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The Court of Appeal rules on in-house contract awards and the Teckal exemption

The Court of Appeal has given guidance on the application of the Teckal exemption in its long awaited judgment in the LAML case, Brent LBC v Risk Management Partners Ltd; London Authorities Mutual Ltd & Harrow LBC (Interested Parties) [2009] EWCA Civ 490. It has also confirmed its robust approach to delays in the procurement process.

Administrative Court proceedings

The LAML appeal arose from two related cases that were heard in April and May last year: R (Risk Management Partners Ltd) v Brent LBC; London Authorities Mutual Ltd and Harrow LBC (Interested Parties) [2008] EWHC 692 (Admin) (“LAML 1”) and Risk Management Partners Ltd v Brent LBC [2008] EWHC 1094 (Admin) (“LAML 2”) .

Both cases related to Brent’s decision to participate in establishing a new mutual insurance company, London Authorities Mutual Ltd (LAML), that would be controlled by, and run for the benefit of, participating London authorities. It was intended that LAML would benefit its members through costs savings and improved risk management. Brent issued an invitation to tender for the insurance contract but abandoned it prior to the award; instead it directly awarded the contract to LAML, which had not participated in the procurement exercise.  Risk Management Partners (RMP) was a rival insurance intermediary who had tendered for the insurance contract.

LAML 1 was an application by RMP to quash the decision on the basis that it was ultra vires, while in LAML 2 RMP claimed damages, contending that Brent's award of the insurance contract to LAML breached the Public Contracts Regulations 2006.

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Procurement claim

In LAML 2, Brent contended that it did not have to comply with the 2006 Regulations as the contract was awarded to a company which fell within the so-called “Teckal exemption”: this is the principle laid down by the European Court of Justice (ECJ) in Teckal srl v Comune de Viano (C107/98) that there is no “contract” for the purposes of the EU Procurement Directive where the contracting authority, although it is formally dealing with a legally distinct person:

  • exercises over that person a control similar to that which it exercises over its own departments, and
  • the person carries out the essential part of its activities with the controlling authority.
    Brent also claimed that RMP was barred from claiming damages as it had not brought its claim within the three month time limit in reg.47(7) of the 2006 Regulations.

However, the High Court allowed RMP's claim, finding that the first condition of the in-house award exemption relating to control was not satisfied as the company documents and contractual provisions pointed to a degree of independence of decision that was inconsistent with the "control condition", and the terms of the policies envisaged a relationship (including disputes) between Brent and LAML that was inconsistent with Teckal; he also held that Brent had breached the Regulations in March 2007 when it abandoned the tender process and awarded the contracts to LAML as until then, it could have lawfully awarded the insurance contracts to a company participating in the tender process. RMP had therefore brought its claim within the time limit and so was entitled to damages.

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Court of Appeal’s decision

Brent’s appeal concerned whether it should have followed the competitive procedure specified in the 2006 Regulations before entering into contracts with LAML; it also appealed on the delay point.
The Court of Appeal dismissed the appeal on the procurement issue, it also dismissed a linked appeal on whether Brent had lawfully exercised its powers in establishing a mutual insurance company.

Teckal exemption

The court looked at the Teckal exemption to the EU Procurement Directive, and considered whether the LAML agreement was an in-house arrangement so that it fell within the exemption. Brent argued that the 2006 Regulations had been drafted in such a way that the Teckal principles were excluded. However, the court held that the Regulations were to be interpreted in line with the interpretation given to the Directive by the ECJ and so the exemption did apply to contracts falling within the scope of the Regulations. 

The court also confirmed that the first condition could be satisfied by the joint control of a group of local authorities, even though the contracting authority by itself does not have such control over the body.

However, while their Lordships did concede that arrangements between participating authorities could in principle come within the exemption, they found that here LAML could not be regarded as a department of each of the participating local authorities - it could not operate effectively unless its Board had considerable freedom to manage its insurance business, and the nature of its business, and the possibly differing interests of different authorities and affiliates, were antithetic to the necessary local authority control. Lord Justice Pill noted that LAML’s constitution aimed to give the Board operational independence, and that this was more important than the power of the members to give directions to the Board by special resolution.

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On the question whether RMP’s claim for damages was time-barred, the Court of Appeal stated that where the proceedings were in respect of an actual breach of the Regulations (as opposed to proceedings to restrain an apprehended breach in advance), time ran only from the date when an actual breach first occurred. In this case, this was March 2007 when the procurement was abandoned and the contracts in question were awarded to LAML. It emphasised that a failure to comply with the procedure at any stage inevitably undermined the integrity of all that followed, so that the right of action was complete, and the ultimate award of the contract was merely the final step in what was already a flawed process.

Implications for contracting authorities

The judgment confirms that the courts will construe the Teckal exemption narrowly. Authorities will have to take great care when structuring new vehicles to ensure that the new body is sufficiently controlled by the authority if they do not wish it to be caught by the Public Contracts Regulations. In particular, they will need to pay careful attention to how far and in what way the operational independence of their directors can be constrained in favour of member control, particularly in situations where the interests of the participating authorities may conflict.

The full judgment is available here.

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