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Laml ruling sends councils back to the drawing board on co-operation
Public Finance – 19 June 2009

By Mark Smulian

The Appeal Court's ruling against a group of London boroughs' insurance mutual has brought calls for the new communities secretary to clarify the wellbeing power.

Both localism and council efficiency efforts received a rude setback last week when the Court of Appeal ruled against a pioneering insurance mutual.

The London Authorities Mutual Limited, a collectively owned insurer for councils, had appeared to tick all the boxes. It was a creative initiative by councils under the 'wellbeing' power - which the government has gently encouraged them to use more - and it provided substantial savings, something the government has less gently pressed councils to find.

The only problem was that the court found it unlawful, a decision that muddies the water enough to make other councils cautious over similar innovations unless the government clarifies the scope of the powers. One of the first things to land on the desk of new Communities and Local Government Secretary John Denham was a pained letter from Laml urging him to do just that.

Those behind the mutual feel particularly aggrieved as it had enjoyed government support before its 2007 launch, including funding from the Department for Communities and Local Government and the former regional centres of excellence.

The Local Government Act 2000 gave councils powers to do anything for their community's social, economic or environmental wellbeing. The court's ruling was, in effect, that 'wellbeing' does not include simply saving money, even if the funds were freed for spending on projects of community benefit.

Laml eventually provided insurance for ten London boroughs for corporate property, terrorism and liability risks. It claims to have made savings of some 15%, inspiring other councils to look into it.

The insurance industry liked neither Laml's arrival nor the prospect of losing other custom to council-owned mutuals. But there appeared to be little it could do to prevent it until the London Borough of Brent abandoned an insurance tendering exercise part-way through to join Laml.

Insurer Risk Management Partners, which had been invited to tender in Brent, took legal action on the grounds that this broke the Public Contracts Regulations 2006 by failing to award the contract by means of open tender. This later broadened into a legal attack on whether councils had the power to set up Laml at all.

Brent had relied for the procurement issue on the 'Teckal' exemption, legal shorthand for a series of European Court of Justice cases. These held that a council can award a contract to a body without tendering if the body is one over which the authority exercises the same degree of control as it does its own departments. The court found this did not apply to Laml.

Stephen Cirell, head of local government with law firm Eversheds, says: 'Nobody is going to be very happy with this judgment but there is no need to think that it has stopped everything. Each case will depend on its own facts and circumstances.'

He explains: 'The wellbeing power is very complex. I think the point in this case was that it was held that it had not been used properly. The court appeared to have been influenced by how the proposals were implemented, perceiving [Laml] to be a risky business venture involving substantial guarantees.

'The court also seemed influenced by the fact that the councils had not been able to show what the benefit was to their communities beyond saving money. The court has said that just saving money is not enough for "wellbeing", though it could perhaps be allowed if there was some direct benefit that could be shown.'

Shared services deals could still proceed, Cirell says, but he adds: 'I suspect it will make other local authorities more cautious, as any lawyer will look at the judgment and say that a council would have to clearly set out the wellbeing benefits of any proposal.'

Laml's chair, and the driving force behind its creation, is Nathan Elvery, deputy chief executive at the London Borough of Croydon. He says he 'does not wish to sound bitter', but is clearly deeply angered by the court's ruling, saying it has 'set things back ten years' in terms of councils' freedom of action.

'I think the implications are quite devastating for local government, and John Denham needs to take action because we've reached a point where this will slow down or stop any major efficiency measures in local government,' Elvery says.

He doubts that the councils could have used alternative lawful means to create Laml because 'we had so many QCs advising us and we had been very careful', but the Lord Justices have 'taken a very narrow view' of councils' remit.

Elvery also thinks other councils will lose money as a result of the case because Laml not only produced a 15% saving on members' insurance costs but, he says, its existence sharpened competition. 'So long as Laml was there it lowered rates for other councils in the market generally, and I expect those to rise now,' he says.

Emergency alternative insurance arrangements were put in place after the judgment and Laml is being wound down. Elvery says it is likely that Laml members will go to the insurance market jointly to try to secure some economy of scale savings but adds: 'I doubt we will get savings on the scale Laml did.'

Laml does not intend to appeal to the House of Lords. 'If we did make another attempt to appeal, we'd have to try to get people from local government to bankroll it, and it is exhausting and frustrating that we have already had no support from local government or from any regional centre of excellence to fight this,' Elvery adds.

The insurers welcomed the judgment. RMP hailed the case as 'a decisive victory'. It points out that the shared services programme 'remains vigorously in force', but that the judgment showed Parliament 'had not given carte blanche to local authorities to do whatever they wish'.

A spokeswoman for Zurich Municipal said: 'We understand how disappointing this decision is for Laml as no doubt their intentions were rooted in achieving perceived savings in their insurance costs.

'We still maintain there were, and are, long-term risks that make comparison of this model with the conventional market very difficult. There are alternative models that we feel support the objectives of the London authorities, but which are "vires" and do not contain some of the limitations or risks of a mutual.'

The Conservatives have said they would give local authorities a power of general competence were they to win the next election. This would be wider than 'wellbeing', permitting councils to do anything not otherwise unlawful.

Whatever powers obtain, councils are likely sooner or later to take commercial decisions to which private companies object. This latest judgment is unlikely to be the last.