LAML, Roanne, and ALMOs

Below is an article written by Allan Donovan on the subject of LAML, Roanne, and ALMOs.

Recent decisions and implications

It is getting to the stage where you can recognise a local authority legal adviser by their similarity to a scared rabbit, frozen in the headlights of the oncoming car! They quite simply, do not know which way to turn!

Commercial contracts and procurement lawyers were still scratching their heads over exactly how to interpret the Roanne decision when along came the Court of Appeal decision on the LAML case.

But can either of these decisions be said to have made things any easier when advising our public authority clients?

The upshot of the CA decision in LAML (Brent LBC v Risk Management Partners Limited [2009] EWCA Civ 490) is, in a nutshell; that there are limitations to the "well being" powers. But, in spite of all the furore about this being a step backwards and a brake on efficiency gains by innovative local authorities, was it such a surprise for judges to find that Parliament never intended local authorities to have carte blanche in making such arrangements?

Nonetheless, without a further appeal or, as some commentators are suggesting, a change in the law it will remain a decision that we have to work with. No doubt, many agonising hours will be spent trying to rationalise the judgement when other ventures are being considered but is it possible to take a far more simplistic approach?

Strip away all of the legal argument and you are left with the far more pragmatic question; what would the average council tax payer make of it all? Am I really paying my council tax so that my local authority can set up and operate as an insurance company? We're not just talking about the pooling of resources but actually operating an insurance company with all of the risks that entails. Of course, the idea would be sold on the basis of the positive advantages to be enjoyed by the council tax payers, benefiting from the huge, anticipated savings. But there's the rub. Any such savings would be exactly that; anticipated. If they failed to materialise or filter through to the tax payers, the mood will quickly turn. Ultimately, one is left with the feeling that this was, perhaps, one risk too far for the courts to accept.

But LAML wasn't just about the vires of the exercise. It also had procurement implications. If Brent and the other authorities had been acting within their power, would they then have been able to rely upon a "Teckal exemption" to avoid EU procurement regulations? That question was answered in the negative but what does that tell us about the level of control that is required to be able to rely upon Teckal?

Where a local authority contemplates a contract with a separate legal entity and that contract is subject to EU procurement rules, they will be obliged to undertake a fully EU compliant procurement exercise. However, where that separate legal entity is set up and owned by the local authority, regardless of whether it is an outright ownership or a shared ownership with other public bodies, the decision in "Teckal" may mean that a procurement exercise is not necessary.

To be able to rely upon the Teckal exemption the local authority has to show not only ownership but also that they exercise a control over that company that is similar to the control they exercise over any of their departments. This is the control test. Additionally, the activity test requires the separate legal entity to carry out the essential part of its activities with or for the controlling authority. Both tests need to be satisfied but it was the control element of Teckal that concerned the CA in LAML.

The CA followed the ECJ lead by going beyond the constitution of the company to look into what would be the day to day activities to see if the local authorities exercise sufficient control over the company. The CA found that as a company limited by guarantee, the members of LAML appointed the board of directors. Members were also entitled to vote and by a 75% majority, give directions to the board. Even so, that was insufficient for Teckal to apply.

In setting up LAML, the authorities had appointed a private company to manage its affairs. Previously, in the Divisional Court, Stanley Burnton LJ considered that; the employment of a private company to manage LAML points against [a Teckal exemption]. In the CA, Pill LJ gave tacit support to that principle when he said (at paragraph 131); 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. However, Moore - Bick LJ disagreed at paragraph 232 by stating; The fact that [a private company] 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.

Whilst Moore - Bick LJ relied upon other factors to reach the same conclusion as Pill LJ such a bold statement, without anything further, adds nothing but confusion to the critical question of local authority control over separate legal entities.

Many local authorities have established Arms Length Management Organisations (ALMOs) to manage and develop their housing stock. They, too, are separate legal entities and there are many similarities with LAML. Most will be managed by boards of directors that include tenant and independent members as an overall majority of council members is discouraged.

To what extent, therefore, does the inclusion of non council members affect the independent decision making of the ALMO? An ALMO will usually be wholly owned by the local authority that established it but ownership is not synonymous with control. The courts in Teckal and every case since have made that abundantly clear. The CA in LAML also confirmed that even senior officers of the council, when sitting on the board of the separate legal entity, are obliged to act in the best interest of the company.

Many ALMOs have been established with a view to the housing stock in particular regeneration or redevelopment areas within the local authority and whilst there can be little doubt about the vires of setting up such companies (They couldn't; could they?), questions remain over how EU procurement rules apply, post Roanne and can a Teckal exemption be invoked?

A "safe" interpretation of the decision in Roanne may be that; where a local authority has any say in the use of a development area then the EU procurement rules will bite but what about Teckal?

Certainly, the received wisdom is that ALMOs are sufficiently within the control of local authorities so that Teckal can be safely said to apply an exemption from procurement rules. But there are a host of reasons to question such an assumption, for that is all it is; an assumption.

Time and again, the Court of Appeal in LAML emphasised that Teckal is an exemption to be narrowly construed and strictly applied against the public body seeking to invoke it.

Can it be, therefore, that by encouraging the establishment of ALMOs the government may have, inadvertently or otherwise, provided a vehicle to circumvent the EU rules on procurement? Is it conceivable that in setting out the legal fiction that is Teckal, the ECJ presented member states with a blueprint of what needs to be done to avoid EU wide competition?

Given recent decisions, perhaps the most pertinent question of all; in such austere times, who is going to be brave enough to risk a challenge?

Allan J. Donovan © 2009

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