In a 3-0 decision the Court of Appeal has today ruled decisively that it is beyond the power of any local authority to set up and participate in a mutual insurer.

The unanimous decision of their Lordships in the case of RMP -v- Brent [2009] EWCA Civ 490 not only reinforces but goes further than the original twin decisions, Part 1 (on vires) and Part 2 (on procurement — see below). At first instance, the Court found that Brent had not shown that it had properly considered whether its area would benefit from the supposed savings to be had from participating in LAML. The Court of Appeal has now held that question to be irrelevant — all that counts is whether an authority can participate in a mutual insurer such as LAML, and the short answer is that it cannot.

RMP is an open-market supplier of insurance services to the local authority sector. LAML is a mutual insurer set up by a number of London local authorities to provide, on a monopoly basis, insurance to London authorities. RMP were invited to tender by Brent, who then abandoned the process and awarded the contract to LAML. RMP contested this decision in two ways: first, by arguing that it was beyond any authority’s powers to set up and participate in such an insurer (the vires case); second, by contesting Brent’s decision to award the contract to LAML outside the public procurement rules, which Brent did in reliance on a European decision known as Teckal (the procurement case).

Harrow and LAML were Interested Parties, and fully legally represented, in both the original hearing and before the Court of Appeal.

The vires case

Brent relied on two statutes: s.2 of the Local Government Act 2000 (the so-called ‘well-being’ power), and on s.111 of the Local Government Act 1972.

The first argument, under s.2 LGA 2000, is that an authority is permitted to do anything which might improve the well-being of its area. Brent said that the money that it hoped to save via its participation in LAML would be put to the well-being of the area for which it is responsible and hence that its participation in LAML was thus legitimate. At first instance, Brent failed in this argument because it could not show that it had properly considered whether any such savings would, in fact, be applied thus. This part of the judgment allowed other authorities, and LAML, to claim that the decision did not apply to them, but rather applied to the particular facts of Brent’s decision to participate in LAML.

That claim has now been firmly squashed. In the leading judgment, Pill LJ said that the s.2 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. The guarantees and degree of speculation involved, in my view take the activity proposed beyond what Parliament intended by the well-being clause” (emphasis added).

That view was shared by Moore-Bick LJ (paras. 180-182) and Hughes LJ (para. 255(ii)).

Section 111 of the 1972 Act allows an authority to do anything that is ‘incidental’ to the carrying out of its normal functions. Those normal functions might include running schools and highways in its area, and it is plainly incidental to those functions to buy insurance to allow the authority to operate safely. To buy insurance from LAML is, it was argued, simply a form of purchasing that insurance.

The judge at first instance dismissed this defence, and the Court of Appeal has done the same. Moore-Bick LJ commented that

“…participation in LAML cannot… be treated in the round as merely one recognised way of obtaining insurance with nothing to distinguish it for present purposes from more usual forms of commercial insurance… In my view 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.” (para. 170)

Importantly, the Court of Appeal resoundingly rejected the idea that the LAML arrangement could be saved by relying on some form of associated risk management service. Lord Justice Moore-Bick held that

“it could [not] be said that the benefits in terms of risk management were sufficient to justify participation in LAML as incidental to those functions.” (para. 172)

The procurement case

Even had it been within Brent’s power to participate in LAML, it breached the Public Contracts Regulations 2006 by failing to award the contract by means of open tender. Brent admitted the fact, but argued that it was entitled to do so by reason of the so-called Teckal exemption (named after the EU decision of the same name). The exemption applies where the authority contracts with a third party over which it exerts the same degree of control as it has over one of its internal departments and where that third party does most of its work for the authority.

The Court of Appeal found there was insufficient control by Brent (and effectively by any other authority) over LAML for the Teckal exemption to apply. Lord Justice Pill observed (at para. 131) that “the nature of the business, and the possibly differing interests of different authorities and affiliates, are antithetic to the necessary local authority control.” Therefore, any authority seeking to join LAML would have to hold a proper open, competitive tender for the award of the insurance contract (though the point is plainly moot, given that no authority has power to participate in LAML).

Since Brent awarded the contract to LAML without the requisite tender process, their Lordships held that RMP is entitled to damages from Brent as a result.

The shared services agenda

None of this affects the government’s shared services agenda, which remains vigorously in force. Indeed, Lord Justice Pill makes specific reference in his judgment (paras. 114-120) to the government’s aim in the well-being power—to reverse the “traditionally cautious approach” to “innovation and joint action”.

But his Lordship also went on to stress that Parliament had not given carte blanche to local authorities to do whatever they wish, that there must be limits on what was permissible and that “Analysis of the expression “promote the well-being” is still required to decide what the limits are”.

The limits are still there; the LAML arrangement simply lay beyond them.

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