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In-house rules

Thu 22 Oct 2009

Setting up an organisation to deliver goods or services can land you in trouble over procurement directives. But there are legal precedents to guide you, says Richard Tinham

Contracting authorities wishing to enter into a contract for the purchase of goods, works or services are generally required to comply with the EU procurement directives and with their corresponding UK regulations. Exemptions to this occur when the proposed contract falls within one of the listed exclusions, has an estimated value below the relevant threshold or is an "in-house" arrangement satisfying specific conditions. In the case of the latter, the nature of those conditions has been the subject of judicial scrutiny.

The decision of the European Court of Justice (ECJ) in the Teckal case established that the directive will not apply where the services, works or supplies are to be provided by a company owned by a procuring authority, provided the procuring authority exercises control over the company which is "similar to that which it exercises over its own departments", and the company performs the "essential part" of its activities for the procuring authority.

In the recent Brent LBC v Risk Management Partners case in the UK Court of Appeal, a group of local authorities established a mutual insurance company that was to provide the authorities with insurance services. The court found the nature of the insurance contracts concerned and the significant level of organisational independence granted to the mutual insurance company were incompatible with the level of control required by the first Teckal limb. So the in-house exemption was found not to be applicable.

However, an ECJ ruling in Sea Srl v Comune di Ponte Nossa in September has confirmed that "control" can be exercised jointly by all public authorities that own a contractor, although it will be absent where there is private participation in the contractor.

The judgment in Commission v Germany in June also provides hope that the in-house exemption is alive and developing. The ECJ found a group of authorities who had cooperated to secure the delivery of services without inviting tenders had not circumvented procurement rules. It was held that an agreement between German districts and the City of Hamburg relating to waste treatment facilities built and operated by a third party fell outside the EU rules.

In that case, the ECJ expanded the principles originally established in Teckal. It confirmed procurement rules do not apply where a contracting authority enters into an arrangement for mutual cooperation with other contracting authorities so long as the arrangements in question are related solely to the pursuit of objectives in the public interest and do not cause a private entity to suffer disadvantage by reference to its competitors.

The ECJ made it clear public authorities jointly using their own resources in cooperation to perform public interest tasks do not have to use a particular legal form.

The Germany case does lend support to the view that public functions might legitimately be jointly delivered by authorities without the need for strict compliance with the principles first laid down in Teckal. This development could be an important tool for supporting central and local government in their pursuit of the shared service agenda.

For further information please contact Richard Tinham, Partner, at rtinham@wslaw.co.uk or 020 7593 5000

Published on Supply Management.com 22 October 2009