February 2011

The European Commission is currently consulting on a fairly extensive suite of possible changes to the procurement regime.  The consultation is very wide ranging but includes requests for views on:

• Bringing the Part B services rules into line with Part A services rules
• Reviewing the scope of the procurement regime/procedures
• Simplification of procedures for goods and services typically available in the "normal" commercial marketplace
• Greater flexibility in the timing and content of the selection and award phases
• Simplification of procedures for local authorities
• Codifying the Teckal exemption
• Providing clarity on what modifications are permissible post contract award
• Whether subcontracting should be restricted
• Improving SME access to markets
• Encouraging competition and wider strategic goals such as improving innovation, combating climate change and preventing discrimination
• Improving safeguards against cartels, conflicts of interest, anti-competitive behaviour and corruption
• Access of non-EU suppliers to EU markets and vice versa

The recent decision of the Supreme Court in the case of Risk Management Partners v London Borough of Brent ("RMP v Brent") is good news for contracting authorities as it confirms that the courts are not minded to apply the procurement regime in situations where public bodies genuinely co-operate to perform one of their public functions.  In the current economic climate public bodies are increasingly turning to shared services models to meet their requirements rather than risking the cost and delay that is sometimes associated with running a full procurement process, and this decision is encouraging to shared services arrangements.

In RMP v Brent, the London Borough, together with several similar boroughs, clubbled to together to create a mutual insurance company called London Authorities Mutual Limited (“LAML”), a private company limited by guarantee established and wholly owned by the local authorities concerned. Earlier, Brent had also commenced a procurement process inviting bids from insurance providers, of which RMP was one. When the project to establish LAML became a reality, Brent terminated the procurement process it had been running and entered into a contract directly with LAML with no further competition. RMP brought a claim arguing that this contract should have been opened up to competition.

In its defence, Brent relied on the exemption in the European Teckal case. This dispenses with the requirement to run a procurement where a contracting authority has set up a wholly-owned service provider:

• over which it exercises a degree of control similar to that which it would have over one of its own departments (the "control" test); and
• the service provider carries out the essential part of its business with the owner contracting authority/ies (the "function" test).

The Court of Appeal in 2009 upheld RMPs claim that the Teckal exemption did not apply, on the grounds that the necessary degree of control was not established. There were various reasons for this judgment including (1) the governing document of LAML contained conflict of interest provisions preventing an authority from being involved in deciding its own insurance claim, and (2) the company had outsourced the day to day management of the company to private sector providers which the Court of Appeal decided prevented the owner-local authorities from having a decisive influence over the direction of the company.

However the Supreme Court has recently overturned the decision of the lower courts. The key points were:

• that there was always possibility of 75% of the local authorities "directing" the company via the special resolution procedure. This is a useful insight for contracting authorities which are currently considering how the constitutions of companies should be drafted to fit within the Teckal exemption;
• the fact that a local authority could not vote in relation to discussion of its own insurance claim did not automatically signify that that local authority did not have the necessary degree of control, in the round and jointly with the other local authority shareholders; and
• the fact that there were two independent directors was not fatal to the control test either, particularly as this is now a requirement of the FSA.

The Supreme Court really took a purposive view of the procurement law regime when deciding whether to apply the exemption. The purpose of the procurement rules, it said, is to preserve competition and prevent unfair discrimination against bidders. However the regime imposes no positive duty on public bodies to go out the market in every possible case; rather public bodies are totally free to place work in house if they so choose. This given, it would be a nonsense to prevent local authorities from working together to exercise their public functions. This approach echoes the view from Europe, where we are increasingly seeing the European court being prepared to apply the Teckal exemption in cases of genuine co-operation.

However readers should bear in mind that the Teckal test itself has not changed and that it still remains a very narrowly construed exemption. It is unlikely to be of much assistance to any public body wishing (as many do in this economic climate) to set up a company which will be able to generate a new source of profit in from the private sector. Features such as private sector shareholdings or a substantial volume of business transacted with private sector customers are likely to prevent a company qualifying.