Local Government update - full analysis

Regulation: London Authorities Mutual Limited (LAML): Spoiling the shared services party?

Public bodies' use of shared service vehicles to pool services, rationalise costs and improve efficiency is increasingly fashionable. In public procurement policy terms, these arrangements should not trigger the need for a competitive tender process. If public bodies can keep certain services in-house, they should be able to cooperate in doing so without offering the service up to the market.

However, public sector shared service vehicles often have wider aspirations and seek to enter the vast public sector markets in competition, and sometimes in cooperation, with private contractors and service providers. The more they do so, the more difficult it is to argue that the services in question are being kept within the family of government.

Brent LBC v RMP

This issue was at the heart of Brent LBC v Risk Management Partners (the LAML case) in which the Court of Appeal handed down its judgment on 9 June 2009, upholding RMP's claim for damages for breach of the procurement rules.

Brent argued that the public procurement regulations did not apply in this case, seeking to rely on the Teckal "in-house" exemption. Teckal carves out from the regulations, agreements which can be considered "in-house" administrative arrangements. For the Teckal exemption to be successful, two conditions must be satisfied. Firstly, the contracting authority must exercise a degree of control over the other party, similar to that which it exercises over its own departments (the "control condition"). Secondly, the party awarded the contract must carry out the essential part of its activities for the contracting authority (the "activity condition").

The Court of Appeal accepted that the activity condition was satisfied in this case, as even though LAML's articles of association permitted it to provide third party services, it was not intended to do anything other than provide services to its members.

However, the court found that the significant degree of operational independence enjoyed by LAML meant that the control condition was not satisfied and therefore the Teckal exception did not apply.

Commission v Germany

The European Court of Justice (ECJ) handed down its judgment in the case of Commission v Germany on the same day. In this case, the City of Hamburg waste disposal services (Hamburg RDS) facility, contracted with four other neighbouring local authorities (Landkreise) to provide waste disposal capacity for a 20-year period. Hamburg RDS contracted with a third party to build and operate the waste treatment plant.

The Commission challenged the Federal Republic of Germany over the contract between Hamburg RDS and the Landkreise, arguing that a call for tender should have been issued. The Teckal exemption conditions were not fulfilled, since none of the Landkreise exercised any power over the management of Hamburg RDS.

The ECJ confirmed that authorities may carry out public interest tasks in cooperation with other public authorities and the procurement rules do not prescribe any particular legal vehicle through which this cooperation must be carried out. The contract enabled the construction and operation of the waste facility for their mutual use on a shared capacity basis. In the circumstances, it held that there was no reason to consider whether the Teckal exemption criteria were fulfilled.

Following LAML (and subject to the pending appeal to the Supreme Court), it may now be more difficult to justify multiple body pooled service arrangements in the absence of a tender process, even where there is no element of private participation. Public bodies may be wise to choose a structure which ensures that the operational independence of the shared services vehicles is constrained by the direct influence of member bodies.

Nevertheless, UK public bodies, alarmed by LAML, may take some comfort from Commission v Germany. Provided the pooled functions are limited to non-commercial public services, no private stakes are involved and the appointment of any private provider for the services in question is subject to competitive tender, then there should be flexibility as to the cooperation structure used.

A more detailed analysis is available here.

Regulation: public procurement - the new EU Remedies Directive

The Office of Government Commerce's (OGC) second consultation on the new Remedies Directive (2007/66/EC), which sought views on draft implementing Regulations, closed on 24 July 2009.

The OGC is now finalising the Regulations and preparing guidance in readiness for their implementation on 20 December 2009. The purpose of the new Remedies Directive is to improve the effectiveness of review procedures in the award of public contracts. The key changes to be introduced into UK law by the proposed Regulations are:

• Standstill rules: the current 10-day standstill period remains, although the Regulations clarify that the standstill period will start at midnight at the end of the day on which the notice is sent to unsuccessful bidders.
  
  The standstill letter must include more detailed information about the winning tender than is required under the present rules, although details of the precise requirements are awaited.
• Suspension of contract: once a legal challenge has been launched contract-making is suspended until the court makes an order or the proceedings are determined, discontinued or otherwise disposed of. This contrasts with the current rules which require an applicant to obtain an interim injunction during the standstill period to prevent the award of a contract.
• Ineffectiveness remedy: the court must rule a contract ineffective if:
  • it has been awarded without prior publication of an Office of Government Commerce (OJEU) notice (unless this is permitted by the procurement rules); or
  • there has been a failure to comply with the rules on standstill and suspension, combined with a breach of the procurement rules which has affected the claimant's chances of winning the contract.

An exception applies where the court is satisfied that for reasons of overriding public interest, the effects of the contract should be maintained.

Where the court declares a contract ineffective, the ineffectiveness will be prospective so that future obligations under it will be cancelled. The court must also impose a fine on the authority and may also award damages to the claimant.

The proposed Regulations also provide that where no declaration of ineffectiveness is made by reason of the overriding general interest or where, for example, there has been a breach of standstill procedures but no accompanying breach of the main procurement rules, the Court must nevertheless order the contract to be shortened, or impose a fine, or both.

The new rules represent a radical overhaul of the current public procurement regime. This is likely to encourage stricter compliance by public bodies while raising the risk of challenge when the rules are not followed.

Data Protection - new powers of Information Commissioner push data protection up the risk register

Until now, the Information Commissioner's Office (ICO) could only envy other regulators with powers to impose fines and conduct audits. This is set to change. Legislation expected to receive Royal Assent later this year will empower the ICO to conduct audits of government departments and other public sector bodies. Under separate legislation, a new power to issue fines is likely to come into force in the spring.

New rights of audit

The Coroners and Justice Bill is expected to receive Royal Assent shortly. Once in force, the new legislation will grant the ICO new powers to audit public sector bodies (subject to some exceptions). Public sector bodies suspected of data protection breaches may find themselves on the receiving end of an assessment notice from the ICO, followed by a visit from the ICO audit team and subjection to an investigation over several days. These investigations could involve data protection compliance information gathering (or non-compliance as the case may be), as well as staff interviews.

Data protection breach fines

Under s144 of the Criminal Justice and Immigration Act 2008 the ICO is granted new powers to fine entities which deliberately or recklessly breach the Data Protection Act principles and cause (or could cause) substantial damage or distress.

It is anticipated that the new power to fine will come into force in April 2010. Although the level of fines has not been confirmed, it is likely that they will be significant, in a move to bring the ICO's powers more in line with those of regulators such as the Health and Safety Executive, the Office of Communication (OFCOM) and the Financial Services Authority.

During the past year, a significant number of public sector bodies have been 'named and shamed' on the ICO's enforcement action web-page and the numbers continue to rise. This trend is likely to accelerate in light of the ICO's new powers of audit and to impose fines. What is more, the estimated additional £16 million per annum generated by recent notification fee increases (applicable from 1 October 2009), means the regulator will have increased resources to pursue data protection breaches and to exercise its new powers.

Many public sector organisations, recognising the potential new risks on the horizon, are conducting data protection health checks to make sure they are in good shape should the ICO come knocking. Others would be wise to follow suit.

Pensions - changing times

The Local Government Pension Scheme (LGPS) has been in existence for almost 100 years. The benefit structure has remained virtually unchanged since its inception. Some changes have been made over the years, particularly in terms of eligibility for membership to reflect the employment of part-timers and to comply with equal opportunities legislation. The Department for Communities and Local Government (DCLG), which is the scheme's sponsoring department, carried out an extensive stock-take of the scheme in the early 2000s with a view to modifying the scheme to ensure its sustainability and affordability to all stakeholders into the long-term.

Unfortunately, the changes have resulted in a scheme that is no cheaper than its predecessor and have introduced a tiered ill-health retirement regime which continues to give cause for concern to scheme members, administrators and employers' medical advisers.

While the LGPS is facing many pressures at the present time, these are likely to be exacerbated by the results of the actuarial valuation to be carried out at 31 March 2010 which will show increased liabilities for most employers as a result of improved longevity and poor investment performance. The DCLG is already looking at ways to minimise the impact of this potential situation and has carried out an informal consultation on adopting alternative approaches to fund solvency, which will rely predominantly on cash flow rather than overall asset/liability ratios. Consideration is also being given to increasing contribution rates for higher earners.

Although the LGPS continues as a final salary scheme, it is likely that the DCLG will carry out a consultation process shortly proposing a reduction in the number of administering authorities and identifying alternatives to the current final salary benefit structure. These may include career average revalued earnings and even defined contribution provision for short-term part-time employees. It may also propose an increase in the scheme retirement age in line with the proposal for state benefits.

The DCLG has also consulted recently on proposed changes to the Investment Regulations. Potential amendments include a requirement for LGPS funds to have separate bank accounts from their administering authority, inclusion of a temporary borrowing provision, clarification of stock lending procedures and revocation of a fund's power to lend to its administering authority.

These proposed amendments are not earth shattering, but will in the main reflect the best practice approaches already adopted by many funds.

It seems highly likely that the LGPS will remain under the microscope for the foreseeable future and it is difficult to believe that it will not be subject to significant change including changing the balance of financial risk between employers and the scheme members.

For ongoing analysis visit http://www.wragge.com/pensions.asp

Pensions: Unfair dismissal - pension benefits are not unique says the Court of Appeal

In Roberts v Aegon UK Corporate Services Ltd the Employment Appeals Tribunal (EAT) was asked to confirm how pension loss should be treated where the dismissed employee was a member of the employer's final salary scheme. Ms Roberts was a member of such a scheme. Following her dismissal she secured alternative employment with a better overall remuneration package. However, her new employment only offered her membership in a money purchase scheme.

The Tribunal had determined that Ms Roberts' new employment brought to an end any ongoing loss of earnings claim. Nevertheless, there was ongoing pension loss because of the different type of pension provided. The employer appealed to the EAT on the basis that the Tribunal should have taken the same view for pension loss as for the other loss of earnings. The EAT agreed with the Tribunal's approach, stating that the Tribunal was entitled to decide that the loss of final salary pension was a very significant factor. Consequently, Ms Roberts was entitled to compensation for loss of pension for as long as her employment with her former employer would have continued. The employer appealed to the Court of Appeal.

The Court of Appeal determined that a final salary pension benefit is not a unique benefit but an important part of the total remuneration package. Consequently, the EAT was not entitled to apply different tests to different aspects of the remuneration package.

The consequence of the court's finding in this case was that when Ms Roberts gained new employment elsewhere there was a break in the chain of causation which meant that she could no longer claim ongoing salary nor pension loss.

This will be welcome news for local authorities and other employers which offer final salary pension schemes to their staff.

Energy - the need to be green

Local authorities are increasingly feeling the heat (from a renewable source of course) from central government and Green pressure groups to improve their act on renewable energy and reducing their carbon footprint.

For local authorities, the key driver on climate change emissions originates in the 2006 Local Government White Paper "Strong and Prosperous Communities." This introduced a new performance framework known as the comprehensive area assessment (CAA). In addition, since October 2008, Display Energy Certificates must be displayed in all public buildings larger than 1,000 square metres and those provided for social housing.

More recently, the focus has switched to using renewable energy in public buildings. In particular, the steps that local authorities can take to increase the levels of microgeneration and low carbon technologies. Many options are available, from the use of small scale wind turbines for electricity generation to connecting to district heating systems to utilise otherwise wasted hot water from industry or dedicated biomass plants.

Established by the Carbon Trust in 2006, Partnerships for Renewables has urged public sector organisations in the UK to consider using their land and property to generate renewable energy. It claims this has the potential to provide power for more than 1.5 million households, as well as generating additional revenues from local authority land assets.

The government will be looking to work with local authorities to deliver its objectives, including establishing regional targets for renewable energy generation. The key will be finding the way through the plethora of new technologies and working with partners who share its vision for a low carbon future. Local authorities should consider how any new projects can be achieved using low carbon solutions, not just new building projects but also refurbishments and even outsourcing of services.

Many authorities have already made large strides in this area and others should look to learn from their experience. Wragge & Co's Energy Infrastructure team advises clients on all aspects of renewable energy generation and use, including procuring and operating on-site generation, sale of excess power to the national grid, the setting up and operation of district heating systems and agreements with private sector bodies to work in conjunction with local authorities on these initiatives.

Health and Safety: local authorities and remediation - do it safely or else

Local authorities need to be aware of their duties in relation to contaminated sites following the High Court decision in Corby Group Litigation v Corby District Council. A breach of those duties may lead to a significant claim for damages against a local authority.

The case concerned birth defects in a group of children born between 1986 and 1999. Their births followed an extensive remediation project carried out by Corby Borough Council (CBC) on land acquired from British Steel. The claimants alleged that the birth defects had been caused as a result of harmful substances generated by the reclamation works and spread throughout Corby.

The judge held that the land reclamation programme was not carried out safely and in accordance with best practices at the time for the management and disposal of contaminated waste.

Any competent local authority should have been aware of the potential harm to members of the public from dust generated at a site such as Corby and should have taken active steps to ensure that dust was not generated either on-site or by transportation of materials from the site.

CBC was held liable in public nuisance, negligence and breach of statutory duty subject to issues of causation being established in later proceedings by individual claimants.

In light of the judgment, local authorities should:

• ensure that appropriate risk assessments and due diligence are carried out before purchasing any site or carrying out any work on it;
• take appropriate precautions (in light of all the circumstances) if work is to be carried out on a contaminated site. Consideration should be given to those working on-site and those potentially affected off-site; and
• ensure individuals with relevant experience are used in reclamation operations involving contaminated sites.

A more detailed analysis of the High Court decision is available here.

Employment: right to legal representation at disciplinary hearings

Since 2000, workers have had a legally enforceable right to be accompanied at a disciplinary or grievance hearing. Who can act as the companion is restricted to either "another of the employer's workers" or a trade union official.

While these limitations have remained unchanged in most cases for almost a decade, where a possible outcome of the disciplinary hearing would result not only in the loss of the employee's job but also their ability to pursue their career, the right to legal representation must be considered.

In the case of Kulkarni v Milton Keynes Hospital NHS Foundation Trust, a male doctor faced disciplinary proceedings following an allegation of inappropriate conduct during an examination of a female patient. The issue before the Court of Appeal was whether in the circumstances of this case - where the employee was facing what was in effect a criminal charge - he was entitled to have legal representation at the internal disciplinary hearing.

The court said yes based on the wording of the NHS disciplinary procedure. The court found that Dr Kulkarni had a contractual right to be represented at an internal disciplinary hearing by a lawyer instructed by the Medical Protection Society. It follows that, any NHS-employed doctor or dentist facing disciplinary charges has the contractual right to a legal representative instructed by their medical defence organisation.

Having decided the appeal by reference to the employment contract there was no need for the Court of Appeal to go further. However, it did go on to consider whether the application of Article 6 of the European Convention on Human Rights was engaged. It is these obiter (persuasive but not binding legal authority) comments that have wider implications and are relevant to any public sector employee facing a threat to their continued career as a result of disciplinary action.

Acknowledging that it was difficult to know where to draw the line, the court suggested that Article 6 would be engaged when an employee faced circumstances that could result in them being deprived of the right to practise their profession as opposed to losing a specific job. Where they were facing what was in effect a criminal charge, a right to legal representation in civil proceedings was implied.

This is in line with another recent High Court case, R (on the application of G) v The Governors of X School and another. In that case, the High Court held that a school teacher had the right to representation by a lawyer of their choice at an internal disciplinary hearing which could lead to the teacher's name being added to the Protection of Childen Act (PoCA) list of those not allowed to work with children. The High Court expressly limited its decision to the facts of the case. However, recognising the case involves a point of law of public importance, this case has also been referred to the Court of Appeal which heard the appeal on 6 October 2009 but have not yet handed down judgement.

While we await direct Court of Appeal guidance, it appears the courts are developing a right for employees to have legal representation at internal disciplinary hearings in cases where disciplinary sanction could result in the individual no longer being able to pursue their chosen career.

Employment: Liability for race discrimination and contract workers

Section 7 of the Race Relations Act (RRA) 1976 provides specific protection from discrimination for individuals supplied by their employer on a contract basis ('contract workers') to do available 'work for' a third party ('the principal'). The provisions of section 7 make it unlawful for principals (for whom the work is actually done), to discriminate against, or subject to harassment, a contract worker. The Employment Appeal Tribunal has recently considered the scope of 'contract workers' for the purposes of the RRA.

In Leeds City Council v Woodhouse and others, the council set up an Arm's Length Management Organisation (ALMO) to manage its housing stock. Mr Woodhouse was employed by the ALMO. The ALMO subcontracted some of its duties under its service agreement with the council back out to the council's Property Services Division, which employed Mr Chapman.

Part of Mr Woodhouse's duties was the inspection of work carried out by the council's Property Services Division as subcontractor to ensure the work was done to the ALMO's satisfaction (thereby ensuring the ALMO was in compliance with the terms of its Service Agreement with the council). While Mr Woodhouse was inspecting the work done by Mr Chapman, Mr Chapman allegedly made racially discriminatory remarks.

The question arose as to whether Mr Woodhouse could rely on s7 RRA as being a 'contract worker' of the council. The council argued he was not, as he was working for the ALMO and the purpose of his work was not for the benefit of the council, but for the ALMO.

However, the tribunal and Employment Appeal Tribunal (EAT) agreed with Mr Woodhouse that he did fall within the ambit of 'contract worker'. The EAT concluded that the test for establishing whether work was done for a principal under the RRA was broad: for whose benefit was the work ultimately being done? The quality control work that Mr Woodhouse did was found to be as much for the benefit of the council as for the ALMO. It followed therefore that the council had a primary liability to Mr Woodhouse for Mr Chapman's remarks under section 7.

Although fact specific, this case is an interesting illustration of the potentially very wide ambit of section 7. Public sector bodies need to be aware of this potential liability when entering what are often structurally complex outsourcing arrangements.

An application for leave to appeal is currently pending before the Court of Appeal.

Planning - an overview of Community Infrastructure Levy

The Community Infrastructure Levy (CIL) was introduced by the Planning Act 2008 in support of the government's aim to make the planning system fairer, more transparent and speedier.

The concept has received a somewhat rough ride from the profession, but has now been crystallised in the consultation and draft regulations published in July 2009. The consultation closed on 23 October and it is anticipated that the regulations will come into force on 6 April 2010.

The basic premise is that "charging authorities" (broadly, current planning authorities) will be empowered to levy a charge on most types of new development. This is to be calculated under a charging schedule which will form part of the Local Development Framework. The schedule will reduce development to charging units to which the levy will be applied.

The charging authorities must identify the infrastructure (both local and sub-regional) to which the income from the levy is to be applied in the development plan. Therefore, most authorities will need to bring forward up-to-date development plans before the CIL may be operated.

The CIL will be registered as a local land charge and the regulations provide for enforcement action against developers who fail to make the payments required.

The ability to enter into planning obligations will continue. For example, the provision of affordable housing does not immediately lend itself to a financial payment, although the consultation paper does ask for comments on improvements to the planning obligations regime.

The consultation paper indicates that CIL "will demand new skills in local authorities and that government will work with other organisations to ensure that staff have the necessary skills in good time to allow a smooth implementation." It remains to be seen how many authorities are willing and/or able to divert staff from existing workloads to prepare for the CIL.

Finally, it also remains to be seen whether the CIL will achieve the government's aims. It will provide clarity and certainty for developers, but in the present climate that may mean that the proposed development is certainly not economically viable.