23 May 2008
Both sides claimed victory after the first ruling on the legal challenge to London Authorities' Mutual Ltd. But in reality the judgment is bad news for councils and for the government's shared services plans
The two rulings in the London Authorities' Mutual Ltd case have major implications, not just for the parties concerned but for the government's shared services programme (Risk Management Partners Ltd v Brent London Borough Council and others).
In this article, we deal with the first judgment on April 22 (the second followed on May 16). This ruling was claimed as a victory by both sides, which is generally a sign that it has wider importance across a sector. And this is certainly true here.
The facts of the case are relatively simple. Laml is a wholly owned mutual company set up by a group of London borough councils to provide insurance services for local authorities in the capital. The councils had not been satisfied that they were getting the best value from their existing insurance, and thought they could do better themselves through a mutual company.
Brent signed Laml's Memorandum and Articles of Association to become a member and therefore committed itself to making substantial payments and capital contributions to fund the company and the risks it covered.
Setting up the company took some time, and because Brent's existing insurance policies were ending, it decided to start a conventional tender process to make sure it had cover. Risk Management Partners expressed an interest in delivering those services. However, once it was clear that Laml was up and running, Brent abandoned the tender process and instead took out policies with Laml.
RMP challenged Brent on two grounds. The first was that Brent did not have the power to join Laml in the way it did; and the second was that Laml could not deliver insurance services back to the authorities without winning that right under a proper tendering exercise. It was the first part of that challenge that the judge ruled on in April.
The case turned on an examination of legal powers, of which the most significant is the 'wellbeing' power under section 2 of the Local Government Act 2000.
This was introduced as a general power to allow local authorities to act innovatively. It provides that councils can do anything that they consider is likely to promote or improve the economic, social or environmental wellbeing of their areas.
This power might be exercised in relation to, or for the benefit of, the whole or any part of a local authority's area, or all or any persons resident or present in it.
Brent's reasons for joining Laml were clear. Reports from officers to the executive focused on the benefits to Brent itself. These were majored as financial, ie, it would save the council money by reducing insurance costs. However, the reports did not show sufficiently well how joining Laml would deliver wellbeing, whether financial or otherwise, to local residents.
This was a procedural error which the judge commented on. Lord Justice Stanley Burnton said: 'I cannot read section 2 as authorising a local authority to do whatever it considers likely to promote its own economic wellbeing.'
What the judge was saying was that the law requires authorities to demonstrate that they are promoting the economic wellbeing of their local citizens, not the economic wellbeing of the local authority itself.
The second legal power relied on was the incidental power under section 111 of the Local Government Act 1972, which allows councils to undertake any activities that help them discharge their functions.
The judge ruled that the power was not wide enough to be used in the way Brent had done. Brent had not taken out an insurance policy, which would be legally permitted as conducive to its normal functions, but was involved in providing insurance to itself and others.
So what are the wider implications of the case? The big lesson is that just because a scheme is likely to save money for the authority, it does not mean that it is automatically lawful. Brent and other councils will have to address their minds to how this arrangement, or an amended arrangement with Laml, will achieve one or more of the wellbeing objectives for their local area.
Nevertheless, the decision does not prevent local authorities working together and, if necessary, using a shared company to deliver better services.
The fact that the court indicated that the wellbeing power could cover participation in Laml enables the local authorities to claim that their actions have been vindicated. This is why both sides have effectively claimed victory.
Whether positive points can be identified or not, there is no doubt that the judgment is unhelpful to local government and is unlikely to survive an appeal to the Court of Appeal unscathed. Local government and ministers will have a rare coincidence of aims in hoping that it does not.
Stephen Cirell is head of local government and Professor John Bennett is a consultant solicitor with Eversheds. They are authors of Best Value: law and practice, published by Sweet and Maxwell
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