Brent London Borough Council and others (Harrow London Borough Council) v Risk Management Partners Limited

The public procurement regime under the Public Contracts Regulations 2006 incorporates the Teckal exemption. A contract between a public authority and a legally distinct entity falls outside that regime only where the authority exercises control similar to that exercised over its own departments and the entity carries out the essential part of its activities for the controlling authority or authorities.

Control may be exercised collectively. It must be effective and confer decisive influence over strategic objectives and significant decisions. Individual control by each participating authority is unnecessary. The exemption can apply to insurance, although risk is transferred to a separate legal person. Where a mutual insurer is collectively controlled by public authorities, serves their public functions, has no private capital or customers, and conducts its essential activities for them, its insurance contracts qualify as in-house arrangements.

London local authorities established London Authorities Mutual Ltd (“LAML”) to provide mutual insurance. Harrow London Borough Council entered into insurance contracts with LAML without conducting the tendering procedure prescribed by the Public Contracts Regulations 2006.

Risk Management Partners Ltd challenged the arrangements. Stanley Burnton LJ held that Brent London Borough Council had breached the Regulations: [2008] EWHC 1094 (Admin); [2008] LGR 429. The Court of Appeal affirmed that decision: [2009] EWCA Civ 490; [2010] PTSR 349. Brent subsequently settled and withdrew its appeal, but Harrow retained an interest in determining the procurement issue.

The central questions were whether the Teckal in-house exemption formed part of the Regulations, whether it could apply to insurance, and whether LAML satisfied the exemption’s control and function tests.

1. Appeal allowed unanimously. Lord Hope and Lord Rodger delivered concurring judgments. Lord Walker, Lord Brown and Lord Dyson agreed with both. Harrow did not breach the Public Contracts Regulations 2006 by entering into insurance contracts with LAML without a competitive tender.

2. The Regulations were made under section 2(2) of the European Communities Act 1972 to implement the EU public procurement Directive. They therefore required a purposive construction consistent with the Directive and the Court of Justice’s jurisprudence. The Teckal exemption reflected a substantive policy that procurement rules should not inhibit authorities from performing public tasks through their own resources, including pooled public resources. A domestic-law contract could consequently fall outside the regulated procurement regime.

3. The exemption applies only if two cumulative conditions are satisfied. The contracting authority or authorities must exercise control over the legally distinct entity similar to that exercised over their own departments. The entity must also carry out the essential part of its activities for those controlling authorities. As an exception to procurement obligations, those conditions require strict application.

4. The exemption was capable of applying to insurance. It assumes the existence of a contract between separate entities. The fact that insurance necessarily transfers risk to another legal person, and cannot be supplied by an authority to itself, was immaterial. The decisive questions remained control and function.

5. Individual control was unnecessary. Participating public authorities could exercise the requisite control collectively. The control had to be effective and enable decisive influence over strategic objectives and significant decisions. LAML’s participating members held all voting rights, elected the member directors, maintained a majority of member directors at quorate board meetings, and could direct the board by a 75% special resolution. LAML pursued exclusively public functions and had no private capital. Those arrangements satisfied the control test.

6. The function test was also satisfied. LAML existed to insure participating London authorities and their sponsored affiliates. It had no private customers or external private capital, and its other objects were subordinate to that principal purpose. Its essential activities were therefore performed for the same authorities that collectively controlled it.

7. The relevant EU principles were sufficiently clear. No preliminary reference under article 267 TFEU was required.

• United Kingdom Supreme Court: The appeal was allowed unanimously. The court held that the Teckal exemption applied and that LAML satisfied both of its conditions: [2011] UKSC 7.
• Court of Appeal: The appeals were dismissed and both decisions of Stanley Burnton LJ were affirmed: [2009] EWCA Civ 490; [2010] PTSR 349.
• Administrative Court: Stanley Burnton LJ held in the damages action that Brent had breached the Public Contracts Regulations 2006: [2008] EWHC 1094 (Admin); [2008] LGR 429. In separate judicial review proceedings, he declared that Brent lacked statutory power to participate in LAML: [2008] EWHC 692 (Admin); [2008] LGR 331.