The phoenix is a splendid mythical bird that is serious about regeneration. Near the end of its 500-1,000 year lifecycle it burns itself to ashes, only to emerge anew to live through another lifetime.

Unfortunately, London Authorities Mutual Limited (LAML), the mutual that followed in the footsteps of the 89-year-old local authority mutual insurance enterprise, Municipal Mutual Limited, after it ceased to write new business in 1992 following substantial losses, failed to emulate the bird. Perhaps 500 years is a minimum time limit for phoenix-like behaviour.

LAML was formed by various London boroughs and started assuming risk on 1 April 2007 but, following a decision of the Court of Appeal on 9 June 2009, it became more of a dead parrot than a phoenix. The decision in question was Brent LBC v Risk Management Partners Limited and London Authorities Mutual Limited and Harrow London Borough Council as interested parties [2009] EWCA Civ 490 (Lords Justice Pill, Moore-Bick and Hughes).

Brent and other authorities had created LAML to provide insurance for their corporate property, terrorism and liability risks. The idea was to use well-being powers to save 15% annually on insurance costs. In the circumstances, Brent awarded the insurance contract to LAML, abandoning the procurement process in which the respondents – Risk Management Partners (RMP) – had submitted what had appeared to be the most economically advantageous tender. RMP claimed damages accordingly for breach of the Public Contracts Regulations 2006 (which implemented Directive 2004/18/EC).

The Court of Appeal found that Brent could not lawfully participate in LAML and that it had breached the procurement rules in awarding the contract to that company.

Legal powersOf particular interest was the scope of the well-being power in section 2 of the Local Government Act 2000. This (with some constraints) allows local authorities to do anything they consider is likely to promote or improve the economic, social or environmental well-being of their area, and indeed beyond, as appropriate. It has been considered a broad power and the courts had previously construed it accordingly. In November 2008, former local government minister, John Healey, had urged authorities to make more use of it.

Moreover, the Department for Communities and Local Government, referring to the power as a ‘forgotten tool in tough economic times’, described it as ‘…a general power of competence permitting councils to do anything except raise tax to promote the economic, social and environmental well-being of their area’.

But in the view of the appeal court, the measure falls considerably short of a power of general competence. So Lord Justice Pill, having canvassed previous case law on local authority powers, did not consider that parliament was giving authorities carte blanche subject only to the specified statutory limitations. He observed that LAML would insure a number of authorities and would have problems which arose from its needs and which would often be remote from the well-being of the authority’s area. In his view, the well-being power ‘…does not extend to a power to enter into the complex and somewhat speculative attempt to save money which is the mainspring of the LAML arrangement’. And he considered that the ‘guarantees and degree of speculation involved… take the activity proposed beyond what parliament intended’. It did not, he remarked, require a specific exclusion to place the enterprise in question beyond the well-being power.

Lord Justice Moore-Bick agreed, expressing the view that ‘section 2 gives a local authority power to take steps that have as their object, direct or indirect, some reasonably well-defined outcome which it considers will promote or improve the well-being of its area’. He considered that the power enables authorities ‘to do things themselves, or to procure or enable others to do things, that directly affect the well-being of their areas’. However, merely ‘to reduce the costs of goods or services purchased by the authority which does not have as its object the use of the money saved for an identified purpose, which the authority considers will promote or improve well-being, does not, on a natural reading of the words, fall within the section’.

Section 111 of the Local Government Act 1972 (an old and battle-scarred trooper on behalf of local authority creative endeavours) also saw service on behalf of LAML, but fell in the field in this context. Although section 111 enables authorities to do anything calculated to facilitate, be conducive or incidental to the discharge of any of its functions, it is expressly subject to other statutory provisions and is a subsidiary power which can only attach to a primary authority function.

And this was the difficulty for, as Moore-Bick LJ pointed out, the council function to which the power to participate in LAML was said to be incidental was not the obtaining of insurance (which is itself incidental and not a substantive function) ‘…but the ordinary range of a local authority's functions, the performance of which gives rise to risks of loss and damage to property and of liability to third parties of all kinds’. But it is settled authority that for section 111 to be effective it must link to a primary function and not to another incidental power (see, for example, R v Richmond upon Thames London Borough Council, ex parte McCarthy & Stone (Developments) Ltd [1992] 2AC 48).

In the circumstances, Moore-Bick LJ expressed the view that ‘membership of the company and the obligations to which it gives rise involve a significant departure from conventional insurance arrangements and are properly to be viewed in this context as incidental to the incidental’.

Public procurementBrent had been relying on the exception in the November 1999 decision of the European Court of Justice in Teckal Srl v Commune di Viano & Azienda Gas – Acqua Consorziale (AGAC) di Reggio Emilia [1999] ECR I-8121 (the Teckal exception). This found that rules governing public procurement can be departed from only where the authority exercises over the person concerned a control similar to that which it exercises over its own departments and, at the same time, that person carries out the essential part of its activities with the controlling local authority or authorities.

However, as indicated, the court found Brent to have been in breach of the procurement regulations. Pill LJ noted that the burden of establishing the control element lay on Brent as appellants. In agreement with the court below, he concluded that the relationship between Brent and LAML was inconsistent with Teckal. Although the authority members of LAML could, with a 75% majority, give directions to the LAML board, those directors, even though appointed by participating members, owed duties to LAML and its needs. He consequently found it ‘difficult to see how LAML can operate effectively unless its board has considerable freedom to manage its insurance business’. In the circumstances, he found that the ‘nature of the business, and the possibly differing interests of different authorities and affiliates, are antithetic to the necessary local authority control’. Similarly, Moore-Bick found it ‘clear that the board rather than the members was intended to exercise control over the company’. And in his view there was ‘an air of unreality about the notion that a public body can obtain insurance from one of its own departments, since it is of the essence of insurance that risk is transferred from one person (the insured) to another (the insurer)’.

Next stepsSo where does this leave local authorities seeking creative solutions for benefit of their areas? It seems that the appeal court has caged rather than killed well-being in the sense that, while it does not regard the power as a ‘carte blanche’, it does expect to see a ‘well-defined outcome’ linked to promotion or improvement of the well-being in question. And although the appeal court disagreed with the court below that, in the circumstances, well-being was not within the contemplation of the decision-making body at the material time, it is nevertheless always wise for the relevant report clearly to set out the appropriate powers underpinning the proposed decision. With due focus, the existing suite of legal powers should allow authorities a fair amount of creative flexibility.

In addition the government, in a July 2009 consultation paper (closing in October), proposed to give local authorities a specific power to engage in mutual insurance arrangements as soon as possible. The paper also asks whether there are other similar potentially beneficial arrangements which are potentially constrained by current legal powers. However, even if a true power of general competence (as, for example, proposed by the Conservatives) is at some stage enacted, this will still of course be subject to public law principles (including the fiduciary duty) and regulated accordingly by the courts.

Public bodies are stewards of public money and differ from private businesses, which are free within their constitutions and relevant law to speculate as they think fit with their resources. But while the public will welcome sound schemes to save cash, they are likely to be less sanguine about speculative activity that may put at risk trustee monies exacted by the state at local and national levels.

Nicholas Dobson is a practising solicitor specialising in local government