Shared services need not be competitively tendered

By Daradjeet Jagpal, Solicitor, Harper Macleod LLP

The UK Supreme Court has recently issued a decision in the case of Brent LBC v Risk Management Partners Limited, which related to how procurement rules apply to local authorities’ shared services arrangements.

In this case, a number of local authorities in London, including the London Borough Council of Brent, awarded insurance contracts to a mutual insurance company, London Authorities Mutual Limited (LAML), without competitive tendering. LAML was wholly owned by the local authorities, did not have any private sector participants and was set up specifically for the purpose of providing the local authorities with insurance services.

Risk Management Partners Limited (RMP) challenged the award of the contract to LAML, arguing that Brent had breached the procurement rules by not following the competitive tender route. Brent argued that it was not required to do so, as the contract with LAML was an in-house award falling within the well-known Teckal exemption.

The Teckal exemption comes from a European Court of Justice case where it was decided that a public authority is not required to undertake a public procurement exercise where it enters into a contract with a body over which it exercises a degree of control similar to that which it would have over an in-house department and, at the same time, the body in question carries out the essential part of its activities with the controlling public authority.

In overturning a Court of Appeal judgment, the Supreme Court considered that the mutual insurance arrangements with LAML fell within the Teckal exemption and did not have to be put out to competitive tender on the basis that the local authority members exercised sufficient collective control over LAML’s strategic objectives and decisions evidenced by:

• local authority members having the right to appoint 9 of the 11 directors on LAML’s board, including the chairman;

• local authority members holding all of the voting rights at general meetings;

• LAML’s board being subject to direction by the local authority members in general meeting, so long as they achieved a 75% majority; and

• LAML only being able to offer insurance services agreed by local authority members at general meetings.

The Supreme Court also found that the “essential services” test under the Teckal exemption was satisfied.

The Teckal function condition was also satisfied because LAML only provided insurance services to the local authority members, and did not compete for business in the open market.

Comment:

The Supreme Court’s decision is a welcome development for public authorities. It confirms that they may procure shared services from a jointly controlled service provider without the need for competitive tendering, as long as the service provider:

• does not have any private sector participants; and
• has been established solely to provide services to public sector members.

The importance of public authorities having the ability to participate in such shared service schemes cannot be overstated at a time of public sector budget cuts.

Daradjeet Jagpal can be contacted on: daradjeet.jagpal@harpermacleod.co.uk