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Contracting with ALMOs – Positive News

Contracting with ALMOs – Positive News

Tuesday 25th February 2014

The good news for registered providers  (“RPs”)and other contracting authorities who use arm’s length management organisations (“ALMOs”) is that the High Court recently confirmed that ALMOs will fall within the in-house, or Teckal, exemption.

EU public procurement law is incorporated into UK legislation by the Public Contracts Regulations 2006 (the “Regulations”).  Under the Regulations, RPs and local authorities (amongst others) are classed as ‘contracting authorities’ and must comply with the Regulations when entering into public contracts for works, goods or services above certain financial thresholds. The Regulations require contracting authorities to advertise contracts and competitively and transparently tender them.

There are limited circumstances where contracts are not deemed to be public contracts and are therefore exempt from procurement law. One such circumstance is the Teckal exemption, which exempts a contract between a contracting authority and a separate but related legal entity from the application of procurement law where the entity satisfies two tests:-

  • The ‘control test’ - the contracting authority must be able to exercise control over the other entity (the ‘Teckal company’) as if it was an internal department of the contracting authority; and
  • The ‘function test’ - the Teckal company must provide the essential part (i.e. the majority) of its services to the contracting authority which controls it.

If it passes both tests, the Teckal company is considered to be an internal department of the contracting authority and as such, contracts that it enters into with the contracting authority are not public contracts.

In the recent case of Tachie v Welwyn Hatfield Borough Council, the claimant raised various grounds of challenge to the Council’s decision to contract out its homelessness functions to an ALMO. One ground of objection was that  the ALMO should not have been awarded the contract without a procurement procedure because it fell outside of the Teckal exemption.

It had been considered that as long as they were set up in accordance with government guidance, ALMOs automatically met the criteria for the Teckal exemption.

In this case, the claimant argued that the Council only had token control over the ALMO, which it had exercised since 2010 and therefore failed the control test. ALMOs inherently have significant independence from their parent organisations and local authority nominees normally only make up a minority of an ALMO’s board, with the board also consisting of tenants and independent members.

In considering whether Teckal applied, the High Court stated that the ALMO’s Memorandum of Association provided clear evidence that the function test was satisfied and that the control test was satisfied because:-

  • Although the ALMO’s articles of association provided for the appointment of non-Council board members, they gave the Council the power to appoint and remove any board member at any time;
  • The focus should be on the nature of arrangements and the existence of a power to exercise control, not whether such control had in fact been exercised;
  • As the control test is usually satisfied if the contracting authority holds all of the shares in a company, the same must apply if the contracting authority is the sole member of a company limited by guarantee; and
  • The Council had limited the ALMO’s discretion by having the power to give direction to the board on strategic matters and on important issues of policy.

Whilst this case may appear to simply restate what was commonly understood, it is a significant decision in supporting conventional wisdom and further clarifies the position of ALMOs in respect of the Teckal exemption. It also sounds a note of caution that the criteria for the exemption must be present within the ALMO’s constitutional documentation and in any agreement between the ALMO and the contracting authority. Subject to this note of caution, RPs and other contracting authorities can continue to contract with ALMOs without having to periodically retender the contracts or worry about the application of procurement law.