to the insurance policies taken.

However, having considered the facts of the instant situation against the authorities, the court came to the view that there were contractual ­provisions in the relationship between the authorities and LAML that pointed to a degree of independence of ­ decision inconsistent with the Teckal exemption. Since Lord Justice Stanley Burnton did not consider that the first limb of the Teckal exemption had been satisfied he considered it unnecessary to examine whether the second had been met. In the circumstances, Brent was in breach of the 2006 Regulations and RMP was entitled to damages accordingly.

ConclusionBoth decisions are interesting and while, at the time of writing, appeal proceedings have commenced on the vires aspect and leave to appeal has been given on the ­ procurement issue, the vires decision is perhaps more vulnerable. This is because that was founded on quite a narrow ­ interpretation of the substantive ­well-being power and in particular that promoting or improving the authority's own well-being was not covered.

On the other hand, the procurement decision was based on an analysis of the particular facts and circumstances of the arrangement in question against case law authorities considered by the court to be relevant.

Whatever happens, the two LAML cases are of significance to all local authorities and those who deal with them since they ventilate two important legal issues. However, whether a senior court spots any flaws in Lord Justice Stanley Burnton’s cellular ­ fission when the amoebae are put under the higher -magnification judicial microscope remains to be seen.