Landmark Supreme Court Decision will Facilitate Shared Services Objectives


On 9 February, the Supreme Court ruled that the Teckal exemption can apply where a number of public authorities have joint control over a service provider provided that there is no private sector involvement and the authorities are acting solely in the public interest in the carrying out of their public service tasks.

The Facts

This particular dispute concerned a contract awarded by Brent and Harrow Councils to London Authorities Mutual Limited (LAML), a company set up by a number of London Borough Councils to provide them with insurance. Risk Management Partners, a commercial insurance provider, claimed that by awarding contracts to LAML the participating local authorities had breached the EU public procurement rules. Brent and Harrow argued that they could rely on the Teckal exemption.

The Teckal exemption is an exemption from the EU public procurement rules established by the Court of Justice. When a contract is entered into between a public authority and a distinct legal entity the exemption can be invoked as a justification for not going out to procurement where:

the public authority exercises over that distinct legal entity control similar to that which it exercises over its own departments (the Control Test); and
the distinct legal entity carries out the essential part of its services with the public authority or authorities who control it (the Function Test).

The Decision

The Supreme Court held that European case law had progressed since Teckal such that the Control Test can be satisfied by joint control provided that there are no private interests involved and the authorities are acting solely in the public interest in the carrying out of their public service tasks. Individual control is not necessary; it is sufficient that a public authority has collective control over strategic objectives and significant decisions.

Whether the Control Test is satisfied in respect of any particular entity will depend on the specific circumstances. In this case, the Supreme Court took a wider view of control than the Court of Appeal had, and than many commentators expected. The Court held that Brent and Harrow had collective control over LAML because the public authorities held all the shares, had all the votes at general meetings and had the power to direct the Board by passing a Special Resolution. It did not matter that the day to day control was carried out by a Board of Directors who owed duties to LAML, rather than the public authorities, or that for claims under the insurance contracts, the relationship between each contracting authority and LAML was “essentially one between independent third parties”.

Lord Rodger commented that: “the Directive is not intended to protect the commercial sector by forcing public authorities to obtain services which they need on the commercial market…The purpose…is simply to ensure that, if public authorities do decide to obtain the services…from outside bodies, proper procedures are followed.”

This judgment will be a welcome take on the procurement directives for public authorities looking to meet cost saving and efficiency targets. The Supreme Court’s positive stance on the legality of common collaborative procurement structures will definitely assist public authorities looking to pursue collaborative procurement objectives.