Ask the team

These are frequently asked questions to our experts from colleagues in Local Government via the Sharpe Pritchard ask the team facility concerning local authority companies, partnerships, charging and trading.

Q: Imagine the following hypothetical scenario :
• Care Services ‘Flexible Framework’ Procurement proposed (Light Touch Regime) – value of care services would amount to many millions of pounds across several schemes (imagine a scheme being a block of eg 50 Units).
• Assumption : for any call-offs to be made under the ‘Flexible Framework’ there would be a transparent ‘mini-competition/direct award’ process where the basis for award would be clearly set out to all potential bidders from the start of the procurement process.
• a ‘Call-Off’ would always be one scheme. So if in the scenario there were 15 Schemes then there would be 15 ‘Direct Award’ Call-Offs being proposed to be immediately made once the ‘Flexible Framework’ has been set up.

The question is: Would it ever be possible to state in the procurement documentation that ‘direct award call-offs’ may be immediately made to all current Providers (i.e. totally replicate the current structure of service provision) on the basis of ‘continuity of care’ / the Care Act 2014 ?

Surely this would be non-compliant as bidders successful in getting onto the framework (yet not currently providing) would not actually get a fair opportunity to be considered for any of the Services which are the subject of the Direct Awards ?

A: Firstly, we need to consider the requirements of procuring a framework agreement under Regulation 33 Public Contracts Regulations 2015 (PCR 2015). Regulation 33(8) PCR 2015 states “Where a framework agreement is concluded with more than one economic operator, that framework agreement shall be performed…following the terms and conditions of the framework agreement, without reopening competition, where it sets out…the objective conditions for determining which of the economic operators that are party to the framework agreement shall perform them” (emphasis added).

In light of the above, objective conditions will need to be set out for when a direct award can be made under the framework. Therefore on the assumption that your proposed scenario could happen if “incumbent provider” is made to be an objective condition for the initial identified call-offs from the framework, balanced against regulation 18 (Principles of procurement), you are leaving yourself open to a potential challenge for breach of the principle of equal treatment.

Your query relates to a procurement under the Light Touch Regime (LTR). Further, you have mentioned “continuity of care”, which, under the Care Act 2014, means that there should be no gap in care and support, in particular when people choose to move. I have not considered the Care Act in further detail but have taken your query to mean, can the continuity of care concept apply more generally as the justification to award the initial call-off contracts to the incumbent providers in a way that is compatible with the PCR 2015, in particular as the framework is being let under the LTR. To assess this, we need to consider the rules governing procedures under the Light Touch Regime, namely PCR regulations 74-56.

Under regulation 76(8), contracting authorities may take into account any relevant considerations when awarding a contract under the LTR, including “the need to ensure quality, continuity, accessibility, affordability, availability and comprehensiveness of the services;”. However, Under Regulation 76(2) the procedures adopted under the LTR shall be “at least sufficient to ensure compliance with the principles of transparency and equal treatment of economic operators.” The proposal to award all initial call-off contracts to the incumbent providers to ensure continuity of care, is unlikely to satisfy the requirements of Regulation 76(2) to meet the requirement of equal treatment of bidders under Regulation 76(2).

In addition, although there is not a requirement for LTR procurements to comply with Regulation 33 (8) PCR 2015, it can provide useful guidance as to how best to demonstrate that Regulation 76(2) can be complied with in the context of framework agreements. Regulation 33(8) PCR 2015 states “Where a framework agreement is concluded with more than one economic operator, that framework agreement shall be performed…following the terms and conditions of the framework agreement, without reopening competition, where it sets out…the objective conditions for determining which of the economic operators that are party to the framework agreement shall perform them” (emphasis added). The requirement under Regulation 33(8) practically underpins the principle of equal treatment of bidders when making a direct award under a framework. As your proposal includes all initial call-off contracts being awarded to incumbent providers, this is not an objective condition for direct awards to be made, and further supports that your proposal, balanced against regulation 18 (Principles of procurement), is very likely to leave the contracting authority open to a potential challenge for breach of the principle of equal treatment.

There is also the practical point of whether all incumbent providers will be successful in getting onto the framework. With your proposal to award the initial call-offs to the incumbent providers, there is the assumption that the existing providers have already been awarded a position on the framework, which again leaves the integrity of the framework open to challenge for breach of the principle of equal treatment.

Other routes to consider to ensure the Continuity of care is achieved

If your concern is there may be a gap between the existing care contracts and the award if the new call-off contracts, the final consideration is to look at alternative methods which do not put the framework procurement at risk of challenge, for example:

• can the framework agreement and the initial call-off contracts be awarded prior to the expiry of the existing care contracts?;
• if not, are there any extension provisions within the current care contracts which can be utilised to align with the dates upon which the initial call-off contracts can be awarded?; or
• if there are no extension provisions are available, can an the care contracts be extended in compliance with Regulation 72 PCR 2015?

 Q: We have set up a private limited company with a sole director, that adopted the Model Articles on incorporation - what should we do in light of Re Fore Fitness Investments Holdings Ltd?

 A: In Hashmi v Lorimer-Wing (also known as Re Fore Fitness Investments Holdings Ltd), the High Court considered the proper interpretation of articles 7 (Directors to take decisions collectively) and 11 (Quorum for directors' meetings) of the model articles for private companies (the ‘Model Articles’), finding that those articles do not work together as currently drafted and the quorum provisions in Model Article 11(2) should be construed as imposing a requirement for a company to have a minimum of two directors.

In light of this decision, we suggest the company in question should:

• Seek advice as to whether it needs the flexibility to operate with one director?
• If it does, it should put forward amendments to its Articles to resolve the perceived contradiction between articles 7 and 11.
• If it does not, it should appoint additional directors.
• Audit historic board decisions and obtain advice on whether any of those decisions taken by the sole director are or may be void.
• Seek advice as to whether any historic decisions should be ratified.

Q: A waste disposal authority asked whether discarded clothing brought to bring banks form part of the Household Waste stream for the purposes of a PFI contract? This question involves an understanding of what the relevant legislation classifies as household waste but ultimately the individual PFI contract would also need to be examined to explore what the definitions say within it on this issue. There follows an outline of the relevant legislation and guidance:

A: Waste is defined in section 75(2) of the Environmental Protection Act 1990 (“EPA 1990”) as anything that is waste within the meaning of Article 3(1) of the Waste Framework Directive, which is: “any substance or object that the holder discards, intends to discard or is required to discard.”

What is Household Waste?
Household Waste is defined in section 75(5) of the EPA 1990 as Waste from any of the following sources:

a) domestic property, that is to say, a building or self-contained part of a building which is used wholly for the purposes of living accommodation;
b) a caravan (as defined in section 29(1) of the Caravan Sites and Control of Development Act 1960) which usually and for the time being is situated on a caravan site (within the meaning of that Act);
c) a residential home;
d) premises forming part of a university or school or other educational establishment;
e) premises forming part of a hospital or which are used to provide a care home service (as defined by section 2(3) of the Regulation of Care (Scotland) Act 2001 (asp 8)).

This definition was expanded by regulation 4 and schedule 1 of the Controlled Waste (England and Wales) Regulations 2012 (“Controlled Waste Regulations 2012”) which states that Waste can be considered Household Waste depending on the place it was produced, the type of Waste, and the type of activity which gave rise to the Waste. Importantly, Waste from a charity shop selling donated goods originating from a domestic property will be considered Household Waste.

Are clothes brought to a bring bank Household Waste?
As a starting point, it should be established whether or not the donated clothes are Waste. The Department for Environment Food and Rural Affairs has issued guidance “Decide if a material is waste or not: general guide” (the “Guidance”) which assists producers or holders in understanding whether or not a material is Waste.

The Guidance states that a material which is reused, meaning it is “used again for the same purpose as was originally intended,” it does not become Waste. The Guidance specifically includes the following examples:

• donating goods to a charity or second hand shop, for example clothes, books, toys, and CDs in re-usable condition;
• when a charity or second-hand shop receives items, checks them and carries out a very minor repair to ensure its reuse as originally intended, for example if a button is sewn onto a coat or a handle is screwed back onto a drawer.

As such, if the clothes were put into bring boxes for the purposes of donation and are in a re-usable condition or a condition where very minor repairs need to be carried out when they are received by the charity or second-hand shop, they are not likely to be classed as Waste. As such, they will not form part of the Household Waste stream.

However, if the clothes are not in a reusable condition, or more than very minor repairs would be necessary to ensure its reuse, these items will be classed as Waste. If these clothes originate from domestic premises (section 75(5)(a) EPA 1990), or originated from a domestic property and are thereafter disposed of by a charity shop (paragraph 2, schedule 1 Controlled Waste Regulations 2012), they will be classed as Household Waste and will form part of the Household Waste stream.

As mentioned above, the PFI contract between the Council and the Contractor may provide additional conditions or a different definition of Household Waste and these provisions would need to be carefully examined and considered when addressing this issue.

Q: What impact (if any) does the ultra vires doctrine have for local government following the provision of powers of general competence under section 1 Localism Act 2011?

The provision of the general power of competence has undoubtedly helped local authorities to identify powers and functions to undertake a wider range of activities which hitherto may have been prohibited due to absence of clear enabling powers and/or imprecise language in pre-existing legislation.

However, the ultra vires doctrine itself is by no means a thing of the past as far as local government is concerned. Cases still arise from time-to-time which impact (or potentially impact) on the local government sector. See for example: School Facility Management Ltd & Ors v Governing Body of Christ the King College & Anor [2020] EWHC 1118 (Comm) where Foxton J reviewed the law on ultra vires. My article outlines the key facts in this case here.

Local authorities now have the powers of an individual of full age and capacity - but, the general powers of competence are constrained by restrictions and prohibitions also contained in the 2011 Act, particularly in the context of charging and trading, which significantly impact on flexibility and require certain actions before the powers can be used (e.g., for trading – setting up a company).

Local authorities and those who deal with or advise them must always identify a clear, precise audit trail regarding statutory powers before undertaking activities. Moreover, finding and identifying the powers to do something (i.e., the ‘capacity’ to undertake an activity) only provides a partial solution to problems and difficulties caused by the ultra vires doctrine. Once identified, powers must be used lawfully in accordance with well-established public law principles.

Q: What relevance (if any) does the Local Government (Contracts) Act 1997 have for new major long-term contracts involving local authorities?

The 1997 Act is associated with the facilitation of the Private Finance Initiative (‘PFI’) programme across local government but the 1997 Act does not, in fact, mention the PFI specifically and was always designed to be applied on a much wider basis and to a wider range of transactions than simply those carried out under the PFI. Section 1 states that every statutory provision conferring a function on a local authority confers a power to enter into a contract with another person for the provision or making available of assets or services or both for, or in connection with, the discharge of that function. So, this section is a useful addition to the general powers of competence outlined above.

Certification under the 1997 Act provides confidence to those who deal with local authorities that even if there is a later ultra vires finding by a court, remedies are available in the form of ‘relevant discharge terms’. Certification is applicable at the option of the parties entering into contracts for services for the purposes of discharging any of the functions of a local authority and which last for at least 5 years.

The advantage of following the powers certification process includes the fact that the parties can make some provision for what should happen in the (hopefully) unlikely event that the contract is subsequently held to be ultra vires by a court following a challenge. These provisions are called ‘relevant discharge terms’ and were designed to enable a fairer remedy to be provided for or considered by a court, than what would otherwise be the case if no certification process had been followed (i.e., a void and unenforceable contract ab initio).

Q: Can a local authority have the power to operate with a commercial purpose under the General Power of Competence?

The General Power of Competence enables a local authority to have the “power to do anything that individuals generally do” under s1 of the Localism Act 2011 (“2011 Act”). Where a local authority wishes to operate for a commercial purpose then s4 of same places requirements on local authorities exercising their power under s1 of the 2011 Act. In particular, s4(2) requires a local authority do those things through a company in order to exercise its general power. A company under s4(2) means a company set up under the Companies Act 2006 or a society registered or deemed to be registered under the Co-operative and Community Benefit Societies and Credit Unions Act 1965 or the Industrial and Provident Societies Act (Northern Ireland) 1969. (s4(4)(a) and (b) of the 2011 Act).

Q: We are a local authority wishing to set up a trading company. What considerations should we take into account?

There are many and even though it is comparatively easy to set up a company it is crucial for local authorities to carefully balance and weigh up the advantages and disadvantages of doing so and to develop a business case which clearly identifies reasons for doing so. Local authorities need to be aware of competing interests and potential conflicts of interests that may arise when creating a new trading business. Among other things, important considerations include: (1) taxation and VAT; (2) how a local authority manages the overall structure of subsidiaries which are owned by it; (3) how central support services are delivered and paid for; and (4) any governance and safeguarding procedures which need to be in place in order for the local authority to meet its obligations, whilst the trading company meets its duties under the Companies Act 2006.

Q: Can a local authority use a Limited Liability Partnership as its trading company vehicle?

No. The range of corporate vehicles contained in both the Local Government Act S 95 and the Localism Act 2011 (section 4) do not extend to Limited Liability partnerships (LLPS). However, A Limited Liability Partnership could be an option where a local authority is not primarily acting for a commercial purpose but is pursuing other objectives e.g. economic development or regeneration objectives. If acting for a commercial trading purpose, s4 of the Localism Act 2011 requires a company that has been set up under the Companies Act 2006 or a Bencom (see Q 1 above)..

Q: What are the limitations on utilising the charging power under s93 of the Local Government Act 2003 (“LGA 2003”)?

S93 allows local authorities to recover the cost of providing services that they would not have ordinarily been able to justify or been able to provide. There is a general duty to ensure that the annual income from charges does not exceed the cost of provision of those services in accordance with s93(3) of the LGA 2003.

S93 does not apply where there is a specific charging power for a particular service in another piece of legislation (in accordance with s93(2)(a)) or if there is legislation which expressly excludes a local authority from charging for a service (s93(2)(b)).

Q: Can you tell us whether the best value duty applies generally to a police authority?

Generally: No. Section 1 of the Local Government Act 1999 imposes the Best Value Duty on ‘local authorities’ which includes (though not limited to):

“(a) an English local authority;
(b) a National Park authority;
(c) the Broads Authority; and
(d) the Common Council of the City of London in its capacity as a police authority…”

Previously this list did include police authorities, however that was removed by the Police Reform and Social Responsibility Act 2011 (which also introduced PCCs) and replaced with that specific inclusion of the Common Council of the City of London.

However, whether the best value duty applies to some police authorities might depend on the constitution of the police authority in question. Some police authorities are also fire and rescue authorities. The Best Value Duty is imposed on fire and rescue authorities, though that duty might only relate to its functions as a fire and rescue authority. By way of analogy, the Common Council of the City of London has both a Best Value Duty imposed on it when functioning as a local authority and also when functioning as a police authority.

The old statutory guidance is here and the revised guidance is here.

Q: Can a Public Authority contract out of their Human Rights obligations under the Human Rights Act 1998 by using a private company to provide a service?

Generally, no. As section 6 of the Human Rights Act 1998 (HRA) imposes a duty on all ‘public authorities’ to act compatibly with European Convention on Human Rights.

A ‘public authority’ is defined to include court or tribunal and any person certain of whose functions are ‘functions of a public nature’. ‘Functions of a public nature’ are then defined to include government departments, local government, police etc.; and private companies performing services traditionally provided by a public authority.

This becomes important when you consider that many public bodies increasingly rely on private contractors to fulfil public functions (outsourcing) such as contracting with housing associations to carry out some functions of a social landlord and contracting with private care homes to provide care.

The Courts have held that a private company performs a public function when it is closely associated with the local authority relying on its services. For example, in Poplar Housing v Donoghue, a registered social landlord was a public authority when attempting to terminate a tenancy originally granted by a local authority - the role of the housing company was so closely assimilated to that of Tower Hamlets Council that the housing company was performing a public function.

This may place a may place a positive obligation on a local authority to prevent human rights breaches of, for example, care home residents whose care it has commissioned from the private sector. This can be done by ensuring the relevant private company has a good track record at procurement stage and ensuring ongoing contract management.

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This ‘Ask-the-Team’ portal facilitates direct communication with Rob from local authorities, who may wish to explore ideas, questions and issues affecting PFI contracts, local authority income generation initiatives, charging, trading, LA Companies, powers and other projects and programmes that local authorities might be involved with or might be contemplating. Please note, however, that the ‘Ask-the-Author’ facility is not designed to replace or be a substitute for detailed legal advice on specific issues.