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||Neutral Citation Number:  EWCA Civ 490
||Case Nos: C1/2008/1254, C1/2008/1251,
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
STANLEY BURNTON LJ
 EWHC 692 (Admin) &  EWHC 1094 (Admin)
Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE PILL
LORD JUSTICE MOORE-BICK
LORD JUSTICE HUGHES
|| BRENT LONDON BOROUGH COUNCIL
||- and -
||RISK MANAGEMENT PARTNERS LIMITED
||- and -
||LONDON AUTHORITIES MUTUAL LIMITED &
HARROW LONDON BOROUGH COUNCIL
Mr Nigel Giffin QC and Miss Deok-Joo Rhee (instructed by London Borough of Brent) for the Appellants
Mr John Howell QC, Mr Javan Herberg and Mr James Segan (instructed by Sedgwick, Detert, Moran & Arnold) for the Respondents
Mr Roger Henderson QC and Mr Rhodri Williams (instructed by Weightmans) for the Interested Parties
Hearing dates : 16th, 17th, 18th and 19th March 2009
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Pill :
- These are appeals against decisions of Stanley Burnton LJ who heard the cases as a High Court Judge but had been appointed to the Court of Appeal when he delivered judgment. Judgments were delivered on 22 April 2008 and 16 May 2008. In the first judgment ( EWHC 692 (Admin)), Stanley Burnton LJ declared that Brent London Borough Council ("the appellants") had no power to become a member or participating member of London Authorities Mutual Limited ("LAML") or to make payments or to enter into commitments to make payments to LAML. These were proceedings by way of judicial review.
- In the second judgment, ( EWHC 1094 (Admin)) Stanley Burnton LJ gave judgment for Risk Management Partners Limited ("the respondents") in their claim for damages against the appellants for breach of the Public Contracts Regulations 2006 ("the 2006 Regulations") in awarding contracts of insurance to LAML, a mutual insurance company of which the appellants were a member. Issues of causation and quantum were reserved. Stanley Burnton LJ granted the appellants permission to appeal in both cases.
- The respondents are a commercial provider of insurance which seeks business from local authorities. They would wish to obtain business which might otherwise go to LAML. LAML was established by a number of London Borough Councils, including the appellants and Harrow London Borough Council ("Harrow") which joined the proceedings as an interested party. LAML and Harrow have joined cause with the appellants in these appeals. They seek to establish that London local authorities did have power to become members of LAML. They challenge the finding of Stanley Burnton LJ, in his second judgment, that the appellants were in breach of the 2006 Regulations in awarding contracts of insurance to LAML in respect of the financial year 2007/8, outside the tender process in which the respondents participated.
- Mr Nigel Giffin QC appears for the appellants and Mr Roger Henderson QC for the interested parties. Mr John Howell QC appears for the respondents. By way of introduction, I can say that the issues were succinctly stated by Mr Giffin: first whether the appellants had power to enter into contracts of insurance with LAML and whether those powers were exercised (the vires issue) and, secondly, whether the appellants should have followed the competitive procedure specified in the 2006 Regulations before entering into contracts with LAML (the procurement issue).
- For the appellants and interested parties, Mr Giffin made the main submissions on the first issue and Mr Henderson on the second. In their main submissions, they dealt with all issues between the parties, including those raised in a respondent's notice. It was also submitted by the appellants that the respondents were not entitled to relief in either case because of their delay in bringing the proceedings. There was a counterclaim for a declaration.
- London local authorities were plainly concerned about the amount they pay to commercial insurers by way of insurance premiums and the services they receive from those insurers. Following extensive studies conducted on behalf of a group of London authorities, it was considered that participation in a guaranteed indemnity mutual insurance company could produce average savings in premiums of 15% to 20%. Moreover, it was considered that the financial incentive for members of the mutual to share best practice would result in improved risk management to which commercial insurers gave relatively little attention. For many years many local authorities obtained their insurance from a company known as Municipal Mutual Insurance Limited but it has not been suggested in this court that any useful comparison can be made between the function of that company and of LAML.
- To achieve participation in LAML, the appellants subscribed on 18 January 2007 to the Memorandum and Articles of Association (and thereby became a member), made a paid capital contribution of £160,500 to LAML on 16 March 2007, executed on 27 March 2007 an undertaking to pay sums on demand to LAML up to a total of £609,500 (the guaranteed capital contribution) and became a Participating Member. Following an invoice on 30 March 2007, the appellants paid premiums of £520,328.14 for the year 2007/08 in respect of terrorism, liability, property and contents insurance.
Local Government Act 2000
- On behalf of the appellants, it was submitted that participation in LAML was within their powers both under section 2 of the Local Government Act 2000 ("the 2000 Act") and under section 111 of the Local Government Act 1972 ("the 1972 Act"). Sections 2, 3 and 4 of the 2000 Act provide, in so far as is material:
"2 Promotion of well-being
(1) Every local authority are to have power to do anything which they consider is likely to achieve any one or more of the following objects—
(a) the promotion or improvement of the economic well-being of their area,
(b) the promotion or improvement of the social well-being of their area, and
(c) the promotion or improvement of the environmental well-being of their area.
(2) The power under subsection (1) may be exercised in relation to or for the benefit of—
(a) the whole or any part of a local authority's area, or
(b) all or any persons resident or present in a local authority's area.
(3) In determining whether or how to exercise the power under subsection (1), a local authority must have regard to their strategy under section 4.
. . .
(4) The power under subsection (1) includes power for a local authority to—
(a) incur expenditure,
(b) give financial assistance to any person,
(c) enter into arrangements or agreements with any person,
(d) co-operate with, or facilitate or co-ordinate the activities of, any person,
(e) exercise on behalf of any person any functions of that person, and
(f) provide staff, goods, services or accommodation to any person.
(5) The power under subsection (1) includes power for a local authority to do anything in relation to, or for the benefit of, any person or area situated outside their area if they consider that it is likely to achieve any one or more of the objects in that subsection.
(6) Nothing in subsection (4) or (5) affects the generality of the power under subsection (1).
3 Limits on power to promote well-being
(1) The power under section 2(1) does not enable a local authority to do anything which they are unable to do by virtue of any prohibition, restriction or limitation on their powers which is contained in any enactment (whenever passed or made).
(2) The power under section 2(1) does not enable a local authority to raise money (whether by precepts, borrowing or otherwise).
(3) The Secretary of State may by order make provision preventing local authorities from doing, by virtue of section 2(1), anything which is specified, or is of a description specified, in the order.
. . .
(5) Before exercising the power under section 2(1), a local authority must have regard to any guidance for the time being issued by the Secretary of State about the exercise of that power.
. . .
4 Strategies for promoting well-being
(1) Every local authority must prepare a strategy (referred to in this section as a sustainable community strategy) [current wording] for promoting or improving the economic, social and environmental well-being of their area and contributing to the achievement of sustainable development in the United Kingdom.
(2) A local authority may from time to time modify their community strategy."
- Mr Giffin submitted that the well-being power conferred by section 2 was a step change in the approach to the powers of local authorities. He relied in support of that general submission on the content and reasoning in the explanatory notes which accompanied the statute and the guidance under section 3(5) which followed it and it is appropriate to quote from those documents at some length. The power was limited, Mr Giffin submitted, only by the restrictions and potential restrictions in section 3. Having referred in general terms to statutes which expressly authorised action by local authorities, the explanatory notes referred to the limited general powers in section 137 of the Local Government Act 1972. The notes continued:
"8. This formulation has, on occasion, led the courts to take a restrictive view of the activities that can be pursued using section 137. In some cases, the courts have inferred from the absence of specific powers in other legislation that certain activities are prohibited and that an authority cannot, therefore, rely on its section 137 powers to overcome that prohibition. This has created uncertainty amongst local authorities and their potential partners about the extent to which authorities can rely on their general powers to undertake certain activities.
11. In the White Paper the Government set out its view that community leadership should be at the heart of the role of modern local authorities. To enable local authorities to develop that role and to respond to the needs of local communities, the White Paper argued that authorities would need the freedom to work with other local public, private and voluntary organisations to develop solutions to local problems.
12. To provide authorities with the necessary freedoms, the White Paper proposed that local authorities' general powers should be extended; specifically, that they should be given a new discretionary power to take steps which in their view promote the economic, social and environmental well-being of those who live in, work in or visit the local area.
13. To facilitate a more co-ordinated and coherent response to local service delivery, the White Paper also proposed that authorities should be required to develop community strategies. These strategies, developed with local people, business, public and voluntary organisations would set out how the authority and its partners would work together to promote the well-being of their local community.
15. Together, these sections allow local authorities to undertake a wide range of activities for the benefit of their local area and to improve the quality of life of local residents, businesses and those who commute to or visit the area. This is intended to clear up much of the uncertainty which currently exists about what authorities can do. Sections 2 and 3 allow authorities to take any action, unless it is subject to statutory prohibitions, restrictions or limitations specifically set out in legislation. The intention is to broaden the scope for local authority action while reducing the scope for challenge on the grounds that local authorities lack specific powers.
16. Amongst other things, section 2(3) means local authorities must consider the objectives and priorities contained in their community strategy before they take action under the power in section 2(1). This is in no way meant to limit the scope of the power in section 2(1). Rather it is designed to encourage authorities to think about the broad goals and objectives contained in the community strategy, before deciding how best to use their well-being power.
17. Additionally, section 2(4) makes clear that the power in section 2(1) enables authorities to work in partnership with other bodies. For example, it allows authorities to assist other statutory bodies to discharge their functions, or to exercise those functions on their behalf. This is intended to help local authorities and other statutory service providers to work together to provide services in ways which meet the needs of communities."
- On 14 May 2001, guidance pursuant to section 3(5) of the 2000 Act, was issued by the Secretary of State. It provided:
"5. If local authorities are to play their full part in the achievement of these goals, they need the necessary statutory powers to do so. For many years, innovative actions by local authorities have been stifled by concerns over the scope of their powers. While some legislation contains deliberate and specific constraints on local authority activities, there has been considerable uncertainty over the extent of the enabling powers that have been conferred on councils. The result has been a necessarily cautious approach to innovation and joint action, and a concomitant limitation of councils' contribution to the improvement of their communities' quality of life.
6. The Government's purpose in introducing the well-being power is to reverse that traditionally cautious approach, and to encourage innovation and closer joint working between local authorities and their partners to improve communities' quality of life. The purpose of this guidance is therefore to acquaint local authorities with the breadth of the new power, and to encourage innovative and imaginative use of it. In particular, each local authority will want to consider how the power can promote the sustainable development of its area by delivering the actions and improvements identified in its community strategy, which could include tackling social exclusion, reducing health inequalities, promoting neighbourhood renewal and improving local environmental quality. Authorities will also wish to consider how the new power can help them to contribute locally to shared national priorities, such as action to combat climate change and encourage the conservation of biodiversity, and to contribute to shared priorities within other plans such as Health Improvement Programmes.
7. The new power is wide-ranging, and enables local authorities to improve the quality of life, opportunity, and health of their local communities. Further information is set out in chapter 2. Specific examples of the kind of action that can be taken are set out in section 2(4) of the Act. These include incurring expenditure, providing staff, goods or services to any person, entering into partnership arrangements and carrying out the functions of other bodies. This list is for illustrative purposes only, and does not in any way limit how local authorities can use the new power."
Under the heading 'Power to form Companies and Other Corporate Bodies', it was stated:
"42. The well-being power will also enable local authorities to form or participate in companies, trusts, or charities, including joint venture companies, provided that they are satisfied that the formation of, or participation in, a particular company is likely to achieve the promotion or improvement of the economic, social or environmental well-being of the authority's area. Such participation could give rise to dividend payments to the authority as a shareholder. In the Government's view, such dividends would not amount to raising money for the purposes of section 3(2) (see paragraphs 65-70). Indeed, an authority may be acting contrary to its fiduciary duty to local taxpayers if it failed to ensure such a return on its investment.
. . .
66. Section 3(2), therefore, places a general prohibition on using the well-being power as a means of raising money. This is a broadly drafted restriction which seeks to ensure that where a local authority has to obtain funds before it can pursue well-being objectives, it can only do so through existing sources of income. So, for instance, the well-being power does not permit a council to levy a new tax, although the way local authorities plan to use the power can influence annual discussions/decisions on setting of council tax levels. Similarly, the well-being power does not confer new powers to borrow money or to charge for services they provide in pursuit of well-being objectives - but nor does it in any way restrict councils' existing powers to do so.
67. The Government considers that the effect of the provision in section 3(2) is to prevent local authorities from using the power in section 2(1) primarily to raise money. Where authorities use the power for a different purpose, but incidentally receive income as a result, that does not, in the Government's view, amount to raising money. Thus a local authority might give financial assistance to a struggling local enterprise by purchasing shares to provide it with capital. If, as a result of the authority's investment the enterprise subsequently becomes successful and the authority later receives income from its shares by way of dividend, this does not, in the Government's view, amount to raising money within the meaning of section 3(2). Similarly, the following actions may not amount to 'raising money' if the receiving of income by the authority is incidental, and not the primary purpose of their use of the power in section 2(1):
- lending money and charging interest;
- jointly obtaining sponsorship for a partnership project;
- receiving an indemnity from an organisation for costs which may be incurred; and
- receiving revenue income from a trust.
. . .
70. Where an authority chooses to use its powers under section 2 to set up a company (see paragraphs 42 and 43), that company as a separate entity is not subject to the restrictions provided by section 3(2)."
Constitution of LAML
The constitution of LAML is relevant to the vires issue as well as to the public procurement issue and I describe it at this stage.
LAML is a company limited by guarantee with a Memorandum of Association, Articles of Association and rules. As stated in the Memorandum of Association, clauses 3(i) and 3(ii), the main objects of LAML are:
"(i) To receive premiums from Participating Members or Affiliates and to indemnify through a mutual fund the liabilities, losses or expenses incurred by Participating Members or Affiliates in accordance with the Rules.
(ii) To grant or effect with Participating Members or Affiliates for the purposes of mutual insurance such classes of insurance business as the mutual may from time to time be authorised to carry on under the Insurance Companies Act 1982 or any Act amending or extending the same and to enter into or to arrange insurance or reinsurance contracts on behalf of any Participating Member or Participating Members or Affiliates as deemed necessary from time to time and to negotiate directly or indirectly with the insurance market cover for any risk on behalf of any Participating Member or Participating Members or Affiliates."
Other objects include entering into partnerships or arrangements from which the Mutual would or might derive any benefit and joining in the establishment or promotion of any other company in any part of the world whose objects shall include the taking over of any of the assets or liabilities of the Mutual or the promotion of which shall or may be calculated to advance its interests (objects (x) and (xi)). The objects clause also provides that "the objects of the Mutual as specified in paragraphs (i) and (ii) above shall be construed as the main objects of the Mutual". Other powers are said to be restricted by reference to or inference from the terms of the main objects.
"Member" means any London Authority that has subscribed to the Memorandum and Articles of Association of the Mutual and "Participating Member" means a Member who receives an Indemnity from the Mutual. "London Authority" means any London Borough, the City Corporation of London, the Greater London Authority or any successor Authority.
"Affiliate" means any person or body sponsored by a Participating Member and in respect of whom or which that Participating Member is empowered to arrange an indemnity. The persons or bodies are limited to those specified in the rules. These are:
(a) the governors for the time being of a Voluntary Aided School
(b) the governors for the time being of a Foundation School
(c) the governors for the time being of a Voluntary Controlled School
(d) the management committee for the time being of an Arms Length Managed Organisation
(e) the board for the time being of any wholly owned company of a Participating Member.
The Articles of Association and the Rules provide for paid capital contributions and guaranteed capital contributions. These terms are defined in article 3 of the Articles and rule 3 of the Rules. Under the Rules, it is for the Board of LAML to determine the type of capital contribution required, its amount, the time at which it is to be made and, in the case of a guaranteed capital contribution, the form in which it is to be made (rule 12(2) and rule 13(1)). Capital contributions are to be used to support the funding of LAML, particularly with regard to establishing and maintaining the general insurance capital requirement which must be established and maintained under the rules of the Financial Services Authority. If there is a shortfall, LAML may draw down from paid capital contributions and may require Participating Members to make an additional paid or guaranteed contribution. Provision is made for the release of a participating member on terms (rule 14).
The business of LAML shall be conducted under the control of the Board (articles 4 and 36). Article 16 provides that the Board shall consist of no less (sic) than 5 directors and no more than 11 directors, of whom at least 2 must be independent directors. The Chairman will be selected from the directors but will not be an independent director.
In his statement of 7 November 2007, Mr Duncan McLeod, the appellants' Director of Finance and Corporate Resources stated:
"As I explained above, Brent Council, Harrow Council and more recently, Tower Hamlets Council have entered into the arrangements for insurance provision with LAML. Participating Councils are full members of LAML, which is run by a Board of Directors which comprises of a number of Directors of Finance of some London local authorities and two independent directors. The Finance Directors on the Board of LAML are from Croydon, Islington, Camden, Haringey, Harrow and Lambeth."
The Board shall accept applications from London Authorities for membership of the Mutual in its absolute discretion and is not obliged to give reasons for any refusal to admit a London Authority to membership. Participating Members shall participate financially in the Mutual and shall be entitled to vote at general meetings (rule 4). Each Participating Member shall be entitled to have one vote at a general meeting of the Mutual (article 15(a)). Members may direct the Board by special resolution by a 75% majority (article 1 and Regulation 70 of Table A). Participating Members representing not less than 50% of the voting rights of those members may call a general meeting (article 54(b)).
It is for the Board to determine the risks against which insurance will be provided and to determine premiums and other terms. The Board may require Participating Members who received an indemnity in respect of a year to pay one or more supplementary calls which may be used to meet claims and outgoings for that year (rules 11 and 12).
Rule 22(1), relied on by the judge, provides that:
"Without the prior agreement of the Board, no Member Director of the Mutual shall sit on the Board while it is engaged in the consideration or settlement of a claim in which the Participating member of that Member Director is interested."
The Board determines what capital contributions are to be made by Members and Participating Members, what reserves to maintain (rule 29) and what re-insurance to arrange (rule 28). Article 11(b) provides that the Board may terminate the membership of a Participating Member, on notice, if: "In its judgment [it] determines it is undesirable for a Participating Member to continue to be a Participating Member". The Board may lay down guidance for the investment of the funds of the Mutual as it shall think fit (rule 30).
Members which are not Participating Members can attend annual and general meetings of LAML but cannot vote other than on any motion to change the rules of LAML in respect of members' obligations concerning capital contributions. The members act through "Member Representatives" who are persons nominated by each of the members. Clearly in its operations, LAML must comply with the requirements of the Financial Services Authority.
On 27 March 2007, LAML entered into a Management Agreement with Charles Taylor & Company Limited for the management of insurance and insurance related services. The agreement gave wide powers and a discretion to the managers. LAML agreed to ratify all contracts and other commitments made or entered into in connection with the proper and lawful performance of the management services and to indemnify the managers in respect of all liabilities which may reasonably and properly be incurred by the managers in respect of claims by third parties (clause 7.2). A proviso preserved LAML's entitlement to bring claims against the managers for negligence, wilful default or breach of the agreement. The agreement conferred a power in the managers to establish, collect, manage and redistribute both capital contributions and premiums of local authorities (clause 4(g) and (i)).
LAML Insurance Policies
To consider the position of LAML, I need to refer to the policies issued. The policies are in normal commercial form. A Member is required to take all reasonable precautions to prevent or minimise accidents, damage, injury, interference or any other loss. A claims procedure, in conventional commercial form, is provided and the Mutual may take over in the name of and on behalf of the Member "the absolute conduct and control of all negotiations and proceedings which may arise in respect of any claim for indemnity or damages and the member will provide all information and assistance which the Mutual may require". Provision is made for the revision of cover provided that the cover provided after such revision is no less than the market agreed position as expressed by the Association of British Insurers and that 90 days notice of the intention to vary is given to the member.
The Mutual is governed by private law as is the relationship between the Mutual and a Member or Participating Member. The Rules shall be governed by and construed in accordance with the law of England and Wales (rule 36).
Submissions on section 2
Mr Giffin submitted that section 2(1) of the 2000 Act is drafted in the broadest terms. The local authority have the power to do anything which they consider is likely to achieve the well-being, economic, social or environmental, of their area; the authority may literally do "anything". The premiums saved by the existence of LAML could be used either on facilities coming within those descriptions or to lower council tax or to build up reserves. For example, a day centre kept open because of the savings achieved would improve the social well-being of the area. Anything which saves costs comes within section 2(1), it was submitted. That is illustrated by the activities contemplated in the explanatory notes and in the guidance. Section 2(1) says what it says; to exclude benefits which can be achieved by cost saving would be to read into the section words not there, it was submitted. The powers particularised in section 2(4) of the 2000 Act are broad, it was submitted, and, by virtue of sub-section (6) do not in any case affect the generality of the power under section 2(1).
Mr Giffin accepted that the power cannot be exercised to make money or to raise money (section 3(2)) but, as construed in the guidance, enables local authorities to form or participate in companies (paragraph 42 of guidance) and to receive income, provided the receipt is incidental to and not the primary purpose of the use of the power in section 2(1) (paragraphs 66 and 67 of guidance). Cooperation with other local authorities and co-ordinated action with them is encouraged by the statute and the guidance.
The respondents have not engaged, it was submitted, in construing section 2 but have resorted to generalisations about Parliamentary intention. Mr Giffin accepted and asserted that section 3(2) is not limited to the raising of money in ways closely analogous to precepting or borrowing. Setting out to make a profit through trading would amount to raising money within the meaning of the sub-section. Thus the appellants' interpretation of section 2 does not open the way for local authorities to engage in all forms of commercial trading. However, if it saved money, and was not done with a view to profit, local authorities have power, under section 2, to set up a bank or an insurance company.
Mr Giffin accepted that the meaning of the language in section 2(1) is a question for the court and cannot ultimately depend on the view of it taken by the Secretary of State in guidance issued under section 3(5). However, the guidance does throw light, it was submitted, on the mischief sought to be remedied, the stifling of innovative actions because of concern over the scope of powers, and the guidance is persuasive in demonstrating the breadth of the well-being power. Authorities may at least have regard to the approach in the explanatory notes and guidance when submitting what Parliament had in mind when using the very general expression "promotion or improvement of well-being".
The power has been broadly construed, it was submitted. In R (Khan) v Oxfordshire County Council  EWCA Civ 309, Dyson LJ stated, at paragraph 43, that section 2 "has a broad purpose" and that the scope of the powers conferred "should not be narrowly construed". In R (J) v Enfield LBC  EWHC 432 (Admin), Elias J said of section 2:
"It is drafted in very broad terms which provide a source of power enabling authorities to do many things which they could not hitherto have done. In my view, [citing section 3(1)] a 'prohibition, restriction or limitation' is one which would almost always be found in an express legislative provision. I do not discount the possibility that such might arise by necessary implication but I would have thought that would be very rare . . . In my view it would be inapt to describe the area where no power has been conferred as constituting a 'prohibition, restriction or limitation' on the power which is contained in the enactment."
Mr Giffin submitted that the presence of section 3(3) is a powerful indication that there is no justification for reading into the well-being power any limitation that does not appear on its face. The Secretary of State has power to prohibit the use of section 2(1) for particular purposes. That is a safeguard against misuse or abuse. In the absence of an exercise of that power by the Secretary of State, the court should not impose limitations on the exercise of the section 2(1) power. Further, the presence of section 3(2) assumes that, in its absence, it would be permissible for an authority to use section 2(1) to raise money. That demonstrates, it was submitted, the breadth of the well-being power, in the absence of specific restriction under section 3.
It was also submitted that participation in LAML made possible better risk management, a function plainly within the section 2 power. Improved risk management was an important part of the arrangements between the local authorities and LAML.
Mr Howell's main submission on section 2 is a simple one. The well-being power in section 2 is a power to do things and not a power to improve the local authority's financial position, even if money saved would permit greater expenditure on improvement of the area. It is not a power, by means of business enterprises, to save money. It is not concerned with how a local authority finances its activities.
In support of the submission that section 2 has nothing to do with local authorities reducing their costs, Mr Howell referred to other legislation with that object. Section 3(1) of the Local Government Act 1999 provides:
"A best value authority must make arrangements to secure continuous improvement in the way in which its functions are exercised, having regard to a combination of economy, efficiency and effectiveness."
The concept of best value, significantly, it was submitted, does not appear in the 2000 Act, which creates the power relied on.
Mr Howell referred to the powers specified in section 2(4), the first of which (a) is to "incur expenditure", positive actions to promote well-being. The other specified powers are of a similar kind, "to give" (b), "to provide" (f). There are powers to "enter into arrangements" and to "cooperate" but no express power to save money or to engage in business for that purpose. While the "generality" of the well-being power is preserved by section 2(6), the express powers do indicate what was and what was not intended.
In Hazell v Hammersmith and Fulham Council, the Court of Appeal considered the council's powers under the Local Government Act 1972. Mr Howell relied on the statement of Sir Stephen Brown P, giving the judgment of a court also comprising Nicholls LJ and Bingham LJ. He stated, at page 779G:
". . . that local authorities are not empowered to carry on a trade or business of entering into interest rate swaps and related transactions, even if the object is to apply the profits which they hope to earn in reducing their cost of borrowing. Such a trade or business would stand on no different footing from any other trade or business in which a local authority might seek to engage, in the hope of profit. But, in general, local authorities have no implied power to engage in a trade or business for profit. And an intention to apply the profits in reducing the local authority's costs or expenses in a particular way would not render intra vires an activity which would otherwise be ultra vires."
The conclusion of the Court of Appeal on that issue was upheld in the House of Lords and Mr Howell submitted that the approach to cost saving remains sound. It applies also to a business created in an attempt to save costs.
Mr Howell submitted that the explanatory notes and the guidance did not relieve the court of the duty to construe the statute and submitted that, in any event, they provide little support for the appellants' submissions. Local authorities are required to develop community strategies (section 4(1) of the 2000 Act and paragraph 13 of explanatory notes). What is contemplated is 'action' to promote the well-being of the local community. There is no evidence of any requirement or proposal in the community strategy for a project of this kind. There is no reference in the documents to cost saving measures or to banking or insurance. Nowhere in the lengthy and elaborate guidance notes are arrangements such as the present contemplated. Paragraph 13 requires a programme to be reassessed "to ensure that it is cast in sufficiently strategic terms to support the delivery of improved well-being in the area, in particular concentrating on cost-cutting issues such as community safety, promoting neighbourhood renewal and tackling social exclusion". That does not include cost saving projects which, by saving costs, might enable such activities to be undertaken.
Judge's conclusions on section 2
The judge rejected the argument, not pursued before this court, that section 2 authorised a local authority to do whatever it considered likely to promote its own economic well-being. It is accepted that the well-being must be that of the area for which the local authority are responsible. The judge considered the breadth of the power granted by section 2 of the 2000 Act. He recorded, at paragraph 64(f), the submission made on behalf of the appellants:
"The potential and substantial economic benefits arriving from participation in LAML would be invested in the local authority's area, for the benefit of its economic, social and/or environmental well-being."
The judge rejected that submission, at paragraph 114:
"It is one thing for a local authority to give financial assistance to a company so that it can carry out activities that benefit the local authority's area; it is another to give financial assistance to a person in order to obtain a financial reward which can in turn be used to benefit its area; and it is yet a further step away from the well-being power if there is no assurance that the profits will be so used."
In the last sentence of his previous paragraph, the judge made a statement which Mr Giffin accepted was the judge's view on section 2 generally:
"If Parliament had intended to confer such an unlimited power, it would have done so in very different terms."
In later paragraphs, the judge held that a local authority could purchase risk management services (paragraph 120) and could enter into a contract with a mutual insurance company for that specified service. He held (paragraph 121) that the principle that local authority finance should be conducted on an annual basis did not in itself prevent an arrangement under which liabilities might remain open for several years. The authorities had submitted that they were entitled to take at least a medium term view of the advantages of mutuality. I do not accept the submission of Mr Henderson (contrary to Mr Giffin) that the judge's remarks in paragraphs 120 and 121 amounted to a finding that the LAML arrangement was within the authorities' section 2 powers.
Local Government Act 1972 Section 111
Section 111 of the 1972 Act provides, in so far as is material:
"(1) Without prejudice to any powers exercisable apart from this section but subject to the provisions of this Act and any other enactment passed before or after this Act, a local authority shall have power to do any thing (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions.
. . .
(3) A local authority shall not by virtue of this section raise money, whether by means of rates, precepts or borrowing, or lend money except in accordance with the enactments relating to those matters respectively."
Submissions on section 111
The statutory power in section 111, one which formerly existed at common law (Attorney-General v Great Eastern Railway Company (1880) 5 App Cases 473), permits a local authority to enter into insurance contracts. Mr Giffin accepted that, subject to his submissions on section 2, and in the absence of a specific power, local authorities have no specific power to insure and the power must be found in section 111. The functions of the authority, for example, as highway authority or education authority, are such that prudence demands that the authority be insured.
All insurance involves a pooling of risks and mutual assurance, Mr Giffin submitted, is simply one form of insurance arrangement. The purpose of insurance is always to save the expense which will be incurred if there is loss or damage. The mutual is no less incidental to the function performed if insurance is obtained by a mutual exercise with other local authorities rather than from commercial insurers. As an exercise of power, it would be no different, it was submitted, from an arrangement between local authorities for waste collection, which could involve each of them in a risk of damage and a need for insurance. Section 101 of the 1972 Act empowers a local authority to arrange for the discharge of any of their functions by any other local authority.
The arrangement is, as it was put by Moore-Bick LJ for the purposes of argument, integral to the incidental. The mutual arrangements are merely part and parcel of the activity of insuring and should be treated as two elements of a single whole. The need for capital contributions and guarantees required by LAML, it was submitted, are not divisible from the conventional payment of premiums. They are the necessary and inseparable facets of a single project for mutual insurance. There is a sufficient nexus between the LAML arrangements and those functions of authorities which require them to be insured.
While a local authority may not have power to insure other local authorities, LAML is a mutual arrangement and the insurance of other authorities is only a consequence of the authority obtaining insurance for itself. It is intrinsic to the mutual model adopted. LAML, it was submitted, is the corporate embodiment of the local authorities for which it is to provide insurance. That is a different situation from a local authority giving a guarantee to support the activities of a commercial insurance company.
Reliance was placed on the speech of Lord Hutton in Re: Northern Ireland Human Rights Commission  UKHL 25. Lord Hutton approved a "liberal approach" to the determination of an authority's powers. He cited with approval the statement of McCarthy J in Attorney General v Lower Hutt City  NZLR 438 at 461:
"In deciding what can fairly be regarded as incidental to express powers, the courts do not think narrowly. They bear in mind the public nature of the obligations of a local body and the requirements of its community, and they take a liberal view of the power under consideration."
Mr Giffin submitted that in considering whether the LAML arrangements are incidental, the court should consider whether it goes "with the grain" of the power conferred. If it does, a broad view should be taken. There are echoes of the section 2 argument in that submission. This is not a situation which the power sought to be exercised runs counter to a comprehensive code governing the activity in question, it was submitted.
Reference was made to cases in which an exercise of power has been held to be within section 111:
(a) R v Westminster City Council Ex parte Legg  LGR 611 (granting an indemnity to members or officers of a local authority, in respect of their legal costs incurred in responding to an objection made to the auditor, could properly be said to facilitate, or be conducive or incidental to, the discharge of the functions of a local authority);
(b) R (A & Ors) v East Sussex County Council  EWHC 2771 (Admin) (making use of a user independent trust was legitimate and not an impermissible escape route from the statutory controls);
(c) R v DPP Ex parte Duckenfield  1 WLR 55 (CA)) (financing police officers' legal expenses in litigation, including private prosecutions brought against them, would not in principle be unlawful or unreasonable and was permissible under section 111(1) as an activity conducive to the duty under the Police Act 1996 to maintain an efficient and effective police force);
(d) In Manchester City Council v Greater Manchester County Council (1980) 78 LGR 560), the County Council handed over to trustees a substantial sum of money to be applied by them for prescribed purposes. It was held in the House of Lords that the creation of the trust had been purely incidental to the exercise of the County Council's power to spend the money as they desired to do and not an end or object in itself outside the powers conferred in the legislation.
(e) In Akuma v Hackney London Borough Council  1 WLR 985, Lord Carswell, with whom the other members of the House agreed, had "no hesitation" in holding that "the regulation and control of the parking of vehicles in a housing estate facilitates and/or is conducive or incidental to the council's discharge of its function of the management of houses in the estate".
The appellants also relied, when read with section 111(1), on section 1(1) of the Local Government (Contracts) Act 1997 ("the 1997 Act") which provides:
"Every statutory provision conferring or imposing a function on a local authority confers power on the local authority to enter into a contract with another person for the provision or making available of assets or services, or both, (whether or not together with goods) for the purposes of, or in connection with, the discharge of the function by the local authority."
It was submitted that making the contract with LAML was authorised by section 1(1), the relevant function being entering into a contract of insurance, which became a function in section 111 terms.
Mr Henderson submitted that local authorities are entitled to cooperate. They may share benefits and risks and insurance risks are no different from others. They may be shared in accordance with agreements made between authorities. An authority may take the risk inherent in LAML provided it has properly assessed the risks and benefits of a joint arrangement. In agreement with Mr Giffin, Mr Henderson submitted that the elements of the LAML arrangements should not be disaggregated; they should be looked at in the round. It is not for courts to consider what type of insurance a local authority obtains.
Mr Howell submitted that the LAML arrangements are not incidental to the functions of the authority. Participating in and financing an insurance company is not reasonably incidental to entering into an insurance contract with it. That is not within section 2 and is not an incidental function within the meaning of section 111. It is incidental to the incidental. A local authority may, in reliance on section 111, enter into contracts of insurance but participation in and financial assistance to an insurance company is beyond its powers. There is no necessary or intrinsic connection between a contract of insurance and participation in, or financial support for, a company providing insurance.
The expression 'incidental to the incidental' comes from the judgment of Farwell J in Attorney-General v Manchester Corporation  1 Ch 643. Manchester Corporation had power to use its tramways to run carriages for the purpose of conveying and delivering parcels. They intended to operate a general parcels delivery business not confined to parcels and goods carried on their tramways. Farwell J held, at page 656:
"To collect and deliver parcels for the tramway is fairly incidental; to collect and deliver parcels outside the radius of the tramway, and without any connection with the tramway, is not incidental to the tramway business, but distinct from it. At the best it could only be said to be incidental to the incidental, and such reasoning would authorize a railway company to carry on a coal merchant's business, because they must buy coal; but this was restrained in Attorney-General v Great Northern Ry. Co (1860) 29 L. J. (Ch.) 794. For the same reasons I hold that the corporation cannot act as general agents for the railway companies, but only in respect of tram-borne goods."
Mr Howell relied on other authorities in which the effect of section 111 was considered. In McCarthy & Stone (Developments) v Richmond upon Thames London Borough Council  2 AC 40, it was held that a local authority could not levy a charge on developers for enquiries relating to speculative development or redevelopment proposals. Lord Lowry, with whom the other members of the House agreed, stated, at page 74H:
". . . the power to give pre-application advice is neither a duty nor a discretionary express power, but is a subsidiary power arising by virtue of section 111(1) (which has codified the common law), because it is calculated to facilitate, or is conducive or incidental to, the discharge of one of the council's functions. To charge for the exercise of that power is, at best, incidental to the incidental and not incidental to the discharge of the functions."
In Morgan Grenfell & Co. Ltd v Sutton London Borough Council (1995) 93 LGR 554, the council participated with an unregistered Housing Association in a scheme under which the Association would purchase properties with the aid of a private loan from a bank and lease them to the council for the purpose of housing the homeless. The bank gave the Association a loan facility which was guaranteed by the council, which also agreed to indemnity the Association from and against all losses.
Peter Gibson LJ, with whom the other members of the court agreed, adopted, at page 584, the proposition of counsel:
"Where Parliament has expressly enacted provisions which define the means by which local authorities are to carry out their functions, section 111(1) of the Act of 1972 cannot be relied upon in support of performance of those functions by other means not expressly empowered by the relevant provisions."
Peter Gibson LJ continued:
"It is simply inconceivable that Parliament ever intended by section 111 (which does no more than put in statutory form what would be implicit at common law) to confer on a local authority power to incur a financial obligation to an unlimited extent by granting a guarantee or indemnity when it has so clearly and in such detail regulated the local authority's powers of expenditure and borrowing and the granting of financial assistance. It is only in cases covered by specific provisions expressly allowing guarantees and indemnities that the local authority can do so. If the local authority cannot bring the case within such a provision, to grant a guarantee or indemnity is beyond its powers."
The effect of the scheme was unlawfully to delegate to the company the discharge of the council's functions of acquiring properties for the purpose of providing housing accommodation (Hobhouse LJ at page 379).
In Credit Suisse v Waltham Forest London Borough Council  QB 362, the council formed a company to purchase housing properties, lease them back to the council and resell them on the expiry of the lease. It was accepted that the renting of the council of the properties from the company was incidental to the function of letting out properties to the homeless. The company entered into a loan agreement with a bank, guaranteed the punctual payment of all sums payable by the company to the bank and undertook to pay the bank any sum which the company failed to pay on its due date. The council further agreed to indemnify the company against all losses arising out of the scheme. It was held in this court that the council did not have the power to give the guarantee or the indemnity.
The relevant statutory functions, those in sections 65 and 69 of the Housing Act 1985, were limited and did not entitle a local housing authority to discharge them by means of a partly owned company. Peter Gibson LJ stated, at page 375C:
"The guarantee and indemnity cannot properly be characterised as calculated to facilitate, or as conducive or incidental to, the discharge of any function of the council, being too remote therefrom."
Hobhouse LJ stated, at page 379E:
"This was, on the Plaintiffs' case, an exercise of the incidental power. The further transactions upon which the Plaintiffs have to rely in this action were remote from the exercise of any function by the Council and not incidental to it. The grant of the guarantee and the indemnity were to facilitate the borrowing by the Company at advantageous rates. That is how it is put in the minute of the resources strategy committee from which I have quoted. The giving of the indemnity to the company had a similar character. Both documents were essentially aspects of an exercise in property speculation. It was hoped that this scheme would be profitable and that the capital values of the properties purchased by the company would increase. The documents executed by the council would only become relevant if property values fell and the venture became loss-making, not profitable. These transactions were remote from the actual function of housing the homeless or the acquisition of housing for the purpose of providing accommodation. They related to an exercise in property speculation on borrowed money and the needs of a trading company not to the needs of the council and the discharge of its functions. (The parallel with what was said by Lord Templeman in Hazell v Hammersmith and Fulham Council,  2 AC 1, 31, 34, is striking.)"
In Hazell, Lord Templeman had stated at page 31E:
"The authorities also show that a power is not incidental merely because it is convenient or desirable or profitable. A swap transaction undertaken by a local authority involves speculation in future interest trends with the object of making a profit in order to increase the available resources of the local authorities. There are many trading and currency and commercial swap transactions which eliminate or reduce speculation. Individual trading corporations and others may speculate as much as they please or consider prudent. But a local authority is not a trading or currency or commercial operator with no limit on the method or extent of its borrowing or with powers to speculate. The local authority is a public authority dealing with public moneys, exercising powers limited by Schedule 13."
At page 34, he stated:
"For the banks it was argued that swap transactions are akin to insurance which enables provision to be made for possible risks. By insurance, an assured sacrifices a premium which when aggregated with premiums from other assured, will form a pool from which the insurer will indemnify the unfortunate victim (if any) who suffers from the risk insured against. A swap contract based on a notional principal sum of £1m. under which the local authority promises to pay the bank £10,000 if LIBOR rises by 1% and the bank promises to pay the local authority £10,000 if LIBOR falls by 1% is more akin to gambling than insurance."
In Credit Suisse v Allerdale Borough Council  QB 306, the council created a company to develop a site by building a swimming pool and time-share units, the sale of which would defray the costs of building the pool. It was held that the council had no power to give a guarantee in respect of the company's borrowing. Even if it had, the guarantee was given for an improper purpose, namely in connection with the construction of time-share accommodation. The company was held to be a free standing entity trading on its own account without obligation to the council. Hobhouse LJ considered, at page 361F, whether section 111(1) of the 1972 Act applied. On the assumption, contrary to his view, that it did, Hobhouse LJ stated:
"It is not suggested that at the material time there was any other power which permitted setting up the company. Assuming that the setting up of the company was a proper exercise of an incidental power under section 111(1), the giving of the guarantee was in my judgment incidental to that incidental activity. The function of the guarantee was to assist the company to borrow at favourable rates and without providing other security. It flowed from the needs of the company. It was not incidental to the discharge of the function. The principle recognised in cases such as Reg. v Richmond upon Thames London Borough council, Ex parte McCarthy & Stone (Developments) Ltd.  2AC 48 is applicable."
In reply on section 111, Mr Giffin submitted that the capital contributions to LAML and the guarantee are necessary and insuperable facets of a single decision to engage in mutual insurance. The element of insuring others was said to be merely the "flip side" of the authority obtaining insurance for itself as part of a mutual arrangement. It cannot be said that the LAML arrangement is inconsistent with any legislative scheme, it was submitted. It was thereby distinguishable from Waltham Forest where the purpose of the scheme was to avoid a code of financial controls and Morgan Grenfell where a power to give guarantees to a registered, as distinct from an unregistered, Housing Association was acknowledged. In the absence of such a restrictive legislative scheme, a benevolent approach can be adopted. In this context, joint arrangements and the consequent sharing of risks and expenses are expressly authorised. The company assisted is simply the corporate embodiment of authorities working together.
Judge's conclusion on section 111
The judge held, at paragraph 93:
"In my judgment, to establish or to become a member of a mutual insurance company such as LAML for the purpose of obtaining insurance is at best incidental to the incidental power to insure (in the sense of obtaining insurance cover), and is not incidental to the discharge of any function of the local authority . . . Brent could not provide financial assistance to a company for it to do what Brent could not lawfully do, i.e., to provide insurance."
In rejecting the appellants' submission on section 1 of the 1997 Act, the judge went into considerable detail. He indicated, without deciding the point, his view that the section was inapplicable to a contract of insurance. I do not consider that issue because I agree with the judge's subsequent finding that entering into a contract by virtue of section 1 is not discharging a function within the meaning of section 111.
The 2006 Regulations were made to implement the United Kingdom's obligations under Directive 2004/18 of 31 March 2004 ("the Directive"). It was a Directive "on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts". The Utilities Directive (2004/17), made on the same day, applied similar rules to procurement by utilities. The broad object of the Directive, and of the Regulations, is, as the judge stated at paragraph 3 of his judgment of 16 May 2008:
"To ensure that public bodies award certain contracts above a minimum value only after fair competition and to the person offering the lowest price or making the most economically advantageous offer."
Recital 2 to the Directive referred to the principles of freedom of movement of goods, freedom of establishment and freedom to provide services and stated:
"For public contracts above a certain value, it is advisable to draw up provisions of Community coordination of national procedures for the award of such contracts which are based on those principles so as to ensure the effects of them and to guarantee the opening up of public procurement to competition."
For present purposes, it is not necessary to set out either the provisions of the Directive or of the Regulations in detail. Article 2 of the Directive requires that "contracting authorities shall treat economic operators equally and non-discriminatorily and shall act in a transparent way".
In awarding contracts of insurance to LAML the appellants did not comply with the procedures in the 2006 Regulations. They relied on what is known as the Teckal exemption, following a decision of the European Court of Justice ("ECJ") in Teckal SrL v Commune di Viano & Azienda Gas – Acqua Consorziale (AGAC) di Reggio Emilia  ECR I-8121. They further submitted that, in any event, the respondents are defeated by delay because they did not comply with the requirements of regulation 47(7).
The respondents submitted that the Teckal exemption is not part of the law of England and Wales, not having been incorporated by or in the Regulations and being inconsistent with them, that the exemption is inapplicable to contracts of insurance and that, in any event, the requirements for the application of the exemption were not satisfied when the appellants awarded contracts to LAML. It followed that they were in breach of duty to the respondents and liable in damages for loss suffered as a result of the breach.
Teckal itself was decided under an earlier directive, Directive 93/36, but that is not material. Teckal, a private company, complained that Viano, an Italian local authority, had conferred on AGAC the management of the heating service for municipal buildings without going out to tender. AGAC was a consortium set up by a number of municipalities. The court stated:
"48. It is common ground in the present case that AGAC supplies products, namely fuel, to the Municipality of Viano in return for payment of a price.
49. As to whether there is a contract, the national court must determine whether there has been an agreement between two separate persons.
50. In that regard, in accordance with Article 1(a) of Directive 93/36, it is, in principle, sufficient if the contract was concluded between, on the one hand, a local authority and, on the other, a person legally distinct from that local authority. The position can be otherwise only in the case where the local authority exercises over the person concerned a control which is similar to that which it exercises over its own departments and, at the same time, that person carries out the essential part of its activities with the controlling local authority or authorities.
51. The answer to the question must therefore be that Directive 93/36 is applicable in the case where a contracting authority, such as a local authority, plans to conclude in writing, with an entity which is formally distinct from it and independent of it in regard to decision-making, a contract for pecuniary interest for the supply of products, whether or not that entity is itself a contracting authority."
The court held (paragraph 46) that it was a matter for the national court to ascertain whether the relationship between the municipality and AGAC met the conditions which the Directive laid down for a public service contract.
That statement of principle has been considered by the ECJ in many subsequent cases. In none of them has the statement of principle at paragraphs 48 to 51 of Teckal been questioned or doubted. It has been re-stated and affirmed. It clearly applies over a range of former and current Directives and, subject to one submission made by Mr Howell, it is not necessary to describe the subject matter of each Directive. The main issue arising in this appeal is in two parts: first whether the control must be exercised by the local authority seeking exemption alone, or is control by a number of public authorities sufficient, and, generally, whether the appropriate degree of control over LAML was present.
The Advocate General had reached a conclusion on the facts, stating, at paragraph 63:
"I do not consider it proven that the municipality exercises hierarchical control over AGAC or that the relationship between it and AGAC does not entail the award of a contract on the ground that the two contracting parties do not in reality have third-party status with respect to each other."
In the present case, the judge found that the first limb of the Teckal principle, the control limb, was not satisfied. He stated that it was unnecessary for him to consider whether the second limb, dealing with the essential part of activities, was satisfied. He held that the respondents were not defeated by their delay in bringing the claim. The respondents were entitled to damages for the appellants' breaches of the Regulations.
In Stadt Halle & RPL Recyclingpark Lochau GmbH v Arbeitsgemeinschaft Thermische Restabfall und Energierverwertungsanlage TREA Leuna  ECR I-1 (11 January 2005, Teckal was cited and reference made to Directive 92/50 which was relevant in that case. The court stated, at paragraph 49:
"By contrast, the participation, even as a minority, of a private undertaking in the capital of a company in which the contracting authority in question is also a participant excludes in any event the possibility of that contracting authority exercising over that company a control similar to that which it exercises over its own departments."
The court added, at paragraph 52:
"Where a contracting authority intends to conclude a contract for pecuniary interest relating to services within the material scope of [the Directive] with a company legally distinct from it, in whose capital it has a holding together with one or more private undertakings, the public award procedures laid down in that Directive must always be applied."
In Parking Brixen GmbH v Gemeinde Brixen and Stadtwerke Brixen AG  ECR I-8612 (13 October 2005) the court considered whether Stadtwerke Brixen was an entity independent of the municipality. The case involved the award by a public authority to a service provider of the management of a public pay car park. Having stated, at paragraph 62, the Teckal principles, the court stated:
"63. Since it is a matter of derogation from the general rules of Community law, the two conditions stated in the preceding paragraph must be interpreted strictly and the burden of proving the existence of exceptional circumstances justifying the derogation to those rules lies on the person seeking to rely on those circumstances.
64. It is appropriate to examine, first, whether the concession-granting public authority exercises a control over the concessionaire which is similar to that which it exercises over its own departments.
65. That assessment must take account of all the legislative provisions and relevant circumstances. It must follow from that examination that the concessionaire in question is subject to a control enabling the concession-granting public authority to influence the concessionaire's decisions. It must be a case of a power of decisive influence over both strategic objectives and significant decisions."
At paragraph 67, the Court considered the factors relating to control including at (e) "the considerable powers conferred on [the entity's] Administrative Board, with in practice no management control by the municipality". The municipality's control was 'tenuous'. That approach was echoed by the opinion of the Advocate General in Carbotermo (post) where she stated, at paragraph 40:
"Here too, it must be examined in concreto whether the control criterion is satisfied."
It was held, on the facts, that the public service concession should have been put out to competition. Awarding it to Stadtwerke Brixen AG could not be regarded "as a transaction internal to the authority, to which the rules of Community law do not apply". The court considered in detail the powers of the company's Administrative Board:
"68. If, in the main proceedings, the share capital of the successful undertaking is held indirectly by several authorities, it may be relevant to consider whether the activities to be taken into account are those which the successful undertaking carries out with all of the controlling authorities or only the activities carried out with the authority which in the present case acts as the contracting authority.
69. It should be borne in mind in this connection that the Court has stated that the legally distinct person in question must carry out the essential part of its activities with 'the controlling local authority or authorities' (Teckal, paragraph 50). It thus envisaged the possibility that the exception provided for could apply not only in cases where a single authority controls such a legal person, but also where several authorities do so.
70. Where several authorities control an undertaking, the condition relating to the essential part of its activities may be met if that undertaking carries out the essential part of its activities, not necessarily with one of those authorities, but with all of those authorities together.
72. . . . The Management Board possesses very broad management powers which it can exercise independently."
The court made no distinction between concessions and other public procurement. It stated:
"Indeed, in the field of public procurement and public service concessions, the principle of equal treatment and the specific expressions of that principle, namely the prohibition on discrimination on grounds of nationality and Articles 43 EC and 49 EC, are to be applied in cases where a public authority entrusts the supply of economic activities to a third party. By contrast, it is not appropriate to apply the Community rules on public procurement or public service concessions in cases where a public authority performs tasks in the public interest for which it is responsible by its own administrative, technical and other means, without calling upon external entities."
In Carbotermo SpA and Consorzio Alisei v Commune di Busto Arsizio and AGESP SpA  ECR I-4137 (11 May 2006), dicta from Parking Brixen were applied without reference to that being a concession case. The Commune di Busto Arsizio awarded to AGESP a contract for the supply of fuel and for the maintenance, modification and upgrading of the heating installations in the municipality's buildings. Taking the second Teckal principle first, the court held, at paragraph 69:
"[Teckal] thus envisaged the possibility that the exception provided for could apply not only in cases where a single authority controls such a legal person, but also where several authorities do so."
And at paragraph 70:
"Where several authorities control an undertaking, the condition relating to the essential part of its activities may be met if that undertaking carries out the essential part of its activities, not necessarily with one of those authorities, but with all of those authorities together."
It had been held, at paragraph 63:
"In applying those principles, the undertaking in question can be viewed as carrying out the essential part of its activities with the controlling authority within the meaning of Teckal only if that undertaking's activities are devoted principally to that authority and any other activities are only of marginal significance."
On the first Teckal requirement, the court cited the decision in Parking Brixen that the control "must be a case of power of decisive influence over both strategic objectives and significant decisions of that company" (paragraph 36, citing paragraph 65 of Parking Brixen). The court also stated, paragraph 37:
"The fact that the contracting authority holds, alone or together with other public authorities, all of the share capital in a successful tenderer tends to indicate, without being decisive, that that contracting authority exercises over that company a control similar to that which it exercises over its own departments, as contemplated in paragraph 50 of Teckal. "
The court concluded:
"38. It is apparent from the case-file that the statutes of AGESP Holding and AGESP confer on the board of Directors of each of those companies the broadest possible powers for the ordinary and extraordinary management of the company. Those statutes do not reserve for the Comune di Busto Arsizio any control or specific voting powers for restricting the freedom of action conferred on those Boards of Directors. The control exercised by the Comune di Busto Arsizio over those two companies can be described as consisting essentially of the latitude conferred by company law on the majority of the shareholders, which places considerable limits on its power to influence the decisions of those companies.
39. Moreover, any influence which the Comune di Busto Arsizio might have on AGESP's decisions is through a holding company. The intervention of such an intermediary may, depending on the circumstances of the case, weaken any control possibly exercised by the contracting authority over a joint stock company merely because it holds shares in that company.
40. It follows that, in such circumstances, subject to their being verified by a court adjudicating on the substance in the main proceedings, the contracting authority does not exercise over the successful tenderer for the public procurement contract at issue here a control similar to that which it exercises over its own departments"
Support for a restrictive interpretation of the Teckal exemption also appears in Carbotermo where the issue arose as to whether the exemption provided for in article 13 of Directive 93/38 should be applied by analogy in the scope of application of Directive 93/36 (paragraph 51). The court found, at paragraph 55:
"As exceptions must be interpreted restrictively, the court does not find it appropriate to extend the application of article 13 of Directive 93/38 to the scope of Directive 93/36."
In support of that conclusion, the court noted (paragraph 56) that during the reform of the public procurement Directives in 2004, an exception in article 23 of Directive 2004/17 was not incorporated in the Directive under consideration in the present case.
In Asociación Nacional de Empresas Forestales (Asemfo) v Transoformación Agraria SA (Tragsa) and Administración del Estado  ECR I-2999 (19 April 2007), it was held that the Teckal conditions were satisfied under the relevant Directives. Tragsa is a state company which provides essential services in the field of rural development and environmental protection.
The court held, at paragraph 57:
"As regards the first condition, relating to the public authority's control, it follows from the Court's case-law that the fact that the contracting authority holds, alone or together with other public authorities, all of the share capital in a successful tenderer tends to indicate, generally, that the contracting authority exercises over that company a control similar to that which it exercises over its own departments."
The court held, at paragraph 60, that it appeared to follow from the relevant Spanish legislation:
". . . that Tragsa is required to carry out the orders given it by the public authorities, including the Autonomous Communities. It also seems to follow from that national legislation that, as with the Spanish State, in the context of its activities with those Communities, as an instrument and technical service, Tragsa is not free to fix the tariff for its actions and that its relationships with them are not contractual."
Tragsa could not (paragraph 61) be regarded as a third party in relation to the Autonomous Communities
The second Teckal condition was also satisfied, Tragsa carried out more than 55% of its activities with the Autonomous Communities and nearly 35% with the State:
"It thus appears that the essential part of its activities is carried out with the public authorities and bodies which control it." (paragraph 63).
In Asociación Profesional de Empresas de Reparto y Manipulado de Correspondencia v Administración General del Estado (Case C-220/06, 18 December 2007, BAILII:  EUECJ C-220/06), the principles stated in Parking Brixen had been cited at length by the Advocate General. The issue was whether Correos, the provider of a universal postal service, came within the Teckal exemption. The relevant Directive was 92/50. Correos is a public limited company whose capital is wholly state-owned. The court noted, at paragraph 53:
"The company's customers consist of any person wishing to use the universal postal service."
The court held, at paragraph 88:
"The contracts to which the Spanish legislation applies . . . do not in actual fact constitute a unilateral administrative measure creating obligations solely for the provider of the universal postal service and departing significantly from the normal conditions of a commercial offer made by that company."
In Commission des Communautés Européennes v République Italienne (Case C-371/05, 17 July 2008, BAILII:  EUECJ C-371/05 - French Text ) the local authority of Mantua awarded management, maintenance and development of municipal computer services to ASI without the award being the subject of an invitation to tender. The court held, at paragraph 26 (the official translation is not available to the court):
"The result is that this authority had the option of crucially influencing both the strategic objectives and the important decisions of ASI by appointing the members of the management body of this company and a municipal official in charge of directing and controlling the activity of the latter. This option is sufficient to establish the existence of a power of structural and functional control of the local authority of Mantua over this company similar to that which it exercises over its own services, so that the first condition set by the Court in point 50 of the aforementioned Teckal judgment is fulfilled."
The second Teckal requirement was also held to have been satisfied.
On the issue of control by a number of authorities Mr Henderson relied, in particular, on the recent judgment of the ECJ in Coditel Brabant v Commune D'Uccle, 13 November 2008, Case C-327/07, decided since the judgment of Stanley Burnton LJ in the present case. As a recent decision in which earlier decisions have been considered, it is necessary to cite from the judgment at length. The Belgian law on Inter-Municipal Cooperatives provides, at article 3:
"Inter-Municipal Cooperatives shall be legal persons governed by public law and shall not have a commercial character, irrespective of their form or object."
The municipality of D'Uccle decided to sell a concession for the operation of its cable television network. Five companies, including Coditel, submitted purchase bids but Brutélé, an Inter-Municipal Cooperative Society, submitted to the municipality an offer of affiliation as an associated member instead of a purchase bid. Instead of selling the network, the municipality decided to become a member of Brutélé entrusting it, by way of concession, with the management of the cable television network. Brutélé is not open to private members. Its governing council consists of representatives of the municipalities appointed by the General Assembly, itself composed of representatives of the municipalities. The governing council enjoys the widest powers.
Contesting the allegation that it had breached the Directive, Brutélé claimed that its statutes:
"Allowed the Municipality of D'Uccle, as an operational sub-sector, to exercise immediate and precise control over Brutélé's activities in that sub-sector identical to the control that that Municipality would exercise over its own internal departments."
The court stated:
"32. It is clear from the order for reference that, in the case before the referring court, the concessionaire is an inter-municipal cooperative society whose members are municipalities and an inter-municipal association whose members in turn are solely municipalities, and is not open to private members.
33. Secondly, it is clear from the file that Brutélé's governing council consists of representatives of the affiliated municipalities, appointed by the general assembly, which is itself composed of representatives of the affiliated municipalities. In accordance with Article 12 of the Law on inter-municipal cooperatives, the representatives at the general assembly are appointed by the municipal council of each municipality from among the municipal councillors, the mayor and the aldermen.
34. The fact that Brutélé's decision-making bodies are composed of representatives of the public authorities which are affiliated to Brutélé shows that those bodies are under the control of the public authorities, which are thus able to exert decisive influence over both Brutélé's strategic objectives and significant decisions.
35. Thirdly, it is evident from the file that Brutélé's governing council enjoys the widest powers. In particular, it fixes the charges. It also has the power – but is under no obligation – to delegate to the sector or sub-sector boards the resolution of certain matters particular to those sectors or sub-sectors.
36. The question arises as to whether Brutélé has thus become market-orientated and gained a degree of independence which would render tenuous the control exercised by the public authorities affiliated to it.
37. In this regard, it should be pointed out that Brutélé does not take the form of socitété par actions, or a socitété anonyme, either of which is capable of pursuing objectives independently of its shareholders, but of an inter-municipal cooperative society governed by the Law on inter-municipal cooperatives. Moreover, in accordance with Article 3 of that Law, inter-municipal cooperatives are not to have a commercial character.
38. It seems to be apparent from that law, which is supplemented by Brutélé's statutes, that Brutélé's object under its statues is the pursuit of the municipal interest – that being the raison d'être for its creation – and that it does not pursue any interest which is distinct from that of the public authorities affiliated to it.
39. Subject to verification of the facts by the referring court, it follows that, despite the extent of the powers conferred on its governing council, Brutélé does not enjoy a degree of independence sufficient to preclude the municipalities which are affiliated to it from exercising over it control similar to that exercised over their own departments.
40. Those considerations are all the more applicable where decisions relating to the activities of the inter-municipal cooperative society are taken by the sector or sub-sector boards, within the limits of the delegated powers granted to them by the governing council. Where one or more affiliated municipalities are recognised as constituting a sector or sub-sector of that society's activities, the control which those municipalities may exercise over the matters delegated to the sector or sub-sector boards is even stricter than that which they exercise in conjunction with all the members within the plenary bodies of that society.
41. It follows from the foregoing that, subject to verification of the facts by the referring court as regards the degree of independence enjoyed by the inter-municipal cooperative society in question, in circumstances such as those of case before the referring court, the control exercised, via the statutory bodies, by the public authorities belonging such an an inter-municipal cooperative society over that society's decisions may be regarded as enabling those authorities to exercise over that cooperative society control similar to that exercised over their own departments.
42. Accordingly, the answer to Questions 1 and 2 must be that:
The court considered, as a separate question, (3), whether control "must be exercised individually by each member, or it is sufficient that it be exercised by the majority of the members". That question has been put separately from questions 1 and 2. The court stated:
Articles 43 EC and 49EC, the principles of equal treatment and of non-discrimination on grounds of nationality, and the concomitant obligation of transparency, do not preclude a public authority from awarding, without calling for competition, a public service concession to an inter-municipal cooperative society of which all the members are public authorities, where those public authorities exercise over that cooperative society control similar to that exercised over their own departments and where that society carries out the essential part of its activities with those public authorities;
Subject to verification of the facts by the referring court as regards the degree of independence enjoyed by the inter-municipal cooperative society in question, in circumstances such as those of the case before the referring court, where decisions regarding the activities of an inter-municipal cooperative society owned exclusively by public authorities are taken by bodies, created under the statutes of that society, which are composed of representatives of the affiliated public authorities, the control exercised over those decisions by the public authorities may be regarded as enabling those authorities to exercise over the cooperative society control similar to that exercised over their own departments."
"49. That possibility for public authorities to use their own resources to perform the public interest tasks conferred on them may be exercised in cooperation with other public authorities (see, to that effect, Asemfo, paragraph 65).
50. It must therefore be recognised that, where a number of public authorities own a concessionaire to which they entrust the performance of one of their public services tasks, the control which those public authorities exercise over that entity may be exercised jointly."
The court concluded:
"54. Consequently, the answer to Question 3 must be that, where a public authority joins an inter-communal cooperative of which all the members are public authorities in order to transfer to that cooperative society the management of a public service, it is possible, in order for the control which those member authorities exercise over the cooperative to be regarded as similar to that which they exercise over their own departments, for it to be exercised jointly by those authorities, decisions being taken by a majority, as the case may be."
I comment on Coditel as follows:
(a) The court has distinguished question 3 from questions 1 and 2 even though factors relied on to answer the earlier questions, for example, the role of sub-sector boards, would appear also to be relevant to question 3. The court has separated the controversial question of joint control (question 3) from the different but equally important question of the control exercised by the authority (or authorities) over the cooperative society.
(b) I cannot accept the submission of Mr Howell that Coditel is distinguishable because it is concerned with a concession and not a contract. For present purposes, the two types of arrangement appear to have been dealt with in the cases by the ECJ in the same way. There is no suggestion in Coditel that the decision was influenced by the subject matter being a contract of concession rather than a contract to supply.
More recently, on 19 February 2009, Advocate General Mazak delivered an opinion in Commission of the European Communities v Federal Republic of Germany (Case C-480/06). The subject matter of the contract in dispute was the incineration of waste, a service covered by Directive 92/50. Other local authorities directly concluded with the refuse collection services of the City of Hamburg a contract for waste disposal without there having been a tendering procedure. The Advocate General cited Teckal and cases in which it has been applied. He stated:
"30. It is moreover in accordance with that derogation that the Court has held that it is impossible automatically to exclude relations established between public law institutions from the scope of those directives on public procurement, regardless of the nature of those relations. [Commission v Spain cited]
31. In the present case, it is obvious that, as the Federal Republic of Germany states, the contract in dispute is a means of cooperation between State bodies. It does not follow from that fact alone, however, that the contract in dispute does not fall within the scope of Directive 92/50. The opposite finding would be possible only were it to be established that the two conditions set out for the first time in the judgment in Teckal are met.
. . .
34. In this respect, I do not share the opinion held by the Federal Republic of Germany that, in the present case, cooperation between two distinct State bodies can be considered to amount to the use of the resources of the contracting authority. The City of Hamburg refuse disposal services cannot be regarded as the resources of the districts concerned, which are the contracting authorities."
The Advocate General added:
"40. Thus, it is necessary to examine whether the districts exercise over the City of Hamburg refuse disposal services a control which is similar to that which they exercise over their own departments and whether the City of Hamburg refuse disposal services carry out the essential part of their activities with the districts.
41. The Court has been required on several occasions to consider the condition relating to 'similar control'. It is clear from its case-law that, in order to determine whether a public authority exercises over the other party to the contract a control similar to that which it exercises over its own departments, it is necessary to take account of not only all the legislative provisions but also the relevant circumstances. It must result from that examination that a contracted body is subject to a control which enables the contracting authority to influence that body's decisions. That must be a power of decisive influence over both strategic objectives and significant decisions of that entity. " [Parking Brixen and Coditel cited]
I extract these principles from the cases:
(a) Teckal is of generic application within the Treaty (articles 43EC and 49EC apply) and relevant Directives.
(b) The Teckal principles may apply to contracts to supply as well as to concessions (paragraph 89(b) above).
(c) The principles stated in paragraph 50 of Teckal remain effective. The principles, as stated, are relied on in all the cases cited and I detect no weakening in the requirements necessary for the application of the exemption.
(d) The derogation from the Directive must be interpreted strictly with the burden of justification on the person seeking to prove exceptional circumstances.
(e) The participation of a private undertaking in the local authority's project excludes the Teckal exemption. The exemption depends on the absence of private, as distinct from public, involvement in the arrangement.
(f) While it may be difficult to reconcile with the concept of control "as over its own department", the control over the other legal entity may be exercised together with other local authorities, as well as by a single authority. The ECJ does not appear to have examined, in this context, the relevance of a possible conflict of interest between the "controlling" authorities.
(g) Ownership of the other legal entity by the local authority or authorities tends to indicate, without being decisive, the necessary control.
(h) Analysis of the relationship between the local authority or authorities and the other legal entity is necessary to decide whether the necessary degree of control is present. There must be a power of decisive influence over both strategic objectives and significant decisions of the other legal entity.
(i) In some cases the ECJ has expressed its opinion on that issue following such analysis of the facts. The Court's view has been expressed as subject to confirmation of the facts by the national court.
(j) The second Teckal principle is satisfied if the essential part of the other legal entity's activities are carried out with the local authority, or authorities, which control it.
Submissions on public procurement
On the central issue of control of LAML by the local authority or authorities, and whether the appellants' contract with LAML came within the Teckal exemption, Mr Henderson relied on the ownership of LAML by the appellants and other local authorities. He relied on the power of the local authorities to appoint the majority of directors and on other aspects of the LAML documents already summarised.
Participating Members representing not less than 50% of the voting rights of those members may call a general meeting (article 54(b)). Members may direct the Board, by Special Resolution by a 75% majority (article 1 and regulation 70 of Table A). Participating Members elect and may remove directors. LAML may only offer such insurance cover as the Participating Members have agreed at a general meeting (rule 16).
Mr Henderson submitted that, with those powers, the local authorities have a power of decisive influence over both strategic objectives and significant decisions of LAML. The second Teckal principle was satisfied because the essential part of LAML's activities were to be carried out with the local authorities. Any business provided by affiliates would only be marginal.
Mr Howell submitted that the necessary degree of control was not present even if control by a number of authorities could be considered. He further relied on provisions in the Utilities Directive which expressly provide for an exemption in respect of contracts between a contracting authority and a joint venture which is formed by a number of contracting entities for the purpose of carrying out activities covered by the Directive and of which that contracting entity is part (article 23 of Utilities Directive). Mr Howell submitted that if it was thought necessary in the Public Utilities Directive to make specific provision for arrangements with Mutuals, such arrangements are not permissible under the present Directive.
I do not agree. The draftsmen would have had in mind, as Mr Henderson submitted, that the requirements with respect to utilities are such that a materially less exacting test may be appropriate. It does not follow that the absence of such specific provision in the present context requires a narrower approach to be taken to the Teckal exemption. In Carbotermo (as noted in paragraph 75 above), the court referred to the difference between the two Directives, and clearly considered that a different effect was intended.
Mr Howell submitted that the constitutional arrangements of LAML should be judged at the moment at which insurance contracts were made. I follow that differences may arise depending on whether the first annual general meeting has been held and what the membership of LAML was at any particular moment. Having regard to the desire of all parties to resolve the general questions about the powers of local authorities, I do not propose to conduct a detailed analysis month by month but to assume that, at material times, LAML was fully operational under its Memorandum, Articles and Rules.
Teckal exemption and 2006 Regulations
Mr Howell, under a separate head, submitted that the Teckal exemption does not form part of national law and I deal with it separately. The 2006 Regulations do not simply reproduce the Directive but set out national requirements for public procurement in terms of domestic legal concepts. Where it is intended that the Regulations shall reflect the concepts in the Directive, it is expressly so stated, as in regulation 4(3) which refers specifically to article 2 of the Directive, quoted at paragraph 63 above.
"Public contract" is defined in Article 1(2)(a) of the Directive as "contracts for pecuniary interest concluded in writing between one or more economic operators and one or more contracting authorities and having as their object the execution of works, the supply of products or the provision of services within the meaning of this Directive". Article 1(8) defines "economic operator" as covering equally the concepts of contractor, supplier and service provider. It is stated to be used "merely in the interests of simplification".
In the Regulations, the term "economic operator" is used in Regulation 4 and is again stated to mean "a contractor, a supplier or a services provider". Public contract is defined in regulation 2 as a "public services contract, a public supply contract or a public works contract", expressions which are also used in article 1(2)(b)(c) and (d) of the Directive.
It was submitted that terms in the Regulations such as "public services contract" (regulation 2(1)) and "offer" (regulation 5(1)) are couched in terms of national contract law. Regulation 5 provides, in so far as is material, that "these Regulations apply whenever a contracting authority seeks offers in relation to a proposed public supply contract". General exclusions (regulation 6) and a threshold (regulation 8) are provided but these do not include a Teckal exemption. The Regulations are to be construed, submitted Mr Howell, in the manner in which any other domestic legislation is construed, unless to do so would be incompatible with the United Kingdom's obligations under European law (Lord Brown of Eaton-under-Heywood in R (Hurst) v London Northern District Coroner  2 AC 189, at paragraph 52).
The appellants' contract with LAML satisfies the definition of a public services contract as defined in the Regulations, Mr Howell submitted, and the appellants sought an offer, as so defined, from LAML. There was no basis for reading the Teckal exemption into them, it was submitted. Regulations may do more, by way of opening up public procurement, than the obligations under the Directive require. The Minister may widen the effect of a Directive provided the further measures are closely related to the primary purpose of giving effect to the Directive. The Minister has made provision in the Regulations for "the purpose of implementing [a community obligation]" under section 2(2) of the European Communities Act 1972.
R v Portsmouth City Council, Ex Parte Coles  95 LGR 494 does not assist the respondents on this issue. Hobhouse LJ stated, at page 508:
"Where a local authority, as did this council, decides to use its own direct labour department, it is not deciding to award a contract: it is deciding not to award a contract. Such a decision is something which falls outside the purview of the Directives although, following the Acts of 1980 and 1988, it has been covered by the Regulations of 1991 . . . Article 20 of the Works Directive only applies to the award of an actual not a fictional contract."
That is very different from the present Regulations in which there is no express departure from the terms of the Directive, and, in my view, no departure is intended.
National law must conform to a framework designed to guarantee the opening up of public procurement to competition. In widening the effect of the Directive, the absence of a Teckal exemption in the Regulations is not ultra vires, Mr Howell submitted.
Article 11 of the Directive empowers member states to stipulate that contracting authorities may purchase works, supplies and/or services through a central purchasing body. They shall be deemed to have complied with the Directive in so far as a central purchasing body has complied with it. I do not consider that provision for central purchasing bodies in the present Directive bears upon the scope of the Teckal exemption.
Judge's conclusion on public procurement issue
Stanley Burnton LJ held "with considerable hesitation", that the term "contract" in the Regulations should be construed in the light of the expressed intention to implement the Directive and as requiring two contracting parties that do not satisfy the Teckal conditions.
The judge held that the Teckal exemption could apply to a contract of insurance, and I agree. Ultimately, in his judgment (paragraph 68) "the real issue is whether on the facts the requirement of the Teckal exemption are satisfied". He concluded, at paragraph 78:
"The general picture given by the documents to which I have referred is of a business the administration of which is relatively independent. Just as in Stadt Halle the fact that there was private participation in the ownership of the contractor was inconsistent with the Teckal exemption, and in Carbotermo the fact that the public authority's interest was held through a holding company was an indication that the Teckal exemption did not apply, so in my judgment the employment of a private company to manage LAML points against it. Moreover, and perhaps more importantly, there are contractual provisions that point to a degree of independence of decision that is inconsistent with the first condition. I refer in particular to Article 11 of the Articles of Association, and to Rule 22(1), under which a Participating Member will normally be excluded from the Board's consideration of its insurance claim. Similarly, the terms of the policies referred to in paragraph 77, are typical of a policy issued by a wholly independent insurer to its insured. They envisage a relationship (including disputes) between Brent and LAML that is inconsistent with Teckal."
The judge found it unnecessary to consider whether the second condition was satisfied.
Conclusions on vires issue
(a) Relevance of guidance
The judicial approach to statutory provisions such as section 3(5) of the 2000 Act varies, as one would expect, with the context and the circumstances. The approach to be taken to statutory construction was stated by Lord Simon of Glaisdale in Ealing London Borough Council v Race Relations Board  2 AC 342 at 361. Having rejected the use, in construing statutes, of "preparatory works", Lord Simon stated:
"(All this is not, of course to say that an explanatory memorandum accompanying a complicated measure, such as accompanies almost every statutory instrument, might not often be useful both in apprising legislators of the details for which they are assuming responsibility and in assisting the courts in their task of interpretation.)"
Lord Simon added:
"In the absence of such material the courts have five principal avenues of approach to the ascertainment of the legislative intention: (1) examination of the social background, as specifically proved if not within common knowledge, in order to identify the social or juristic defect which is the likely subject of remedy; (2) a conspectus of the entire relevant body of the law for the same purpose; (3) particular regard to the long title of the statute to be interpreted (and, where available, the preamble), in which the general legislative objectives will be stated; (4) scrutiny of the actual words to be interpreted, in the light of the established canons of interpretation; (5) examination of the other provisions of the statute in question (or of other statutes in pari materia) for the illumination which they throw on the particular words which are the subject of interpretation."
In the present case, it is the local authority which, under section 3(5), "must have regard" to the guidance about the exercise of the power under section 2(1) but, in considering the legality of a local authority's exercise of the power, a court needs to have the same regard. In Chief Constable of Cumbria v Wright & Anr  1 WLR 1407, the Divisional Court had to consider the approach to guidance issued by the Home Office in relation to the Anti-social Behaviour Act 2003. Keene LJ stated, at paragraph 17:
"It is, of course, for the courts and not the executive to interpret legislation. However, in general, official statements by government departments administering an Act, or by any other authority concerned with an Act, may be taken into account as persuasive authority on the legal meaning of its provisions. That is the principle stated by Bennion, Statutory Interpretation, 4th ed (2002), section 232."
The context in which the explanatory notes and guidance are to be considered is that of a statute which has employed the expression "promotion or improvement of the well-being of their area". The expression "well-being" is used commonly enough but its generality and non-specificity is such that its definition and the limits, if any, upon it are not readily defined. In construing the meaning in this context of the non-technical expression "well-being", the guidance under section 3(5) need not be authority, or even persuasive authority, but what it purports to be, that is guidance. It may assist in deciding the parameters within which local authorities may operate. I consider it later in that context. It is still for the court to determine the meaning of the expression "well-being", and guidance found by the court to be contrary to such construction is to be ignored.
I would add that, following Lord Simon, the court should have regard to the "juristic defect which is the likely subject of remedy", that is the perceived technicality involved in earlier grants of power, but also to "the entire relevant body of the law for the same purpose". The judicial approach to scrutiny of the powers of local authorities is relevant in the current context. In using the expression "well-being", Parliament may have been making a step change but it was not such a change as to make redundant the approach of the courts to the assessment of the statutory powers granted to local authorities. The general expression should be considered against the background of the authorities.
While the claim made under section 2 is distinct from that under section 111, and requires separate consideration, the approach of the courts to the exercise of the section 111 power may, notwithstanding the step change, throw light on what Parliament intended when enacting section 2 of the 2000 Act. In cases such as Hazell, the courts demonstrated an approach to the powers of local authorities which, in my view, makes it unlikely that Parliament conferred a carte blanche on local authorities, subject only to section 3, by the general expression used. I return to this question later.
(b) Conclusions on section 2 and section 111
As already stated, the expression "promote the well-being" is a general one. Well-being is defined in the Shorter Oxford Dictionary as a "happy, healthy or prosperous condition; moral or physical welfare". The expression is commonly enough used but rarely, I suspect, in a context such as the present. I accept that the words have, and were intended to have, a broad meaning and were intended to prevent an over-technical approach to the definition of powers. The Government's purpose was stated in the guidance (paragraphs 5 and 6) to be to reverse the "traditionally cautious approach" to "innovation and joint action". Beyond that, analysis must be attempted, however, and, in the context of the wording of the statute, the explanatory note and guidance, and the entire relevant body of the law in this area.
Promotion of well-being is not an expression one would normally associate with a somewhat complex arrangement to save money, such as the LAML arrangement, rather than with action directly to promote or improve a healthy or prosperous condition. The documents specifically contemplate positive action in a variety of areas: community strategies to promote the well-being of the local community (explanatory note paragraph 13), a wide range of activities for the benefit of the local area (explanatory note paragraph 15), promotion of sustainable development by delivering the actions and improvements identified in the community strategy and action, for example, to combat climate change and to contribute to health improvement programmes (paragraph 6 of guidance).
Missing from the detailed explanatory note and guidance, and conspicuously so in my judgment, is any reference to projects anything like the present; an insurance arrangement aimed at cost saving which involves the local authority insuring other authorities and assuming the risks thereby incurred. Detailed consideration is given in the guidance to the permitted exercise of the section 2 power in a financial context, for example, to the relevance of receiving income by the authority (paragraph 67 of guidance) and to setting up a company (paragraphs 42 and 70) but nothing like the LAML arrangement is mentioned. There is no reference to proposed cost saving projects or to enterprises such as a mutual insurance company. Had it been intended to apply to an arrangement such as the disputed arrangement, I would have expected the power now claimed to have been conferred either specifically or by the use of an expression other than and more directed to the subject matter than the expression "promote the well-being".
Clearly, section 2 of the 2000 Act was intended to create a general power and thus, in appropriate circumstances, to limit the need to rely on section 111 of the 1972 Act and the somewhat technical arguments which have arisen on that section. However in analysing the breadth of the power conferred the approach adopted to the construction of statutory powers in such cases as Hazell and Waltham Forest retains in my view a relevance. Powers which have been held not to be incidental to functions of the authority, such as giving guarantees to companies, do not readily obtain sanction by the use of a general expression, the wording of which does not easily bear upon such activities. In this statutory context, I do not consider that Parliament was giving a carte blanche to make arrangements, subject only to section 3 of the 2000 Act and to the identification of some advantage, or potential advantage, to the local authority's financial position.
In construing section 2, much reliance was placed by the appellants on the presence of section 3. Section 2 is a power to do anything not specifically excluded by section 3, it was submitted. In the context described, I cannot accept that submission. The exclusions in section 3 are intended to cover specific matters or, in the case of section 3(3), exclusions the need for which may, in the opinion of the Secretary of State, arise. It does not necessarily follow from the presence of section 3 that section 2 must be construed as including cost saving measures. Analysis of the expression "promote the well-being" is still required to decide what the limits are. That includes analysis of the obligations to be undertaken by the appellants under the LAML arrangement and the proposed insurance arrangements. The analysis of those issues for the purposes of the appellants' reliance on section 111 and on the Teckal exemption bears also on the construction of the well-being provision. The attitude of the courts to a claimed power to give guarantees is of some relevance. The new entity, LAML, would insure a number of authorities and would have problems which flow from the needs of LAML and often be remote from the well-being of the appellants' area.
While the setting up of a company may, subject to limitations, come within the well-being power, I doubt whether participation in an insurance company with a view to seeking cheaper insurance premiums, circumscribed as it would be by those limitations, does so. In any event, I am not persuaded that participation in an insurance enterprise which involves giving guarantees to the company and assuming what could be very substantial liabilities to other local authorities comes within the well-being power. That 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. It did not require a specific exclusion to place beyond the section 2 power the enterprise proposed.
Of course, the risks involved may be lessened by the employment of professional agents and the reinsurance they may suggest but the substantial speculative element cannot be ignored. Any enterprise by a local authority involves risks but the local authority becoming insurer for itself and other authorities over a wide area of activity is of a different order.
As to section 111 of the 1972 Act, obtaining insurance for the substantive functions of a local authority fits easily into the concept of incidental powers. The present venture is not, however, merely a different way of obtaining insurance; it is a venture to set up an insurance company of which the local authority is a member and by which insurance is obtained not only for itself but for other local authorities. The local authority is not merely making an arrangement with other local authorities, it is insuring other local authorities and exposing the authority to a risk which insurance with a commercial insurance company does not, that is, a direct exposure to the losses of others. I cannot regard that as incidental to the functions of a local authority in the manner contemplated by section 111.
The appellants are correct to say that local authorities cannot obtain a contract of insurance with LAML without participating in LAML and financially supporting LAML but that illustrates the appellants' difficulty under section 111. The inability to obtain this type of insurance without the concomitant commitments does not make those commitments lawful. It cannot create a power to make such arrangements or to render such arrangements incidental to their functions such as education and highways.
As already stated (paragraph 61), I agree with the judge's conclusion that entering into a contract by virtue of section 1 of the 1997 Act is not discharging a function within the meaning of section 111. A local authority may enter into a contract as an act incidental to performing one of its functions but the contract is not itself a function of the authority in the section 111 sense and does not extend the scope of such functions. Section 1 of the 1997 Act did not expand the meaning of functions in section 111 of the 1972 Act.
Appropriate arrangements for risk management, and its monitoring, including arrangements involving cooperation between local authorities, may well be within the scope of an authority's power. The presence of such aspirations in the LAML scheme, does not thereby render the entire scheme lawful, however.
Moore-Bick LJ is to deal with the other aspect of the vires issue, that is whether the power to participate in LAML, if it existed, which in my view it did not, was on the facts exercised. I have read his judgment on that issue in draft (paragraphs 183 to 193) and agree with his conclusions.
Conclusions on public procurement and the Teckal exemption
In some of the cases (e.g. Asemfo), the question posed is whether there are "contracts" between the local authority and the entity concerned. Mr Howell submitted that the contractual arrangements in this case did not permit the Teckal principle to apply. It might appear from the wording of the first sentence of paragraph 50 of Teckal that the existence of a contract between the local authority and the entity is fatal to the application of the Teckal exemption. I regard that sentence only as one aspect of testing the relationship between the local authority and the entity concerned. Paragraphs 48 to 51 of Teckal must be read together. I agree with Mr Henderson that the contrast contemplated in paragraph 51 of Teckal was between contracts which are the equivalent of in-house departmental agreements, captive companies and their equivalent, and contracts where the local authority contracts with a person with independence from it and lacking the control it exercises over its own departments. I see no merit in the argument that the Teckal exemption fails for want of a relevant contract. Whatever its effect, the contract between the appellants and LAML was a contract as contemplated in paragraphs 48 to 51 of Teckal. The absence of a contract would normally indicate a departmental activity but, if there is a contract with the other entity, the Teckal principle may still extend to it.
Is the first Teckal requirement satisfied? The court should take an overall view of the arrangement between the authority or authorities and the other entity. Is there control similar to that exercised over the authority's own departments? Local authorities are effectively the owners of LAML.
There is a dispute as to whether the relevant consideration is the power of the local authority over the legal entity on the basis of the documents or what would happen in practice. The present proceedings were brought before any settled practice between the local authorities and LAML had developed. The ECJ in Parking Brixen used the expression "in practice" (paragraph 67(e)) and the Advocate General in Carbotermo required examination in concreto. The powers arising from the relevant documents, in my judgment, provide the starting point for the analysis. It is, however, permissible to consider the circumstances in which the arrangement will operate, including that LAML is an insurance company, in considering the powers of the authority or authorities over LAML and how they are likely to be exercised.
The guidance of the ECJ, for example, in Parking Brixen, paragraphs 67 to 72, and in Carbotermo, paragraphs 38 to 40, appears to me to assist the respondents' case on the question of control. The burden of establishing control is on the appellants. In agreement with Stanley Burnton LJ, at paragraph 78, I conclude that the relationship between the appellants and LAML is inconsistent with Teckal. While, in general meeting, a 75% membership of LAML may give directions to the Board, the powers of the Board are extensive. In exercising them, the directors of LAML, though the majority are appointed by Participating Members, owe duties to LAML and its needs. Those duties are owed by a director appointed by the appellants, even if that director is one of their senior officers. That is important in the context of insurance in which business must be conducted in accordance with the regulations of the Financial Services Authority and under its supervision and under the market agreed position as expressed by the Association of British Insurers.
I note the power of the Board to terminate the membership of a Participating Member (article 11(b)) and the power to establish, collect, manage and redistribute both capital contributions and premiums of local authorities, a power delegated to the management company. In context, the power of a majority of participating members to call a general meeting, taken with the power to direct the Board by special resolution by a 75% majority, even taken with other factors relied on by the appellants, does not amount to control over LAML as contemplated in Teckal.
Very large sums of money are potentially involved and there is a real public interest, by which I mean in this context the interest of council tax payers, in the scrupulous operation of an entity such as LAML as an insurance business. The intention to achieve the aim of operational independence is illustrated by the powers of the Board and the arrangements made with the management company and the terms of policies issued. I find it difficult to see how LAML can operate effectively unless its Board has considerable freedom to manage its insurance business. The nature of the business, and the possibly differing interests of different authorities and affiliates, are antithetic to the necessary local authority control.
I add that if I had found that the first requirement of Teckal was satisfied, I would have been prepared to find that the second requirement also was. The provision for "affiliates" did not ipso facto defeat it, at any rate in the initial stage of operations. Their position may be fairly regarded as marginal.
On the discrete issue whether the Teckal exemption applies in England and Wales (paragraph 99 and following, above), I note that the Teckal exemption is mentioned neither in the present Directive (which post-dated the Teckal decision) nor in the 2006 Regulations. In my judgment, the intention of the Regulations was to implement the Directive as construed by the ECJ. The terminology in the Regulations is similar to that in the Directive. It was plainly intended that the public procurement regime promoted by the Directive should be applied throughout the Union; recital 2 of the Directive speaks of the advisability of "provisions of community coordination of national procedures for the award of such contracts". It is not necessary to consider whether Regulations broadening the scope of the Directive would be lawful; in the absence of a clear intention to the contrary, it was in my view intended that the Regulations be construed in accordance with the jurisprudence of the ECJ. The expressions defined do not require a construction in national law different from that contemplated in the Directive.
The respondents' claims both for judicial review and for damages under the Public Contracts Regulations 2006 ("the 2006 Regulations") were begun on 6 June 2007. The appellants argue that both sets of proceedings were out of time.
Time for judicial review is governed by CPR 54.5(1), which requires the claim form to be filed:
"(a) promptly; and
(b) in any event not later than 3 months after the grounds to make the claim first arose."
Time can be extended by the court under CPR 3.1(2)(a), but not by agreement between the parties.
Time for a claim under the 2006 Regulations is governed by regulation 47 which provides in paragraphs (1) and (2) that a contracting authority's obligation to comply with the regulations is a duty owed to an economic operator. So far as material that regulation provides:
"(6) A breach of the duty owed in accordance with [this regulation] is actionable by any economic operator which, in consequence, suffers or risks suffering, loss or damage and those proceedings shall be brought in the High Court.
(7) Proceedings under this regulation must not be brought unless –
(a) the economic operator bringing the proceedings has informed the contracting authority or concessionaire, as the case may be, of the breach or apprehended breach of the duty owed to it…..and of its intention to bring proceedings under this regulation in respect of it; and
(b) those proceedings are brought promptly and in any event within 3 months from the date when the grounds for the bringing of the proceedings first arose unless the court considers that there is good reason for extending the period within which the proceedings may be brought.
(8) Subject to paragraph 9 but otherwise without prejudice to any other powers of the Court, in proceedings brought under this regulation the Court may –
(a) by interim order suspend the procedure leading to the award of the contract ….. or suspend the implementation of any decision of action taken by the contracting authority or concessionaire, as the case may be, in the course of following such a procedure; and
(b) if satisfied that a decision or action taken by a contracting authority was in breach of the duty [owed under the regulations]
(i) order the setting aside of that decision or action or order the contracting authority to amend any document;
(ii) award damages to an economic operator which has suffered loss or damage as a consequence of the breach; or
(iii) do both of those things.
(9) In proceedings under this regulation the Court does not have power to order any remedy other than an award of damages in respect of a breach of the duty…if the contract in relation to which the breach occurred has been entered into."
In the present case, the relevant chronology was as follows:
i) on 9 October 2006 the appellants' executive resolved in principle to participate in LAML, subject to satisfactory amendments to the latter's constitutional documents;
ii) on 7 November 2006 the respondents were told by the appellants' brokers that the appellant "had committed to going into the Mutual" but that there were hurdles of constitution to be overcome, uncertainty whether it would be ready by the next renewal date (1 April 2007) and there would be some insurance that would be sought outside it anyway; accordingly there was to be a full tender exercise; the respondents were also told that there was to be a further meeting of the executive on this matter on 13 November;
iii) at that meeting on 13 November 2006, the executive resolved to approve participation in LAML;
iv) in December 2006 the appellants invited tenders for cover generally from 1 April 2007;
v) on 18 January 2007, the appellants began membership with LAML;
vi) because incorrect documentation had been used, a replacement invitation to tender was issued on 1 February 2007, requiring tenders by 23 February; the respondents tendered in time; LAML did not participate;
vii) on 7 March 2007 a representative of the appellants' brokers told the respondents, informally, that the appellants' insurance would be dealt with through LAML; it was only at that stage that the respondents looked at the appellants' website and located the decision of 13 November 2006;
viii) the respondents sought formal confirmation by letter of 19 March 2007, and received it by letter from the appellants of 27 March;
ix) the appellants made payments to LAML from 16 March onwards (paragraph 7 above);
x) by letter of 4 May 2007 the respondents' solicitors raised with the appellants the question of breach of the regulations;
xi) both sets of proceedings were begun on 6 June 2007.
It follows that the claims were brought just within 3 months of the informal notification by the appellants' brokers on 7 March, but more than 3 months after all preceding events.
Having referred to authority, Stanley Burnton LJ stated, at paragraph 91:
"In my judgment, therefore, for the purposes of the Regulations in the present case "grounds for the bringing of the proceedings" first arose when the breach which forms the subject of the claim occurred. It would have been different if the claim were for an injunction to restrain a breach of the Regulations; but it is not.
92. It is therefore necessary to determine when the breach of the Regulations first occurred. It seems to me it was when the appellant abandoned the tender process and awarded the contracts to LAML. That occurred in March 2007. Until then, it could have lawfully awarded the insurance contracts to a company participating in the tender process. It is not contended that on that basis the respondent failed to satisfy the requirements of regulation 47(7)."
It is common ground that the issues already considered in this judgment should be resolved in any event. The practical issue on delay is whether the respondents should be permitted to claim damages. Mr Giffin submitted that, within the meaning of regulation 47(7)(b) and CPR 54.5(1), the "grounds for the bringing of proceedings" and "the grounds to make the claim" first arose in November 2006 when the appellants resolved to approve participation in LAML or, alternatively, on 18 January 2007 when the appellants became a member of LAML. Reliance is based on the power under regulation 47(7)(a) to complain of an "apprehended breach of the duty owed to the economic operator".
In Stadt Halle, the ECJ, at paragraph 22, referred to the obligations of Member States "to ensure that effective and rapid remedies are available against the decisions taken by contracting authorities". At paragraph 39, the court stated: "an expression of the will of the contracting authority in connection with a contract, which comes in whatever way to the knowledge of the persons interested, is amenable to review where the expression has passed the stage [of mere preliminary study] and is capable of producing legal effects".
Mr Giffin relied on the decision of Langley J in Keymed (Medical & Industrial Equipment) Ltd v Forest Healthcare NHS Trust  EULR 71 where the effect of regulation 29(4)(a) of the Public Supply Contracts Regulations 1995, which is in materially the same terms as regulation 47(7)(b), was considered. Langley J held, at 95A, that the grounds would "first arise" when the particular breach first (not last) occurred or was apprehended and, at page 95E, that "the Regulations expressly contemplate the bringing of proceedings and the grant of interim relief before a contract is awarded and that grounds have arisen to do so". In that case, the possible distinction between apprehended and actual breach was not addressed. The judge held, at page 97E, that he should exercise his discretion to extend time.
In Severn Trent Plc v Dwr Cymru Cyfyngedig  CLC 107, Langley J, considering regulation 32(4)(b) of the Utilities Contracts Regulations 1996, also in the same terms, referred, at page 112H:
"to the 'conceptual difficulty' in deciding when 'grounds for bringing proceedings' first arise where the proceedings are in respect of an 'apprehended' breach.
. . . For my part, I agree that close analysis of such questions is less important than the overall question of discretion which is whether, in the particular circumstances and the context of the regulations, proceedings claiming in effect injunctive relief are appropriate or whether Severn Trent should be precluded from pursuing any remedy or left to pursue a claim only for damages should the O & M agreement in fact be concluded."
The judge held, at page 114D, that the proceedings had been brought 'promptly' within the meaning of the regulation.
Mr Giffin submitted that either time runs or it does not and a claimant cannot (if out of time from the date a breach has been apprehended) improve his position by waiting for the actual breach to occur. Time ran from November 2006, he submitted.
In R (Burkett) v Hammersmith & Fulham London Borough Council  1 WLR 1593, it was held that the grounds for the application, in relation to an application for judicial review of a grant of planning permission, first arose on the date when permission was actually granted, even though a challenge could earlier be made to a local planning authority's resolution to grant permission. Lord Steyn stated, at paragraph 42:
"For my part the substantive position is straightforward. The court has jurisdiction to entertain an application by a citizen for judicial review in respect of a resolution before or after its adoption. But it is a jump in legal logic to say that he must apply for such relief in respect of the resolution on pain of losing his right to judicial review of the actual grant of planning permission which does affect his rights. Such a view would also be in tension with the established principle that judicial review is a remedy of last resort."
Lord Steyn, at paragraphs 43 to 50, gave reasons for that approach including "that it is unreasonable to require an applicant to apply for judicial review when the resolution may never take effect" (paragraph 50). Thus it was acknowledged that the right to challenge, by way of judicial review, the resolution to grant planning permission did not start time running for the purposes of a challenge to the issue of the grant itself.
The present context is different but some of the same considerations apply. At regulation 47 of the 2006 Regulations, specific provision is made for interim relief by way of an interim order suspending the procedure leading to the award of a contract (regulation 47(8)(a)). That makes necessary the possibility of a claim based on the concept of "apprehended breach".
It does not in my judgment follow that, with respect to a claim for damages for an actual breach, time began to run at a date earlier than the dates in March when the appellants abandoned the tendering process and made payments to LAML. Only then were the appellants committed to taking policies from LAML. (Since proceedings were commenced on 6 June, that is within 3 months of 7 March, I do not find it necessary to analyse the March dates more fully).
Before March 2007, the respondents had not sustained the damage which is the basis of their claim for damages. It may be that they could earlier have made an application for interim relief but that did not start time running on the claim actually made. There is no dispute that a declaration should be made, if one is required, and the proceedings claiming damages, the relevant proceedings, are conceptually different from proceedings for quia timet relief which the regulation permits and regulates. I do not regard that approach as contrary to the approach of Langley J in Severn Trent at page 112H.
For present purposes, I would construe the wording of CPR54.5(1) as having the same effect. Further, the timing of the claim did not, in the circumstances, breach the requirement for promptness.
In any event, there is in my judgment good reason for extending the period within which the proceedings may be brought, within the meaning of regulation 47(7)(b). As late as February 2007, the appellants issued an invitation to tender and, late in the month, the respondents submitted a tender in response within time. The appellants should not be allowed to defeat, on the ground of delay, the claim brought by the respondents at the time it was.
I would dismiss the appeals.
Lord Justice Moore-Bick :
These appeals raise some important and interesting questions relating to two areas of law concerning public bodies: the scope of the powers available to local authorities when obtaining insurance against the usual range of risks to which they are exposed; and the extent, if at all, to which local authorities are entitled to enter into contracts for the supply of goods and services without complying with the principles and procedures embodied in the Public Contracts Regulations 2006.
The circumstances which have given rise to the appeals have been fully described by Pill L.J., whose account of them I gratefully adopt. It is unnecessary for me, therefore, to rehearse them at length in this judgment. In short, both appeals arise out of a desire on the part of certain London Boroughs to obtain insurance against the kind of risks formerly covered under policies issued by commercial insurers through the establishment and membership of a mutual insurance company known as London Authorities Mutual Limited ("LAML"). The first question for decision is whether local authorities have the power to enter into a venture of the kind in question.
All insurance depends on the sharing of risk. Commercial insurers operate on the basis of accepting risks from a large number of policyholders, expecting that losses will occur in only a minority of cases and setting premiums at a level which they calculate will be sufficient to cover the expected losses together with the costs of administration and overheads and also an element of profit. One consequence for the individual policyholder is that he obtains the benefit of a contract with the insurer on fixed terms, but there are disadvantages in that the level of premium will usually reflect the fact that similar policies will be sold to a wide range of insureds, some of whom represent a greater risk than others. Moreover, he has to bear his share of the insurer's profits.
Mutual insurance, by which a group of similarly-placed persons or organisations agree to insure each other, relieves the insureds of the burden of the profit element of an ordinary commercial premium and, depending on the criteria for membership of what is in effect (and is often described as) a 'club', may reduce the risk, and therefore the overall cost of cover, for the benefit of all concerned. It is not surprising, therefore, that mutual insurance clubs have for many years been an established feature of the shipping community, particularly as vehicles for providing liability insurance. In 1903 a group of local authorities formed a company limited by guarantee called Municipal Mutual Insurance Ltd for the purpose of enabling them to obtain insurance on a mutual basis. There is no evidence before us of the structure of the company or of the manner in which its business subsequently developed, but it is public knowledge that it ceased to write new business in September 1992 following substantial losses and a need to increase its reserves. The question whether local authorities have the power to enter into a mutual insurance scheme does not appear to have been questioned at any stage, but no conclusions can be drawn from that. The question that arises on this appeal must be determined solely by reference to the nature and structure of LAML.
In paragraphs 11 to 23 of his judgment Pill L.J. describes the structure of LAML. It is a company limited by guarantee, whose primary objects are to receive premiums from Participating Members or their Affiliates and to indemnify through a mutual fund the liabilities, losses and expenses incurred by them. As a limited liability company LAML enjoys legal personality independent of its members, having a board of directors who are responsible for its affairs. Being a company limited by guarantee, it is capitalised by contributions provided by the members, both in the form of paid-up capital contributions and guaranteed capital contributions, the board having the power to decide how much is to be provided, at what times and in what form. Although the directors are appointed by the members, they owe a fiduciary duty to LAML and as directors are bound to act in the best interests of the company. The board is responsible for determining important aspects of the company's business, including the risks against which cover is to be provided, the terms on which cover is offered, including the level of premiums to be charged, and the need for supplementary calls required to meet claims and expenses. Each local authority wishing to be insured through LAML enters into a contract of insurance with the company, the terms of which are similar to those one would expect to find in a commercial policy.
Mr. Nigel Giffin Q.C. for Brent and Mr. Roger Henderson Q.C. for Harrow and LAML each submitted that London authorities have the power to become Participating Members of LAML under either or both of sections 111 of the Local Government Act 1972 and section 2 of the Local Government Act 2000 (the so-called "well-being" power). Since it was common ground that every local authority has power under section 111 to obtain insurance against the risks associated with its authorised activities (entering into contracts of insurance being calculated to facilitate, or conducive or incidental to, the discharge of their various functions), the only question is whether that power extends to obtaining insurance by the particular means involved in becoming a Participating Member of LAML. I propose, therefore, to begin by considering the scope of that section.
Local Government Act 1972, section 111
Mr. Giffin submitted that when considering whether any particular form of insurance arrangement can be regarded as incidental to one of a local authority's substantive functions, that arrangement should be considered as a whole. If, viewed in that way, it can properly be so regarded, it is unnecessary and inappropriate to break that arrangement down into its constituent elements and ask the same question in relation to each of them. Mutual insurance is simply one well-established form of insurance and should be accepted as such. Mr. Henderson, who adopted Mr. Giffin's submissions on this limb of the case generally, also submitted that local authorities are entitled to co-operate in the performance of their functions, including in ways that involve the sharing of risks. He also submitted that it is for each authority to decide how best to meet its own needs for insurance.
Mr. Giffin's argument undoubtedly has a certain attraction to it, but in my view it proves too much. For this purpose there is nothing special about insurance and therefore, if the argument is well-founded, the same approach must apply equally to arrangements of other kinds which, viewed overall, could be said to be conducive to the performance of the authority's substantive functions or incidental to them. However, the decided cases do not in my view support such a broad approach.
In Crédit Suisse v Allerdale Borough Council  Q.B. 306 the Council wished to provide a swimming pool in its area pursuant to the statutory power in section 19 of the Local Government Act 1976. In order to finance the project the council acquired a company off the shelf to develop a site by building a swimming pool and a number of time-share properties, the sale of which was intended to defray the cost of building the pool. The authorised share capital of the company was 100 shares of £1 each. Only two shares were issued, one to the council's treasurer and one to its solicitor, each of whom made a declaration of trust in favour of the council. Three members of the council and the treasurer were appointed directors; the council's solicitor was appointed company secretary. It can be seen, therefore, that in practice the council was in a position to exercise a high degree of control over the company. In order to finance the development the company obtained a loan from the claimant bank which the council guaranteed. All that was done in the purported exercise of its powers under section 111.
In the event the project was unsuccessful, the company went into liquidation and the bank made a claim under the guarantee. Colman J. held that the council had no power to enter into the guarantee and dismissed the bank's claim. His decision was upheld by this court which considered that the scheme was a device to circumvent the controls on local authorities' expenditure. However, I have found particularly illuminating the judgment of Hobhouse L.J., who, in a passage at pages 359D to 360F, pointed out some of the consequences which flowed in that case from the use of a limited company to implement the scheme. Part of the importance of that passage for the present case lies in the reminder that the company was an independent legal person with an identity separate from that of the council.
Peter Gibson and Hobhouse L.JJ. returned to this question in Crédit Suisse v Waltham Forest London Borough Council  Q.B. 362. In that case the council formed a company to purchase houses for the purpose of leasing them back to the council in order to enable it to discharge its statutory duty to house homeless persons. The company entered into a loan agreement with the claimant to obtain the funds needed to purchase properties and the council gave a guarantee of the loan, purporting to exercise its powers under section 111. Following a collapse of the property market the company went into liquidation and the bank sought to enforce the guarantee against the council. Gatehouse J. held that the guarantee was enforceable since it constituted part of an arrangement which, taken as a whole, was designed to enable the council to discharge its statutory obligations. However, his decision was reversed on appeal, this court holding that the council had no power to guarantee the obligations of the company under the loan agreement. In my view the decision in that case is inconsistent with the proposition that, if arrangements viewed as a whole are conducive to the performance one or more of a local authority's functions, it is unnecessary and inappropriate to examine the constituent elements more closely.
It is true, as Mr. Giffin pointed out, that in both Crédit Suisse v Allerdale Borough Council and Crédit Suisse v Waltham Forest London Borough Council the council had devised the scheme in question as a means of evading the statutory restrictions on local authorities' borrowing powers, but that was not the only basis on which the claims failed. In each case the court examined the various elements of the arrangement, coming to the conclusion that entering into a guarantee in respect of the company's liability to the bank could not properly be regarded as incidental to the discharge of its statutory function. These decisions were followed and applied in Morgan Grenfell & Co. Ltd v Sutton London Borough Council (1996) 95 L.G.R. 574, a case in which the council had entered into a guarantee of a loan made by the claimant bank to a housing association in order to enable it to buy properties for lease to the council. Peter Gibson L.J. made it clear at page 583 of the report that the earlier decisions to which I have referred did not turn simply on the fact that the council in question had entered into the arrangements as a means of circumventing the statutory restrictions on borrowing, or on the fact that the scheme as a whole was unlawful as a result, but because individual elements of the arrangements fell outside the scope of the councils' powers under section 111. Accordingly, I am unable to accept Mr. Giffin's submission that those cases can be distinguished simply on the basis that the schemes involved an unlawful attempt to circumvent the statutory provisions.
In Hazell v Hammersmith and Fulham London Borough Council  2 A.C. 1 Lord Templeman pointed out at page 31 that:
"The authorities . . . establish the general proposition that when a power is claimed to be incidental, the provisions of the statute which confer and limit functions must be considered and construed. . . .
The authorities also show that a power is not incidental merely because it is convenient or desirable or profitable"
Thus, in Attorney-General v Manchester Corporation  1 Ch 643 the corporation, which had the power to use its tramways for the carriage of parcels, was held entitled to act as a carrier for the purpose of collecting and delivering parcels that were to be or had been carried on the tramway, but did not have the power to carry on a general parcels delivery business within the same area using the same transport facilities. A business of that kind was described as being merely "incidental to the incidental". At page 656 Farwell J. explained the position as follows:
"But this is all restricted to goods which travel along the tramways, or some part thereof; there is nothing in the Acts to authorize the corporation to act as carriers generally without reference to their tramways. The question, as is pointed out in Attorney-General v. London County Council  1 Ch 781, is not whether the business can be conveniently or advantageously conducted with the tramway business, but whether it is by necessary implication incidental or accessory to it, and I think that it is not. To collect and deliver parcels for the tramway is fairly incidental; to collect and deliver parcels outside the radius of the tramway, and without any connection with the tramway, is not incidental to the tramway business, but distinct from it. At the best it could only be said to be incidental to the incidental, and such reasoning would authorize a railway company to carry on a coal merchant's business, because they must buy coal; but this was restrained in Attorney-General v. Great Northern Ry. Co. (1860) 29 L.J. (Ch.) 794. For the same reasons I hold that the corporation cannot act as general agents for the railway companies, but only in respect of tram-borne goods."
The principle was reiterated in McCarthy & Stone (Developments) v Richmond upon Thames London Borough Council  2 AC 48, in which charging for giving pre-application planning advice was considered to be incidental to an activity that was itself only incidental to council's function as a planning authority. By contrast, in Akumah v Hackney London Borough Council  UKHL 17,  1 WLR 985, the House of Lords held that the regulation and control of parking in a housing estate facilitated, or was conducive or incidental to, the council's function of managing the houses in the estate. These and other decisions to which we were referred in the course of argument demonstrate that it is necessary to identify with some care what does and does not form part of a local authority's functions before deciding whether the activity in question can properly be regarded as incidental to one or more of them.
In the present case the functions of the council to which the power to become a member of LAML is said to be incidental are not obtaining insurance (which is not itself a substantive function) but the ordinary range of a local authority's functions, the performance of which gives rise to risks of loss and damage to property and of liability to third parties of all kinds. In those circumstances, Mr. Howell Q.C. submitted that a clear distinction is to be drawn between obtaining insurance from a commercial insurer (which is accepted to be incidental to the performance of those functions) and becoming a member of a mutual insurance company which involves, in addition to simply obtaining a policy of insurance, the provision of insurance to other members of the company.
In my judgment the authorities to which I have referred show that, when a local authority enters into arrangements to obtain property, goods or services necessary for or incidental to the performance of its primary functions, the farther those arrangements depart from the simple acquisition of the benefits in question, the greater the likelihood that they will fall outside its powers. The reason is, perhaps, obvious: if what is required (in this case insurance) can be obtained by a straightforward contract with a recognised kind of supplier, more elaborate arrangements are likely to involve elements which, although they may form an integral part of what may be regarded as a beneficial scheme, are not necessary for the achievement of the objective and can less easily be regarded as incidental to the performance of the authority's function.
In the light of the authorities participation in LAML cannot in my view 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. The fact is that it involves the following related, but nonetheless quite distinct, elements: the establishment of a company with separate legal personality and an independent board of directors for the purpose of entering into contracts of insurance with its members; membership of the company with the consequent obligations to provide the capital and reserves needed to enable it to function; and a contract of insurance between the member and the company. Although the members of LAML do not insure each other directly, they do so indirectly through the obligation to fund the company and so become bound to bear their share of the losses incurred by other members, insofar as they are not funded by premiums. That, after all, is the essence of mutual insurance, but it is different in important respects from an ordinary policy of insurance of the kind that is available in the market. 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.
Having said that, I should make it clear that I entirely accept Mr. Henderson's submission that local authorities are entitled to co-operate with each other in the performance of their functions and that in some cases that may involve them in sharing of certain kinds of risks. However, I do not think that that takes the matter any farther. For the reasons I have given I do not think that the question can be approached in such broad terms. It is necessary to examine the proposed course of action and to decide whether it is one which the authority is empowered to undertake. In many cases co-operation which carries with it a degree of sharing of risks may be incidental to the performance of the authority's functions (waste disposal involving the use of shared lorries was an example canvassed in argument); in others it will not.
I also agree with Mr. Howell that the arrangements cannot be saved by reliance on the benefit of improved risk management. Risk management in this context means little more than identifying, understanding and taking steps to manage risks of loss and damage arising from a local authority's activities. Most insurers and insurance brokers are willing to give advice on reducing and managing the risks associated with the kinds of activities carried on by local authorities and similar services can be obtained from other commercial and non-commercial bodies. I can see that participation in LAML might in practice lead to a greater degree of co-operation and the direct sharing of information between its members, but if there were sufficient interest in improving risk management, that could be achieved without its existence. It is difficult to see how any argument that managing property or activities is a function in its own right can have survived Hazell v Hammersmith and Fulham London Borough Council (see, for example, Lord Templeman's observation on debt management at page 34), but even if it had, I do not think that it could be said that the benefits in terms of risk management were sufficient to justify participation in LAML as incidental to those functions.
For these reasons I think the judge was right to hold that Brent does not have power under section 111 of the Local Government Act 1972 to become a member of LAML.
Local Government Act 2000, section 2
I turn next to consider section 2 of the Local Government Act 2000, which gives local authorities the power to do anything which they consider is likely to promote or improve the economic, social or environmental well-being of their areas. The material parts of sections 2, 3 and 4 of the Act are set out in the judgment of Pill L.J. and need not be repeated here. Brent's argument in relation to section 2 was essentially very simple: the use of the word "anything" shows that the power it confers is unconstrained, otherwise than is expressly provided by sections 2 and 3, and therefore gives local authorities power to do anything that will directly or indirectly promote or contribute to the well-being of their areas. That includes participation in LAML, which will reduce the cost of insurance, allowing the money saved to be used either to reduce council tax or to maintain or improve the services provided by the council. In either case the economic, social or environmental well-being of the area or its residents will be promoted.
As I read his judgment, the judge did not find it necessary to reach a final conclusion on this point because he was satisfied that Brent had not in fact formed the opinion that participation in LAML would promote the well-being of its area. The necessary condition for the exercise of the power had therefore not been satisfied. However, the scope of the power provided by section 2 is a matter of some importance and I therefore propose to consider that issue first.
Mr. Giffin submitted that the powers conferred by section 2 are expressed in wide terms and ought to be construed broadly. The very existence of the Secretary of State's power in section 3(3) to make orders prohibiting local authorities from doing specific things under section 2(1) tends to emphasise the width of the power granted by that section. It also provides the only safeguard needed against abuse of the power. Section 3(2) (which makes it clear that section 2(1) does not enable a local authority to raise money) is a sufficient indication that action taken to improve its financial position by other means does fall within the scope of section 2(1).
In response to these arguments Mr. Howell pointed out that the power in section 2(1) is concerned with promoting or improving the well-being of the local authority's area. He submitted that Parliament did not intend it to cover arrangements that have as their sole object the improvement of the authority's own financial position, since that by itself does not achieve the statutory objective. What matters is what the authority intends to do with the additional funds at its disposal.
Brent's argument has all the attraction of simplicity and there is certainly some support in the authorities for the proposition that section 2(1) should be construed broadly: see R (Khan) v Oxfordshire County Council  EWCA Civ 309,  LGR 257, in which Dyson L.J. described the section as having a "broad purpose" and expressed the view that the scope of the powers conferred by it should not be narrowly construed. In a similar vein Elias J. in R (J) v Enfield LBC  EWHC 432 (Admin),  LGR 390 observed that the section is drafted in very broad terms which provide a source of power which enables local authorities to do many things which they could not previously have done. However, once again in my view, it proves too much, since, if it is correct, it means that a local authority can lawfully embark on any scheme that is expected to reduce its costs. As the terms of section 2(4) make clear, the power conferred by section 2(1) extends to actions on the part of a local authority that promote the well-being of its area indirectly, for example by providing funds to an organisation to enable it to set up a business that will serve local residents. Nonetheless, there must obviously be some degree of connection between the authority's actions and the promotion or improvement of the area's well-being to enable the authority to conclude that the action it proposes to take is likely to have that effect.
I think some assistance in relation to this question can be derived from section 3(2). The fact that a local authority cannot use its powers under section 2(1) to raise money suggests two things: first, that any action taken under section 2(1) must be financed out of authority's existing resources; second, that taking steps to improve the authority's general financial position is not to be treated as something that will of itself promote or improve the well-being of its area. I think the judge had a point when he said in paragraph 114 of his judgment (rejecting as too broad the proposition that it was sufficient that the economic benefits arising from participation in LAML would be invested in the local authority's area, for the benefit of its economic, social or environmental well-being):
"It is one thing for a local authority to give financial assistance to a company so that it can carry out activities that benefit the local authority's area; it is another to give financial assistance to a person in order to obtain a financial reward which can in turn be used to benefit its area; and it is a yet further step away from the well-being power if there is no assurance that the profits will be so used."
In my view section 2 gives a local authority power to take steps that have as their object, direct or indirect, some reasonably well defined outcome which it considers will promote or improve the well-being of its area. In other words, it gives authorities the power to do things themselves, or to procure or enable others to do things, that directly affect the well-being of their areas. In my view action to reduce the costs of goods or services purchased by the authority which does not have as its object the use of the money saved for an identified purpose which the authority considers will promote or improve well-being does not, on a natural reading of the words, fall within the section. Moreover, only a year before the 2000 Act was passed Parliament had imposed on local authorities a duty to secure continuous improvement in the way in which their functions were exercised, a duty which involved obtaining the best value for money and therefore a reduction in the cost of goods or services wherever possible. It is difficult to accept that section 2(1) was directed to the same end.
In support of his submissions Mr. Giffin sought to rely on the explanatory notes published at the same time as the Act and upon the ministerial guidance subsequently issued under section 3(5). The relevant passages are set out in the judgment of Pill L.J. In my view they are of some assistance in so far as they help one to understand the context in which the Act was passed and to identify the mischief which it was intended to remedy. Apart from that I do not think they are a proper aid to its interpretation for the reasons I shall develop a little more fully later in this judgment. Quite apart from that, however, they do not in my view shed any real light on the question now before the court. In particular, they contain nothing either way which touches on the question whether embarking on a course of action which is expected to reduce the authority's costs can of itself and for that reason alone be regarded as doing something that will promote or improve the well-being of its area.
For these reasons I have come to the conclusion that section 2(1) of the Local Government Act 2000 does not give London Borough Councils power to obtain insurance by becoming members of LAML. That makes it unnecessary to consider the ground on which the judge rejected this limb of the case, namely, that in the case of Brent the council did not in fact consider that participating in LAML would promote the well-being of its area. However, since that was the basis for the judge's decision, I think it right to express my own views on the point.
It is necessary to begin by describing briefly the background to the resolution of 13th November 2006. Following the initial evaluation of the proposal to establish a mutual insurance company for London authorities, a report was submitted to the members of Brent's Executive for consideration at its meeting on 9th October 2006. Paragraph 1.2 of the Summary stated that the mutual was likely to generate economic and other knock-on benefits from financial savings and improved risk management. Paragraph 3.1.3 of the report stated that Charles Taylor reported that a mutual would offer its members savings of between 15% and 20% on average on premiums for liability and property insurance and would accumulate surpluses between £8.3 million and £15 million over the first five years of trading. Those surpluses would be available to members and could be used to reduce premiums further. Paragraph 3.1.10 stated that the advantage to the authority of participating in the proposed mutual was the economic benefit both to the authority itself and to its area as a result of the reduction in premiums which would free up council money for other spending. It also referred to the additional advantage of developing through the mutual risk management standards to encourage better practice and the reduction of unmanaged risk.
Paragraph 6.5 of the report was in the following terms:
"This authority therefore needs to satisfy itself that the financial and risk management benefits from participation in the Mutual are likely to achieve the promotion or improvement of the well-being of the area, the economic well-being of the authority, and, from the application of savings to other services or to a reduction in local taxation, the economic, social and/or environmental well-being of the area or of persons resident or present in it."
At the meeting on 9th October the Executive resolved to give approval in principle to participation in the mutual, subject to receiving a further report from the officers once they had fully explored the proposal and had obtained external legal advice.
A further report was submitted to the members of the Executive for consideration at its meeting on 13th November 2006. It was directed mainly to the legal and commercial structure of LAML, but repeated in similar terms the savings expected to result from membership and the benefits to be gained from improved risk management. A substantial section of the report was devoted to recording the legal advice that had been obtained since the meeting in October. The report noted that leading counsel had advised that the authority had power under section 111 of the Local Government Act 1972 and under section 2 of the Local Government Act 2000 to participate in the mutual. In relation to the power under section 2 of the Local Government Act 2000 the report drew attention to the fact that, although insuring against liability does not in itself promote or further well-being, since it was hoped that a saving of around 15% in premium would be made, there would arguably be indirect promotion of well-being in the form of additional resources available for existing or new services. At that meeting the Executive resolved to approve the authority's participation in LAML. The minute recording that resolution was no doubt made in compliance with Regulation 3(2)(b) of the Local Authorities (Executive Arrangements) (Access to Information) (England) Regulations 2000 which require a written statement to be made as soon as reasonably practicable after any meeting of an Executive recording any decisions reached and the reasons for them. The minute does not refer to the enabling power under which the authority understood itself to be acting, nor does it formally record that the Executive considered that participation in the Mutual was likely to promote or improve the economic, social or environmental well-being of the authority's area.
Mr. Howell made two related submissions. First, he submitted that it was necessary for the Executive to consider under which of the two available statutory powers it intended to act because different factors might have to be taken into consideration. Second, he submitted that in the absence of a resolution confirming that the Executive as a whole had formed the opinion that participation in LAML was likely to promote or improve the economic, social or environmental well-being of the authority's area it was not possible to be satisfied that the requirements of section 2 had been met.
Mr. Giffin submitted that where a public body has acted on the basis of a report that was placed before it as the foundation for a proposed decision and a decision is made to adopt a recommendation based on the report, it is to be presumed, in the absence of any clear indication to the contrary, that the reasons for its decision are those contained in the report. In support of that proposition he drew our attention to R v Mendip District Council ex parte Fabre (2000) 80 P&CR 500 and R (Richardson) v North Yorkshire County Council  EWCA Civ 1860,  1 WLR 1920.
R v Mendip District Council ex parte Fabre concerned a planning application. The council's planning officer produced a report for the planning committee recommending approval of the application, but the committee turned it down. A revised application seeking to deal with the committee's objections was prepared and the planning officer produced an updated report, again recommending approval. On consideration of the revised application the committee approved it, but gave no reasons for doing so. The decision was challenged on the grounds that, given the earlier decision and the absence of any reasons for approving the application, there was no rational explanation for the committee's change of mind. Sullivan J. held it was a fair inference in the absence of evidence to the contrary that the committee had been persuaded by the planning officer's views and that they had made their decision for the reasons he had advanced. That observation was approved by Simon Brown L.J. in paragraph 35 of his judgment R (Richardson) v North Yorkshire County Council.
Mr. Howell sought to distinguish R v Mendip District Council ex parte Fabre on the grounds that there was in that case no duty to provide reasons, but the principle reflected in the observation of Sullivan J. is one of common sense rather than law and holds good to the extent that the circumstances of the case dictate. In my view in the circumstances of this case there is no substance in either of Mr. Howell's points. Whether the Executive as a whole had formed the opinion necessary to enable the authority to act under section 2 of the Local Government Act 2000 is a question of fact, as the judge recognised in paragraph 117 of his judgment. He did not think that the evidence taken as a whole was sufficient to establish that it had done so, given the absence of any reference in the minutes to the satisfaction of the statutory conditions for the exercise of the power under that section, the fact that there was a passage in the first report which suggested that it was sufficient if participation in LAML would promote the economic well-being of the authority itself and that the authority had by then been advised that section 111 was a better provision to rely on than section 2.
I am afraid that I am unable to agree with the judge on this question. The report submitted to the meeting on 13th November referred back to the report submitted on 9th October, as did the resolution passed on that occasion. Even if it had not done so, there can have been little doubt that the members of the Executive were aware of the contents of that earlier report and had them well in mind when deciding whether to approve the recommendation to participate in LAML. Those who recommended participation had given only two reasons for doing so: a significant reduction in the cost of insurance in the medium to long term and an improvement in risk management practices, the former being clearly the more important. The proposal was recommended on the basis that a reduction in the cost of insurance would enable the authority to spend more on services or reduce local taxes, either of which would promote or improve the economic, social or environmental well-being of its area. The fact that it was suggested in the first report that it would be sufficient for participation to improve the economic well-being of Brent itself is in my view of no significance, since, however one puts it, the ultimate effect would be to make additional resources available for spending on local services or a reduction in local taxes. The suggestion that some or all of the members of the Executive may not have been satisfied that the conditions set out in section 2 were met, but were content nonetheless to make use of the powers under section 111 seems to me, with respect, to be unrealistic. The importance of satisfying the conditions set out in section 2 had been drawn to the attention of the members in the first report and touched on again in the second, but there was in truth only one substantial justification for participating in LAML, namely, to save costs. In those circumstances any member of the Executive who supported the resolution must, in my view, have considered that participation in LAML was likely to produce a saving in costs which would release funds for one or other of the purposes just mentioned.
I accept that there may be cases in which it is necessary for a body which derives its powers solely from statute to identify clearly the particular power under which it purports to act if more than one is available. That will be so where different criteria exist in relation to different powers and where there may be doubt about the basis on which the decision is taken. In the present case, although the authority had been advised that it could act under one or other of two statutory provisions, there was in reality only one basis on which the Executive could adopt the recommendation, namely, that it would lead to a saving of money that would release resources for the benefit of the area and its inhabitants.
For these reasons I have reached the conclusion that if section 2 of the Local Government Act 2000 had enabled Brent to participate in a mutual insurance company, the conditions for making a valid decision to do so were satisfied.
The Public Contracts Regulations 2006
The Public Contracts Regulations 2006 ("the Regulations") implement Directive 2004/18/EC on the co-ordination of procedures for the award of public works contracts, public supply contracts and public service contracts. The Directive consolidated and replaced with certain amendments the three previous Directives, 92/50/EEC, 93/36/EEC and 93/37 EEC to which references are made in many of the authorities to which it is necessary to refer. The Regulations set out the procedures with which public bodies must comply before they enter into certain types of contract for a consideration in excess of a specified amount. These include contracts of insurance. A failure on the part of a local authority to comply with the Regulations is a breach of duty rendering it liable in damages to any potential supplier who can show that he has suffered damage as a result. It is common ground that Brent did not comply with the requirements of the Regulations before it obtained insurance cover from LAML for the 2007-2008 year. Brent says, however, that it was not obliged to do so by reason of what has become known as the "Teckal" exemption, a principle first enunciated by the European Court of Justice in the case of Teckal S.r.L. v Commune di Viano & Azienda Gas–Acqua Consorziale (AGAC) di Reggio Emilia  ECR I-8121.
Azienda Gas–Acqua Consorziale (AGAC) was a consortium established by forty-five Italian municipalities, including Viano, to manage energy and environmental services. The shares of the municipalities participating in the consortium varied; Viano's share was 0.9%. Teckal was a private company whose business included the supply of fuel and servicing heating systems. For some time prior to 1997 Teckal had supplied fuel to Viano and had serviced its heating systems, but in May 1997 Viano decided to switch its custom to AGAC and did so without inviting competing tenders from other interested persons. Teckal challenged that decision on the grounds that Viano had failed to comply with Directives 92/50/EEC (services) and 93/36/EEC (goods). AGAC argued that Viano had merely decided to undertake these matters itself through a body set up for the purpose.
The most important part of the judgment is to be found in paragraphs 49 to 51, in which the court stated as follows:
"49. As to whether there is a contract, the national court must determine whether there has been an agreement between two separate persons.
50. In that regard, in accordance with Article 1(a) of Directive 93/36, it is, in principle, sufficient if the contract was concluded between, on the one hand, a local authority and, on the other, a person legally distinct from that local authority. The position can be otherwise only in the case where the local authority exercises over the person concerned a control which is similar to that which it exercises over its own departments and, at the same time, that person carries out the essential part of its activities with the controlling local authority or authorities.
51. The answer to the question must therefore be that Directive 93/36 is applicable in the case where a contracting authority, such as a local authority, plans to conclude in writing, with an entity which is formally distinct from it and independent of it in regard to decision-making, a contract for pecuniary interest for the supply of products, whether or not that entity is itself a contracting authority."
It held that it is for the national court to decide whether the two conditions set out in paragraph 50 are satisfied.
Although the court was dealing with Directives 92/50/EEC and 93/36/EEC, it was common ground that the principles enunciated in this and subsequent cases remain applicable under the current Directive. The court in that case appears to have recognised the existence of what might be called "captive" service providers, which, although legally distinct from the local authorities with whom they contract, are for all practical purposes controlled by them and therefore cannot properly be treated as independent parties. Contracts with such bodies have been described in some cases as examples of "quasi-in-house-procurement".
The principle has been reiterated and applied in many subsequent cases. In Stadt Halle & RPL Recyclingpark Lochau GmbH v Arbeitsgemeinschaft Thermische Restabfall und Energierverwertungsanlage TREA Leuna Case  ECR I-1 the City of Halle decided to enter into a contract with RPL Recyclingpark Lochau GmbH ("RPL") for the handling and disposal of its residual waste. It also proposed to enter into contracts with two neighbouring local authorities to accept their waste for treatment by RPL. Arbeitsgemeinschaft Thermische Restabfall und Energierverwertungsanlage TREA Leuna challenged the proposed contracts on the grounds that Halle had failed to comply with the requirements of Directive 92/50/EEC. In paragraphs 50-52 of her Opinion Advocate General Stix-Hackl pointed out that what is in issue in these cases is the concept of a 'contract' within the meaning of the Directive. She observed that the starting point is that an agreement between two legally distinct persons is a contract for these purposes, but that in Teckal the court had narrowed the concept of 'contract' by interpreting it teleologically (or as we might say, purposively). She was at pains to emphasise, however, that the principle operates as an exception to the general rule contained in the Directive and as such is to be construed narrowly.
RPL was owned 75.1% indirectly by the City of Halle and 29.9% by a private company. Having pointed out in paragraph 48 of its judgment that a local authority is entitled to make use of its own resources without being obliged to invite tenders from third parties, the court noted in paragraph 49 that there may be other circumstances in which a requirement to invite tenders is not mandatory, citing the principle in Teckal. However, it also held that even a minority shareholding in private hands is sufficient to exclude the operation of the principle because it prevents the authority from exercising a degree of control similar to that which it exercises over one of its own departments. There are two reasons for that: first, because there are fundamental differences in approaches and objectives between the pursuit of public and private interests (paragraph 50); second, because the award of a contract to a semi-public company without inviting tenders would interfere with the objective of free and undistorted competition (paragraph 51). Accordingly, in a case of that kind the Directive always applies.
Similar questions arose for consideration in Parking Brixen GmbH v Gemeinde Brixen and Stadtwerke Brixen AG  ECR I-8612. The case was concerned with a public service concession (the provision of car parking) and as such did not fall within the scope of any of the Directives, but it did engage the principles of the EC Treaty relating to equal treatment, non-discrimination and transparency, which are the fundamental principles on which the Directives are based. In that case the Municipality of Brixen awarded a concession for the operation of two public pay car parks to its wholly-owned subsidiary Stadtwerke Brixen AG without inviting tenders from third parties. The question for the court was whether it was permissible for it to do so on the grounds that the agreement fell within the scope of the Teckal exemption.
In paragraph 46 of her Opinion Advocate General Kokott expressed the view that the Teckal principles could be transposed to cases such as that before the court, in part because she considered that they are intended to implement the fundamental rules contained in the Treaty (paragraph 47). In paragraph 53 of its judgment the court confirmed that, although public service concessions fall outside the scope of the Directive, the award of such a concession is bound to comply with the fundamental rules of the Treaty relating to equal treatment, non-discrimination and transparency. It also confirmed that the Teckal principles could be transposed to the provisions of the Treaty and to the general principles relating to the award of concessions (paragraph 61) with the result that those principles do not apply in cases where a public authority grants a concession to a body which satisfies the criteria of the Teckal exemption (paragraph 62). I think it is beyond doubt, therefore, that in that respect the court was intending to assimilate the law relating to the granting of public concessions to that which applies to public service, works and supply contracts. The court also held that since it involves a derogation from the general rules of Community law, the Teckal exemption is to be interpreted strictly.
In Parking Brixen the court emphasised that for the necessary degree of control to exist the public authority granting the concession must have the power of decisive influence over the concessionaire in relation both to strategic objectives and significant decisions. In that case the conversion of Stadtwerke Brixen, a special undertaking of the municipality, into Stadtwerke Brixen AG, a company limited by shares with an independent board, which was bound to open itself to other capital and which had diversified into other enterprises, had weakened the degree of control exercised by the municipality to the point at which it had little practical control over the company's affairs. The fact that the municipality had the right to appoint a majority of the members of the board was not considered to give it the necessary degree of control (paragraph 70). Accordingly, it could not be regarded as a transaction "internal to that authority" and the Teckal exemption did not apply.
This principle was to be applied in the later case of Jean Auroux v Commune de Roanne  ECR I-385 in which the court held that a semi-public company whose capital included private funds could not be regarded as under the control of the municipality for the purposes of the Teckal principles.
The next case which it is necessary to mention in which these principles were discussed is Carbotermo S.p.A. and Consorzio Alisei v Commune di Busto Arsizio and AGESP S.p.A.  ECR I-4137. In that case the municipality of Busto Arsizio had awarded a contract for the supply of fuel and for the maintenance, modification and technical upgrading of its heating equipment to AGESP. AGESP was a joint stock company wholly owned by AGESP Holding S.p.A. whose shares were owned as to 99.98% by the municipality and the balance by a number of adjoining municipalities. The constitution of the company provided that shares could be owned by, among others, private citizens. It also provided that the board should have the broadest possible scope of powers, without limitation, for the ordinary and extraordinary management of the company. Most of AGESP's turnover was derived from contracts with the municipality.
The first question referred to the court was whether the award of the contract to AGESP was compatible with Directive 93/36/EEC. The court repeated the statements of principle to be found in Teckal and Parking Brixen before observing that the fact that a contracting authority holds the entire share capital in a company, either alone or together with other local authorities, tends to indicate (without being decisive) that it exercises the degree of control contemplated in Teckal (paragraph 37). In the case of both AGESP and AGESP Holdings, the board of directors enjoyed the widest powers of management, so that such control as was exercised by the municipality lay solely in the powers conferred by law on the majority shareholders of a company (paragraph 38). Its control was therefore limited. In the light of those facts the court held that the municipality did not exercise the degree of control necessary to bring the case within the Teckal exemption.
The second question for the court concerned the requirement that the contractor must carry out the essential part of its activities with the controlling authority. The court referred to Stadt Halle for the proposition that the principal object of the rules relating to public procurement is the free movement of services and the promotion of undistorted competition, objectives to which the second limb of the Teckal principle is directed. It stated that its purpose is to ensure that the Directive remains applicable in circumstances where a body controlled by one or more local authorities is active in the market and therefore likely to be in competition with other commercial undertakings (paragraph 60). The court made it clear in paragraphs 61-65 of the judgment that the Directive applies unless the contractor's activities are performed principally for the authority and that any other activities are of only marginal significance (paragraph 63). That is to be judged by reference to all the facts of the case, but that insofar as turnover is concerned, what matters is the turnover which it derives from contracts with the authority.
Having discussed that aspect of the matter, the court turned to the question of multiple ownership. Again, it referred to the statement of principle in paragraph 50 of the judgment in Teckal, in which the court had used the expression "local authority or authorities". It held that it was apt to cover the case in which the supplier is controlled by several authorities, rather than simply one (paragraph 69), and held in paragraph 70 that:
"Where several authorities control an undertaking, the condition relating to the essential part of its activities may be met if that undertaking carries out the essential part of its activities, not necessarily with one of those authorities, but with all of those authorities together."
The question of control was considered again in Asociación Nacional de Empresas Forestales (Asemfo) v Transoformación Agraria S.A. (Tragsa) and Administración del Estado  ECR I-2999. Tragsa was a Spanish company owned as to 99% by the state and as to the remaining 1% by four autonomous communities. It was established to carry out agricultural, forestry and other rural development activities for those public bodies. Although an independent body, it was required to act in accordance with instructions received from them and to carry out work at rates fixed by regulation. Asemfo complained that Tragsa abused its dominant position because its public authority clients did not comply with the requirements of the rules relating to the awarding of public contracts. The court reiterated the statements of principle to be found in Teckal, Stadt Halle, and Carbotermo before holding that the relationship between Tragsa, the state and the autonomous communities was such that it could not be regarded as a true third party and satisfied both limbs of the Teckal principle.
A contrary decision was reached, however, in the case of Asociación Profesional de Empresas de Reparto y Manipulado de Correspondencia v Administración General del Estado (Case C-220/06, 18 December 2007), which was concerned with an agreement between the Spanish government and Sociedad Estatal Correos y Telégrafos S.A., a public company wholly owned by the state which is the provider of universal postal services, for the provision of what are described as "non-reserved postal services". Correos was obliged under Spanish law to enter into an agreement with the government for non-reserved services, if required to do so, and to that extent its position was similar to that of Tragsa. However, the court distinguished Asemfo on the grounds that, as provider of the universal postal service, Correos did not carry out the essential part of its activities with the controlling authority or authorities but provided services to an unspecified number of customers. It reiterated the principle enunciated in Carbotermo that the second of the Teckal principles is aimed at ensuring that the public services directive applies whenever the undertaking in question is active in the market and therefore likely to be in competition with other undertakings (paragraph 62).
Whether the requirement of control is satisfied depends on the particular facts of the case. In Commission of the European Communities v The Republic of Italy (C-371/05) (17th July 2008) the Commission complained that the local authority of Mantua had awarded a contract for the maintenance, management and development of its computer services to a company called ASI S.p.A. without complying with the procedures set out in Directive 92/50/EEC. Once again, the Teckal exemption was invoked to justify the award of the contract.
It was not possible to obtain an official translation of the court's decision in this case and in a few respects I am a little doubtful whether the translation provided to us quite captures the sense of the original. The court held that, when considering the question of control, it is necessary to take into account not only all the legal aspects of the relationship but also the factual circumstances of the case in question (paragraph 24). In that case the local authority as the majority shareholder in ASI had the power to appoint the members of the management boards and direct the activities of the company. It also determined the costs of running the company (by which I assume is meant that it determined its budgets) and exercised a degree of control by appointing a council official to oversee and direct the company's activities and by monitoring its financial affairs to ensure that it adhered to the terms of the agreement (paragraph 25). The result in the view of the court was that the local authority had the power of decisive influence over both the strategic objectives and the important decisions of the company and that was sufficient to satisfy the first of the Teckal principles (paragraph 26). That was not affected by the fact that the other two shareholders, although limited liability companies, were also owned by local authorities. The fact that the constitution of ASI also permitted private shareholders did not detract from the position either because no private shareholdings existed at the time the relevant contract was awarded and none were contemplated (paragraphs 29 and 30). The court held that the second limb of the Teckal rule is satisfied if other activities carried out by the enterprise in question are of no more than a marginal nature ("ne revêtant qu'un caractère marginal").
The next case to which it is necessary to refer is Coditel Brabant S.A. v Commune d'Uccle, Région de Bruxelles-Capital and Société Intercommunale pour la Diffusion de la Télévision (Brutélé) (Case C-327/07) (13th November 2008). In October 1999 the municipality of Uccle decided to purchase with effect from 1st January 2000 a cable television network that had been installed and operated for the previous thirty years by Coditel and to grant the right to operate it to a concessionaire. Tenders were invited for the concession and were received from Coditel and three others. In May 2000 Uccle decided not to award a concession but instead to sell the network. Five companies, including Coditel, submitted bids and Brutélé, an inter-municipal co-operative society with separate legal personality, made an offer of a different kind instead of a purchase bid. Uccle rejected four of the purchase bids as inadmissible, leaving only Coditel's bid and Brutélé's alternative proposal. In those circumstances it decided not to sell the network but to accept Brutélé's offer of associate membership of the co-operative and to allow Brutélé to manage the network on that basis. Coditel challenged the decision on the grounds that Uccle had failed to comply with the requirements for awarding public contracts.
The contract between Uccle and Brutélé was in the nature of a public service concession and was not governed by the Directive but by very similar principles derived from the Treaty itself, as applied in cases such as Parking Brixen. The court referred to the principles established in Stadt Halle and Carbotermo and noted that Brutélé was owned directly or indirectly entirely by local authorities and was not open to private members (paragraph 32). It also noted that Brutélé's decision-making bodies were composed of representatives of the public authorities affiliated to it with the result that those public authorities exerted a decisive influence over its strategic objectives and significant decisions. The court was concerned whether Brutélé had attained a degree of independence sufficient to escape from the control of the local authorities, but concluded that it had not because, not being either a société par actions, or a société anonyme, it could not act independently of its shareholders and was prevented by the law governing inter-municipal co-operative societies from acting in a commercial manner or otherwise than in the interests of its members (paragraphs 37 and 38). It held therefore that Brutélé did not enjoy a degree of independence sufficient to preclude the municipalities from exercising over it control similar to that which they exercised over their own departments (paragraph 39).
The final question for consideration was whether, in the case of a concessionaire controlled by a group of public authorities, it was sufficient to satisfy the requirement of control that it be exercised jointly by majority vote of the participants or whether it was necessary for each member to be able to exercise the degree of control that it would exercise over one of its own departments. The court recognised that it would be consistent with the reasoning underlying the decisions in cases such as Carbotermo and Afemso to accept that it would be sufficient if the authorities exercised control over the concessionaire jointly (paragraphs 45-50 and 46). It summarised its decision as follows in paragraph 54:
". . . where a public authority joins an inter-communal cooperative of which all the members are public authorities in order to transfer to that cooperative society the management of a public service, it is possible, in order for the control which those member authorities exercise over the cooperative to be regarded as similar to that which they exercise over their own departments, for it to be exercised jointly by those authorities, decisions being taken by a majority, as the case may be."
Finally, it is necessary to refer to the opinion of Advocate General Mazak dated 19th February 2009 in Commission of the European Communities v Federal Republic of Germany (Case C-480). The case concerns an agreement between the City of Hamburg and the district authorities of Harburg, Rotenburg (Wümme), Sotau-Fallingbostel and Stade for refuse disposal services. Without having invited any tenders, Hamburg entered into a contract with the districts under which it made available to them at a fee a proportion of the capacity of a waste incinerator plant then under construction. Acting on a complaint from a local resident who considered that he was paying too much for waste management, the Commission challenged the arrangement on the grounds of a failure to comply with Directive 92/50 EC. The Federal Republic relied on the fact that the agreement was between local authorities and on the Teckal principles as justifying the agreement. Advocate General Mazak pointed out that the operation of the directive is not excluded just because the agreement is between public bodies (paragraph 30), but that the Teckal exemption will apply if the necessary conditions are satisfied.
The contracting authorities for this purpose were the districts, who were purchasing waste disposal services from the City of Hamburg, which was in the position of supplier. It was therefore necessary to ask whether the districts exercised the necessary degree of control over the City's refuse disposal services and whether the City's refuse disposal services carried out the essential part of their activities with the districts. The Advocate General pointed out that the only relationship between the districts and the City was that established by the contract and that did not make it possible for them to exercise any control over the City's refuse disposal services (paragraph 44). He did not need to discuss the second limb, but noted that waste disposal represented only part of the activities of the City's refuse disposal services.
In the light of these decisions Mr. Henderson Q.C. submitted that the first Teckal principle is satisfied in this case because the nature and degree of control that the members together exercise over LAML is essentially the same as that which they exercise over their own departments. The second, he submitted, is also satisfied because LAML carries out the essential part of its activities with the controlling local authorities. Mr. Howell submitted that on the true construction of the Regulations the Teckal exemption has no application, but he also submitted that even if it does apply, its requirements are not satisfied in this case because the necessary degree of control is lacking.
Are the Regulations subject to the Teckal exemption?
Mr. Howell submitted that the Teckal principles do not apply to contracts falling within the scope of the Regulations because the principles embodied in the Directive have been transposed into English law in a way that excludes it. That is the result, he submitted, of employing concepts peculiar to English law in the framing of the Regulations and must be presumed to have been the intention of those who drafted them. The argument is based on the use in the Regulations of terminology which differs from that of the Directive and on the existence of references to the Directive itself at points where (it is said) no suitable domestic legal concept is available, the purpose of such references being to ensure that the regulation in question is interpreted in accordance with the concepts of the Directive rather than those of domestic law.
Section 2(2) of the European Communities Act 1972 allows the designated minister, when making regulations for the purpose of implementing Community rights or obligations, to extend their scope to matters that naturally arise out of or are closely related to those rights or obligations: see Oakley Inc. v Animal Ltd  Ch 337. Mr. Howell submitted that the Regulations are to be interpreted in the same way as any other domestic legislation, unless to do so would be incompatible with the United Kingdom's obligations under European law: see R (Hurst) v London Northern District Coroner  2 AC 189, per Lord Brown of Eaton-under-Heywood at paragraph 52. Accordingly, words such as "offer" and "contract" when used in the Regulations mean an offer or contract as understood in domestic law. The omission of the Teckal exception would not, he submitted, place the United Kingdom in breach of the Directive and accordingly in the absence of any provision giving effect to it there is no basis on which it can be read into the Regulations.
Brent, Harrow and LAML submitted that since the purpose of the Regulations was to implement the Directive, they should be construed in a way consistent with it. That primarily meant construing the word "contract" in accordance with the Teckal exception as not extending to an agreement between a public authority and a body that could be regarded as the equivalent of one of its own departments. In support of that submission they relied on the decision of this court in R v Portsmouth City Council ex parte Coles, R v Portsmouth City Council ex parte George Austin Ltd (1996) 95 L.G.R. 494.
The judge found this a difficult question and so do I. The local authorities derive little assistance, in my view, from the Portsmouth City Council case, in which this court considered the effect of Directive 71/305 EEC and the Public Works Contracts Regulations 1991. Regulation 30 provided that contracts for public works should be awarded on the basis of the lowest price or the most economically advantageous offer. The same regulation also provided that for that purpose an "offer" included a bid by one part of the authority carry out works for another part when it had been invited to tender in competition with third parties. The latter provision did not mirror any provision of the Directive. Two contracts for repairs, maintenance and improvements to the council's housing stock arose for consideration. Invitations to tender for the work were published in accordance with the Directive, but in the event the council awarded most of the work to its own works department. The court held that the Regulations applied to the improvements contract, but the Directive alone to the maintenance contract. In relation to the first the council was in breach in not awarding the contract to the lowest bidder, but in relation to the maintenance contract it held that the Directive applied only to genuine contracts and not to fictional contracts of the kind that exist when a council agrees to contract with one of its own departments. The issue which confronts us on this appeal did not arise in that case, but the case provides a good example (which is repeated in the current regulations: (see regulation 30(10)) of including in the implementing regulations a provision that is not to be found in the Directive.
The judge accepted that the exclusion of the Teckal exemption would not have resulted in any breach of this country's obligations in relation to the implementation of the Directive so that the court is not required by the principle in Marleasing S.A. v La Comercial Internacional de Alimentacion S.A.  ECR I-4135 to interpret the Regulations as incorporating it. Having referred to the Explanatory Memorandum to the Regulations, which suggest that the Government had not intended to depart from the Directive, he could see no reason why the Government should have wanted to exclude the Teckal exemption from English law. He could not see why a separate corporate entity satisfying the Teckal conditions should not be treated as part of a contracting authority for the purposes of the Regulations and noted that the draftsman could have excluded the exemption expressly, but had failed to do so.
Mr. Howell submitted that the judge did not deal with the question in a sufficiently rigorous way. It is not enough, he submitted, to ask why the Government should have wanted to exclude the Teckal exemption; once one accepts that it was open to the Government to do so it is necessary to deal with the language of the Regulations as they stand. I think there is some force in that submission.
By their terms the Regulations apply whenever a contracting authority seeks offers in relation to a proposed public supply contract, public works contract, or Part A public services contract (which includes insurance services): see regulation 5(1). Regulation 6 contains some general exclusions, but these do not include the Teckal exception. Subject to regulation 30(1) (for the purposes of which "offer" includes a bid by one part of a contracting authority to provide services, to carry out work or works or to make goods available to another part of the contracting authority when the former is invited by the latter part to compete with offers sought from third parties), "offer" is used in the sense which it bears in the ordinary law of contract. If, therefore, a local authority seeks an offer for services from one of its own departments without inviting bids from third parties, it can be said that what is sought is not an offer in the sense in which the word is used in the Regulations because it cannot lead to a contract. That is the reasoning which underlies the decision in R v Portsmouth City Council ex parte Coles. However, that reasoning obviously does not apply in a case where the contractor is a separate legal person.
The fact is that the Teckal exception embodies a legal fiction in as much as it treats what is in law a separate legal person as if it were nothing more than an emanation of the contracting authority. This has two consequences: the authority and the contractor are regarded as one and the same person; and that which would in the ordinary way be regarded as a contract is ignored for the purposes of the Directive. This approach has in effect become a rule of European law. It had already become an integral part of the earlier Directives by the time the current Directive and indeed the Regulations were made. I think it unlikely, in the absence of any indication to the contrary, that when implementing the Directive the Government intended to exclude the Teckal exception and thereby to put public authorities in the United Kingdom in a less advantageous position than those in the rest of Europe. Indeed, I am not sure that it was open to the Government, consistently with the United Kingdom's obligations under European law, to exclude what was already an established and important principle of law affecting the scope of the Directive. In any event, however, in view of the background to and the purpose of the Regulations, the expression "seeks offers" in regulation 5 can, I think, be interpreted as referring only to offers from third parties who are fully independent of the contracting authority and therefore do not fall within the Teckal exception and that "contract" can be interpreted accordingly.
I find it possible to reach that conclusion without recourse to the Explanatory Notes which indicate that the Government intended to avoid any elaboration which risked being at odds with the Directive. In London Borough of Ealing v Race Relations Board  AC 342 Lord Simon of Glaisdale expressed the view at page 361 that an explanatory memorandum of the kind that accompanies almost every statutory instrument might often be useful in assisting the courts in their task of interpretation. That observation, however, forms part of a passage in which his Lordship discusses in general terms the shortcomings of legislative history as an aid to identifying the intention of the legislature. It is immediately followed by a passage in which he identifies the five principal avenues of approach open to the courts to the ascertainment of the legislative intention, which do not include a ministerial explanation of the meaning of the instrument in question.
I draw attention to this because I have reservations about the extent to which an Explanatory Memorandum published by a minister or government department can properly be used as an aid to the interpretation of the legislation to which it refers. In Chief Constable of Cumbria v Wright & Anr  1 WLR 1407 (D.C.) Lloyd Jones J. (with whom Keene L.J. agreed) accepted, following Bennion, Statutory Interpretation, 4th ed (2002), section 232, that such a document may be taken into account as persuasive authority on the meaning of the legislation in question. However, it is necessary to appreciate the limits of that approach. It is an important constitutional principle, as Lloyd Jones J. himself recognised, that the judiciary, not the executive, decide the meaning and effect of legislation. It was no doubt for that reason that in the same passage he emphasised that a document of this kind does not differ in its status from a statement by any other informed commentator, such as an academic author. Not surprisingly, he rejected the submission that it gives rise to a presumption that the views contained in it are correct and should be rejected only for good reason. For my own part I would accept that an Explanatory Memorandum may be of assistance for some purposes, for example, if it throws light on the background to the legislation and thereby enables the court to understand better its general purpose. I would accept also that it insofar as the views expressed in such a document are inherently persuasive they may be taken into account. However, in my view that is as far as it goes. It is also worth noting that in R (Gillan and another) v Commissioner of Police of the Metropolis  UKHL 12,  2 AC 307 Lord Bingham expressed the view that a Home Office Circular addressed to chief constables concerning the use of powers under section 44 of the Terrorism Act 2000 to stop and search members of the public at random for articles that could be used in connection with terrorism could not, even arguably, affect the construction of that section.
Does the Teckal exemption apply in this case?
The rationale of the Teckal exemption is that the principles of equal treatment, non-discrimination and transparency, which are derived from the Treaty itself and which underpin all the public procurement directives, do not apply in a case where a local authority contracts with a body which, although a separate legal person, is for all practical purposes a department of the authority itself. Hence the term "quasi-in-house-procurement". The two critical criteria for this purpose, first identified in Teckal itself and reiterated in all subsequent cases, are control and exclusivity, but it is also clear that the application of these criteria is not mechanical. Account has to be taken of the circumstances of the case and as new situations have come before the court the principles have to some extent been refined and developed. I think it is clear, for example, from cases such as Parking Brixen and Coditel that the same principles apply whether the case is one of public procurement, which falls within the scope of one of the directives, or the grant of a concession, which does not. The court has recognised the common source of the principles that apply to such cases and has also recognised that the Teckal exception applies with equal force in both cases. I therefore reject Mr. Howell's submission that the cases relating to public concessions can be distinguished on the grounds that they deal with a different subject matter.
I think it is also now established by cases such as Carbotermo, Asemfo and Coditel that a body which is controlled by a group of public authorities will satisfy the Teckal principles if the authorities jointly exercise the necessary degree of control over it and it carries out its essential functions for them. The presence of private capital, on the other hand, and participation in commercial activities with third parties are each likely to exclude the operation of the exception.
LAML was established specifically as a vehicle to enable public authorities to obtain and to provide each other with insurance. It was not the intention of those who established it that it should provide insurance to third parties and although its objects enable it to do so, I do not myself think that that is sufficient of itself to prevent it from complying with the second of the Teckal principles. The European Court of Justice has made it clear when considering the first of those principles that it is necessary to look at all the circumstances of the case (Commission of the European Communities v The Republic of Italy) and a similar element of practical common sense can be detected in the way in which the court approached the second principle in that case, indicating that it was possible to disregard activities of a marginal nature. In that case the fact that the contractor's constitution allowed the entry of private capital was not held to take it outside the Teckal exemption, provided there were no private shareholders at the time the contract was awarded. Insofar as LAML could provide insurance to a small class of persons described as "affiliates" I would regard that part of its operations, if relevant at all, as no more than of a marginal nature. The critical issue in this case is therefore control.
Mr. Henderson submitted that the nature and degree of control exercised by the local authorities over LAML is sufficient to bring the case within the Teckal principles. The judge took a different view. He considered that the administration of LAML was independent and he placed some reliance on the fact that a private law body, Charles Taylor Consulting Plc. ("Charles Taylor"), had been employed to manage its affairs. He also attributed some significance to the fact that the terms of the policies issued by LAML are typical of those issued by commercial insurers, which he considered to envisage a relationship between the parties that is essentially inconsistent with the Teckal principles.
The fact that Charles Taylor was employed to manage its business is not in itself fatal, in my view, to the contention that LAML is to be equated to a department of the council. The judge's second point, however, is more powerful and reflects the submission made by Mr. Howell that, since it is impossible for a person to insure himself, an undertaking which provides insurance to a local authority must stand in the position of an independent third party and cannot therefore satisfy the Teckal principles. This is a point to which I shall return in a moment.
Mr. Henderson placed some reliance on the paragraph 31 of the court's judgment in Coditel in which it stated that the fact that the authority granting the concession holds the entire share capital of the concessionaire, either alone or in conjunction with other public authorities, tends to indicate that it exercises control of a kind similar to that which it exercises over its own departments. However, the court also expressly recognised that that is not determinative and could hardly have said otherwise, having regard to its emphasis in Commission v Italy on the need to take into account all relevant circumstances.
When considering the question of control it seems to me that it is necessary to keep clearly in mind what lies at the root of the Teckal exception, namely, a recognition that the principles of equal treatment, non-discrimination and transparency governing public procurement do not apply if an authority is in substance obtaining goods or services internally, hence the expression "quasi-in-house-procurement". In such circumstances a failure to invite tenders does not undermine the principles of free competition or transparency since the authority is obtaining what it needs from its own resources. Moreover, support can be found in the opinion of Advocate General Trstenjak in Coditel for the proposition that local authorities should have the freedom to decide whether to carry out their functions using entirely their own resources, or to carry them out using a body with separate legal personality; and that, if they choose the latter, it is open to them to act in co-operation with other public authorities through bodies which they control in a manner similar to their own departments without being subject to the rules governing public procurement (paragraph 86). Although not expressly adopted by the court, that seems to me to reflect the existing case law, but it does not take the matter much farther.
Mr. Howell submitted that the question of control is to be determined at the point when the parties enter into the contract in question and that in this case Brent had no effective control over LAML until it had obtained a policy of insurance and so became a Participating Member. This is an ingenious argument for which some support can be found in Commission v Italy. It also has a certain logical attraction, but I do not think that it is consistent with the court's decision in Coditel. In that case the successful bidder, Brutélé, offered Uccle membership of the co-operative as a means of obtaining the services which it had to offer. Prior to becoming a member of the co-operative Uccle can have had no power to control Brutélé's actions, but the court held that the conditions for the application of the Teckal exception were satisfied by the nature of the relationship between Uccle and Brutélé which came into existence as a result of the contract.
One comes back, therefore, to the nature and degree of control which the members exercise over LAML. LAML is a company limited by guarantee. The members appoint the board and are entitled to vote at general meetings; they may also by a 75% majority give directions to the board. However, decisions on capital contributions, reserves, membership and terms of cover are entrusted to the board. These are the kinds of decisions that would ordinarily be taken by the board of a joint stock company. As with any company, the directors owe fiduciary duties to the company, whose interests they are obliged to promote. In my view that is all consistent with the view that the board of LAML was intended to exercise a substantial amount of discretionary control over the way in which the company was run, particularly in relation to its dealings with individual members. It is true that by concerted action the members could force decisions of a strategic nature on the board, but it is also clear that the board rather than the members was intended to exercise control over the company. Moreover, the nature of the relationship between the member as insured and LAML as insurer was essentially one between independent third parties, as is illustrated by Rule 22. That reflects the reality of the situation and is consistent with Mr. Howell's submission that the Teckal exception has no application in the context of insurance. There is an air of unreality about the notion that a public body can obtain insurance from one of its own departments, since it is of the essence of insurance that risk is transferred from one person (the insured) to another (the insurer). I do not find the judge's example of the captive insurer very persuasive. Such bodies do in legal terms accept the risk transferred from their insureds and in terms of their function, therefore, occupy a position quite distinct from them, although in practice they are often little more than vehicles for transferring risks into the wider insurance market.
Having regard both to its structure and to the nature of its operations, therefore, I do not think that LAML can be regarded as effectively a department of each of the participating local authorities and for those reasons I do not think that the Teckal exception can be relied on to excuse a failure to comply with the Regulations.
Both sets of proceedings with which this appeal is concerned were started on 6th June 2007. By CPR Part 54.5 a claim for judicial review must be started promptly and in any event not later than 3 months after the grounds to make the claim first arose. A claim for relief under the Regulations is subject to the same requirement: see regulation 47(7)(b). In each case, however, the court has power to extend time. Brent, Harrow and LAML submitted that each of the claims with which this appeal is concerned was started more than three months after the date on which the grounds for bringing the proceedings first arose and that the court should not exercise its power to extend time.
In my view it is convenient to consider the two cases separately, since the principles which govern a claim for judicial review are not necessarily the same as those which govern a claim under the Regulations. For reasons which will become apparent I find it convenient to consider the position under the Regulations first.
The sequence of events surrounding Brent's decision to become a member of LAML is set out in the judgment of Pill L.J. Brent submitted that grounds for bringing proceedings existed (and that time therefore started to run) in November 2006 when its brokers told Risk that it had taken the decision in principle to join LAML. Proceedings for breach of the Regulations were not commenced until 6th June 2007. If Brent is right, they were well out of time.
Regulation 47(7)(b) provides (so far as material) as follows:
"(6) A breach of the duty owed in accordance with paragraph (1) or (2) is actionable by any economic operator which, in consequence, suffers or risks suffering, loss or damage . . .
(7) Proceedings under this regulation must not be brought unless –
(a) the economic operator bringing the proceedings has informed the contracting authority . . . of the breach or apprehended breach of the duty owed to it in accordance with paragraph (1) or (2) . . . and of its intention to bring proceedings under this regulation in respect of it; and
(b) those proceedings are brought promptly and in any event within 3 months from the date when the grounds for the bringing of the proceedings first arose . . .
(8) Subject to paragraph 9, but otherwise without prejudice to any other powers of the Court, in proceedings brought under this regulation the Court may –
(a) by interim order suspend the procedure leading to the award of the contract . . . in relation to the award of which the breach of duty owed in accordance with paragraph (1) or (2) is alleged, or suspend the implementation of any decision or action taken by the contracting authority . . . in the course of following such a procedure; and
(b) if satisfied that a decision or action taken by a contracting authority was in breach of the duty owed in accordance with paragraph (1) or (2) –
(i) order the setting aside of that decision or action or order the contracting authority to amend any document;
(ii) award damages to an economic operator which has suffered loss or damage as a consequence of the breach; or
(iii) do both of those things.
(9) In proceedings under this regulation the Court does not have power to order any remedy other than an award of damages in respect of a breach of the duty owed in accordance with paragraph (1) or (2) if the contract in relation to which the breach occurred has been entered into."
When considering when grounds for proceedings first arose it is necessary to bear in mind that the Regulations prescribe the procedure which a contracting authority must follow before entering into a contract with a supplier of goods or services. The duty owed in accordance with paragraphs (1) and (2) of regulation 47 is therefore a duty to comply with that procedure. It follows that a failure by the contracting authority to comply with any step in the required procedure involves a breach of duty sufficient to support a claim under the Regulations. Moreover, because the procedure governs the whole process from the formation of the intention to procure goods or services to the award of the contract and is structured in a way that is intended to ensure equal treatment and transparency throughout, a failure to comply with the procedure at any stage inevitably undermines the integrity of all that follows.
It is apparent from regulation 47(7) and (8) that grounds for bringing proceedings may exist well before the procedure reaches the award of a contract, but the regulation does not expressly identify the point at which that will occur. In Severn Trent Plc v Dwr Cymru Cyfyngedig  CLC 107 the court had to consider the corresponding provision of the Utilities Contracts Regulations 1996. Langley J. noted that (as under the present Regulations) proceedings may be brought in respect of an apprehended breach and recognised that there was a conceptual difficulty in deciding when grounds for bringing proceedings first exist in such a case. However, the issue that we have to decide did not arise in that case and the judge was satisfied that on any view the claim had been started in time.
The question did arise for consideration, however, in Keymed (Medical & Industrial Equipment) Ltd v Forest Healthcare NHS Trust  EuLR 71, a case concerning the Public Supply Contracts Regulations 1995, which contained a provision in substantially the same terms. In that case Langley J. described the position as follows at page 94:
"The overriding duty on a contracting authority is "to comply with the provisions of these Regulations" generally, and in my judgment grounds will first arise for the bringing of proceedings once it could be shown that they were not complied with from the outset of the award procedure. If it were otherwise and a supplier could select the last breach available to him, . . . it would mean that he could sit back and do nothing even in respect of breaches of which he was aware or which he apprehended. That would again be contrary to much of the purpose of reg. 29. I think Mr. Barling is right in his submission that in a case where the whole procedure is conducted in breach of the Regulations (as Keymed alleges in this case) the failure to comply with them first arises and is established by failure to give the requisite notices to the OJ. Thereafter the regulatory procedures cannot effectively be complied with. "
That is a helpful description of the nature of the duty imposed by the Regulations in this case, with which I agree. It is reflected in the approach taken by this court in Jobsin Co. UK Plc v Department of Health  EWCA Civ 1241,  1 C.M.L.R. 1258 in which Dyson L.J. approached the question of the date on which grounds for the bringing of the proceedings first arose by reference to the date on which the right of action accrued. It is accepted that that is a matter to be judged objectively and does not depend on the claimant's knowledge.
Finally, it is necessary to mention the case of M. Holleran Ltd v Severn Trent Water Ltd  EWHC 2508 (Comm),  EuLR 364 in which Cooke J. had to consider the corresponding provisions of the Utilities Contracts Regulations 1996. That case also concerned an alleged failure to comply with a prescribed procurement procedure. He held that, as a matter of ordinary language, grounds for the bringing of proceedings first arise when the facts constituting the basis of complaint occur.
Mr. Giffin submitted that, since a claim can be made as soon as a breach of the Regulations is apprehended, time begins to run from that moment for all purposes, whether the claimant is aware of the fact or not, and that the award of the contract at the conclusion of what is by then necessarily a flawed procedure does not provide fresh grounds for bringing proceedings. However, in response to those authorities, Mr. Howell drew our attention to the decision of the House of Lords in R (Burkett) v Hammersmith & Fulham London Borough Council  UKHL 23,  1 WLR 1593, a case concerning an application for planning permission, which he submitted pointed to the opposite conclusion.
The facts of that case can be summarised quite shortly. In September 1999 the local planning authority resolved that outline permission should be given for a development, subject to the satisfaction of certain conditions. In April 2000 the applicant sought permission to apply for judicial review of that decision but in May 2000, the conditions having been satisfied, the authority granted outline planning permission. The judge refused permission to apply for judicial review both on the merits and also on the grounds of delay. The judge who heard the renewed application reached the same conclusion, holding that grounds to make the claim first arose in September 1999 when the resolution was passed, and his decision was upheld on appeal. Their Lordships, however, granted the applicant permission to amend her claim to challenge the grant of planning permission itself and in the light of that an issue arose as to the date on which grounds to make the claim had first arisen. They held that it was the date on which permission had been granted. Neither Keymed v Forest Healthcare nor Jobsin v Department of Health was cited to their Lordships.
The judge considered that the similarity of wording between CPR Part 54.5 and regulation 47(7)(b) meant that the principles applied in Burkett should be applied to a claim under the Regulations. He therefore held that grounds for bringing proceedings in this case arose when the breach which formed the subject of the claim occurred, although he recognised that the position is different if the claim is for an injunction to restrain a breach of the Regulations. Mr. Howell, adopting the judge's reasoning, relied on the decision in Burkett as demonstrating that the existence of grounds for challenging a decision which may later culminate in an unlawful act does not mean that grounds for challenging that act arise before it is actually committed. He submitted that time did not begin to run against Risk until March 2007 when Brent finally confirmed its intention to become a member of LAML and abandoned the tender process.
Although the language of regulation 47(7)(b) mirrors that of CPR Part 54.5, I think it is necessary when considering whether the approach adopted in Burkett can be applied in the present case, to have regard to the differences in the nature and subject matter of the proceedings. Judicial review is a means of challenging the unlawful exercise of power. That is an important part of the background against which CPR rule 54.5 falls to be construed. Moreover, as Lord Steyn observed in paragraph 38 of Burkett, it is in some circumstances possible to challenge a decision that is not final and which, as in that case, has no legal effect. In a case of that kind there are good policy reasons for not requiring a person to challenge a decision which does not affect his rights as a condition of being allowed challenge at a later stage one that does: see Lord Steyn at paragraph 42. The contrast with a claim under the Regulations is clear: the latter is an action to vindicate private rights in the context of a procedure that in many cases will be still in progress. Moreover, as I have already observed, a failure to comply with the procedure at any stage inevitably undermines the integrity of all that follows. Accordingly, the right of action is complete immediately and cannot be improved by allowing the procedure to continue to a conclusion. Where there has been a failure to comply with the proper procedure the later award of the contract does not constitute a separate breach of duty; it is merely the final step in what has already become a flawed process. For these reasons I do not think that the approach adopted in Burkett can simply be transposed to a claim under the Regulations.
Nonetheless, I am not persuaded that in a case such as the present grounds for the proceedings first arise as soon as a breach of the prescribed procedure can be apprehended. The proposition that time for bringing proceedings in respect of a breach of the Regulations runs from the date when a breach can be apprehended strikes me as rather bizarre and is in my view the result of a failure to recognise the difference between proceedings based on an apprehended breach and proceedings based on a breach that has been committed.
It is clear from regulation 47(7) and (8) that the court not only has an express power to intervene in the procurement procedure before it has reached a conclusion, but that, subject to paragraph (9), it retains its ordinary powers of granting relief, including relief in the form of a quia timet injunction. There is a fundamental distinction between what might be called 'anticipatory' proceedings based on an apprehended breach of duty and proceedings based on an breach already committed and the grounds on which they may be brought are conceptually different. Grounds for bringing anticipatory proceedings arise when there is sufficient evidence of an intention on the part of the contracting authority not to comply with the prescribed procedure. In all other cases grounds for bringing proceedings arise only when the contracting authority fails to comply with that procedure. This distinction is important, because regulation 47(7)(b) speaks of grounds for the bringing of the proceedings and thereby directs attention to the particular proceedings before the court. For these reasons I do not think that the mere existence of grounds that will support anticipatory proceedings is sufficient to start time running against a claimant who seeks relief in respect of an accrued breach of duty. It follows that in my view grounds for bringing the proceedings did not arise before 7th March 2007 and the claim was brought in time.
As far as the proceedings for judicial review are concerned, the judge held that time did not begin to run until an unlawful act had been committed, following the decision in Burkett, and that part of his decision is not challenged. However, Mr. Giffin submitted that such an act was committed on 18th January 2007 when Brent became a member of LAML. However, I do not think that can be right, because it was not until early March that the council finally decided to obtain insurance from LAML rather than the market. If that is so, it cannot be argued that Risk failed to commence proceedings within the time laid down by the Rules; nor in my view is there any substance in the submission that, in the rather unusual circumstances of this case, it failed to act promptly. Commencing proceedings for judicial review was a significant step which called for proper consideration and careful preparation. The nature of the issues raised by the proceedings and the circumstance which gave rise to them are strong factors in favour of extending time. In the absence of any evidence that Risk failed to act with reasonable expedition, I would grant an extension of time, should it be necessary to do so.
For these reasons, which are substantially the same as those given by Pill L.J., I would dismiss both appeals.
Lord Justice Hughes :
The several issues in this case are very fully and helpfully set out in the judgments of both Pill and Moore-Bick LJJ which I have had the great advantage of reading in draft. I agree with both of those judgments. For the reasons which they both give, I conclude that:
i) participation in LAML was not authorised by section 111 Local Government Act 1972;
ii) nor was it authorised by section 2 Local Government Act 2000;
iii) if, however, participation had been within section 2 of the 2000 Act, Brent had sufficiently formed the opinion and resolved that it would promote the well-being of its area;
iv) accordingly RMP succeeds on the vires issue;
v) the Teckal exemption applies to the Public Contracts Regulations 2006;
vi) the first Teckal condition for exemption can be satisfied by the joint control of a number of co-operating local authorities and the principle of Coditel is not confined to concessions;
vii) the existence of a contract between Brent and LAML is not fatal to the satisfaction of the first Teckal condition;
viii) but on the facts of this case there is insufficient control of LAML by the participating local authorities to satisfy the first Teckal condition;
ix) if the first Teckal condition had been satisfied, the second would also have been, notwithstanding the presence of affiliates;
x) time did not run against RMP in respect of its claim founded upon actual breach (as distinct from any earlier claim which there might have been for quia timet relief in respect of an apprehended breach) until the first actual breach which in this case was March 2007; note however that any failure by a contracting authority to comply with any step in the required procedure involves an actual breach and it is accordingly not open to a putative claimant to await the last in a series of actual breaches and to contend that time runs only from then;
xi) in any event the facts of this case would justify an extension of time if it were required;
xii) accordingly RMP succeeds on the procurement issue.
I have reached these conclusions without recourse to the various explanatory notes and ministerial guidance to which we were referred. Those, for the reasons explained by Moore-Bick LJ, cannot relieve the court of its duty itself to construe legislation.
In the result I therefore agree that Brent's appeals must be dismissed.
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