In Brent LBC and others (Harrow LBC) v Risk Management Partners Limited [2011] UKSC 7, the Supreme Court unanimously held that a local authority was entitled to enter into contracts of insurance with a mutual insurer without first putting those contracts out to tender in accordance with the Public Contracts Regulations 2006 (the Regulations). For the full facts of this dispute, please read our earlier blogs “here” and “here“.

The proceedings between Brent LBC and Risk Management Partners Limited settled following the Court of Appeal decision. Harrow LBC, an interested party that would have been liable to pay damages in light of the Court of Appeal’s decision, appealed to the Supreme Court.

The Regulations give effect to EU Directive 2004/18 (the Directive). The purpose of the Directive is to ensure that a public body can only award a contract to an outside body following fair competition. The appeal concentrated on the applicability of an exemption to the Directive developed by the European Court of Justice in Teckal Srl v Comune di Viano (Reggio Emilia) (C-107/98) (1999) ECR I-8121. If applicable, the exemption means that the contract is treated as akin to an in-house arrangement with the result that the Directive does not apply and there is no requirement to put the contract out to tender. In order for the exemption to apply, two tests must be satisfied: a ‘control test’ – the local authority must exercise control over the body to whom the contract is awarded similar to that which it exercises over its own departments, and a ‘function test’ – that body must carry out the essential part of its activities with the controlling local authority.

The Supreme Court was asked to rule on three questions of principle: (1) Did the exemption apply to the Regulations? (2) Did the exemption apply to contracts of insurance? (3) Was individual control necessary for the control test to be satisfied?

The Supreme Court unanimously allowed the appeal: (1) The exemption applied to the Regulations as the purpose of the Regulations was to give effect to the Directive and the exemption applied to the Directive. (2) There was no reason to treat a contract of insurance differently from any other contract. If the control test was satisfied, the exemption could apply. (3) Individual control was not necessary for the exemption to apply. The European Court of Justice had consistently held that local authorities were free to co-operate with other local authorities in order that they would collectively have the resources required to perform their services. Therefore, control as required for the exemption to apply would exist if the local authority could show that it had collective control, with the other local authorities, over the strategic objectives and significant decisions of the body. Having reviewed the relevant provisions of the mutual in question’s Articles of Association the Supreme Court held that both Brent LBC and Harrow LBC possessed that control.