Risk Management Partners Ltd, R (on the application of) v The Council of London Borough of Brent

I have before me two claims. Both concern a new mutual insurance company, The London Authorities Mutual Limited (“LAML”), established, as its name suggests, by a number of London local authorities, of which the London Borough of Brent (“Brent”) is one.

In February 2007, in accordance with the Public Contracts Regulations 2006, Brent invited tenders, to be submitted by 23 February 2007, for Combined and Miscellaneous Insurance, divided into 7 lots, to provide cover for a period from 1 April 2007. The Claimant (“RMP”) submitted a tender which appeared, when the contract award procedure was abandoned, to have been the most financially advantageous of the offers received by the Council, although further information and clarification was required. However, on 27 March 2007 Brent informed RMP that the contract award procedure for 6 of the lots had been abandoned, because Brent were proposing to award a contract for insurance (except for one of the lots) to LAML, which had taken no part in the public procurement exercise.

In its claim in the Administrative Court, RMP contends that Brent’s participation in LAML is outside the powers granted to Brent by Parliament: i.e., it has acted ultra vires. In the alternative, it alleges that Brent’s participation was not duly authorised. It seeks appropriate declaratory relief. Its claims are disputed by, in addition to Brent, Harrow London Borough Council, one of the other participants in LAML, and by LAML itself. In addition to their substantive contentions, they contend that RMP failed to bring its proceedings promptly or within the period of 3 months after the grounds to make the claim first arose, as required by CPR Part 54.5, and their formal position was that permission to apply for judicial review should be refused by reason of that delay, or alternatively that relief should be refused by reason of delay. As will be seen, both Brent and the Interested Parties have sensibly departed from this initial position.

In its claim in the Queen’s Bench Division, RMP contends that in awarding the insurance contracts to LAML Brent acted in breach of the requirements of the Public Contracts Regulations 2006, and it seeks damages for that breach. This claim too is disputed by Brent. By order dated 23 January 2008, the Interest Parties have been added as Defendant to this claim for the purposes of making written oral submissions to the Court.

By order dated 8 August 2007, Dobbs J directed that RMP’s application for judicial review and the substantive application for judicial review should be heard as a “rolled-up” hearing, with the substantive hearing to follow immediately on the application for permission, if permission was granted; and she ordered the claim under the Public Contracts Regulations 2006 (claim number HQ07X01934) to be heard with the application for judicial review, apart from issues as to causation and quantum. Both claims were listed for hearing before me for the four days beginning on 11 February 2008. In the event, however, it rapidly became clear that submissions on the issues of vires and authority would themselves take up the four days, and it was therefore agreed to sever the hearings of the judicial review claim and of claim number HQ07X01934.

It was also agreed that I should determine the issues of vires and authority and hand down a judgment on them, leaving questions of remedy, if any, to be considered in the light of my judgment at a subsequent hearing.

This is my judgment on the issues of vires and authority.

LAML is a company limited by guarantee. It was incorporated, as a shell company, on 12 May 2006. Its business is that of a non-life insurer. Its Memorandum and Articles of Association were signed on behalf of the subscribers in January 2007, and were then adopted. Of the 32 London Boroughs, the City Corporation of London and the Greater London Authority, 10 Boroughs subscribed to the Memorandum of Association, including Brent and Harrow. Its main objects are:

(i)

To receive premiums from Participating Members or Affiliates and to indemnify through a mutual fund the liabilities, losses or expenses incurred by Participating Members or Affiliates in accordance with the Rules;

(ii)

To grant or effect with Participating Members or Affiliates for the purpose of mutual insurance such classes of insurance business as the Mutual may from time to time be authorised to carry on and to enter into or arrange insurance or reinsurance contracts on behalf of any Participating Member or Participating Members or Affiliates as deemed necessary from time to time and to negotiate directly or indirectly with the insurance market cover for any risk on behalf of any Participating Member or Participating Members or Affiliates.

However, its subsidiary objects include entering into partnership or joint venture in relation to any business which it is authorised to carry on or from which it might derive any benefit.

“Member” means any London Authority that has subscribed to the Memorandum and Articles of Association; “Participating Member” means a Member who receives an Indemnity (a defined term) from the Mutual. Articles 4 and 5 of the Memorandum provide that the liability of the Participating Members is limited to £100. Affiliates for whom insurance may be obtained from LAML are the governors for the time being of Voluntary, Foundation and Voluntary Controlled Schools; the Management Committee of an Arms Length Managed Association; and the Board of a company wholly owned by a Participating Member: see rule 6 of the Rules referred to below.

The Articles of Association include, in a schedule, the Rules, which may only be altered by ordinary resolution of the Participating Members in general meeting, unless it involves a variation to a Member’s obligations concerning Capital Contributions, in which case the Rules may be altered by ordinary resolution of the Members, provided that the Board has first approved the alteration.

The business of the Mutual is managed by the Board of Directors, the majority of whom are appointed by the Members with a minority of independent directors.

The Articles of Association and the Rules provide for the payment by Members or Participating Members of the following:

It is for the Board of LAML to determine the type of capital contributions required, their amount and the time at which they are made, and in the case of a Guaranteed Capital Contribution the form in which it is to be made. LAML is required to have capital as determined under the rules of the Financial Services Authority, which is referred to in the Articles of Association and in the Rules as the General Insurance Capital Requirement. Capital contributions are to be used to support the funding of LAML particularly with regard to the General Insurance Capital Requirement. This requirement is to be maintained in order of priority by drawing down on Guaranteed Capital Contributions, Paid Capital Contributions from Participating Members, Paid Capital Contributions from Members and, if the Board exercises its powers, by additional Paid or Guaranteed Capital Contributions from Participating Members.

By late 2006, Brent, in common with other London authorities, was dissatisfied with its existing insurance, which had been for some time placed with commercial insurance companies. Its dissatisfaction related to the lack of competition, the premiums it was paying and claims handling. Hence its consideration of the establishment of a mutual insurance company for it and other London authorities.

At some date after January 2007, Malcolm Davies, the Head of Risk and Insurance of the London Borough of Croydon, produced a document entitled “Establishment of the London Authorities’ Mutual Ltd (LAML): A Case Study”. He stated that ten London authorities, of which Brent, Croydon and Harrow were three, were committed to setting up LAML. Under the heading “What was the Catalyst for this Project?” and the sub-heading “Legal Powers”, he stated:

The Local Government Act 2000. The so-called “well-being powers” have been designed to effectively allowed (sic) local authorities to work together for any purpose likely to promote benefit, financial or other, in their own area.

Brent’s insurance policies were due to expire on 31 March 2007; it followed that any alternative insurance had to be in place by that date.

Duncan McLeod, the Director of Finance and Corporate Resources of Brent, produced a report for the meeting of the Executive of 9 October 2006. Its summary and recommendations were as follows:

1.0

Summary

1.1

This report describes the proposal to establish a “Mutual” insurance company controlled by, and run for the benefit of, participating London authorities. They would pool their risks and the costs of administration, whilst retaining the current levels of self-insurance. The Mutual will reinsure high-level risk and issue policies to its members annually. It will register with the Financial Services Authority as an insurance company and it will need to capitalise (by guarantees from member authorities) and appoint experienced executive directors as well as London Finance Directors to ensure it was run appropriately.

1.2

The Mutual is likely to generate economic and other knock-on benefits from financial savings and improved risk managements.

1.3

Participating authorities will be full members. The Mutual will be run by a board of directors comprising of directors appointed by the member authorities and a minority of independent directors.

1.4

The report therefore asks for approval to explore further the option of joining the proposed Mutual. Officers will report back to the Executive once the options have been explored further and legal advice has been obtained. It also asks for approval for the carrying out of a tender process in parallel with examination of the Mutual, should the Mutual proposal not proceed or not be ready to issue insurance contracts by 1^st April 2007.

2.0

Recommendations

2.1

The Executive agrees in principle to participate in the Mutual but subject to receiving a further report back from officers once they have fully explored this option and once external legal advice is obtained.

2.2

The Executive notes that the proposal is that the Council would become a full member of the company and would agree to purchase Brent’s corporate Property, Liability and Motor insurance requirements for a minimum period of one year through the Mutual with effect from 1^st April 2007. In the event that the Mutual is unable to assume risk by that date the Council would obtain interim cover through the tendering process described below.

2.3

The executive further notes that the proposal also is that the Council would participate in capitalising the company by way of a financial guarantee of no more than £1m.

2.4

The Executive gives approval to officers to the inviting of tenders for insurance services as an alternative to joining the London Authorities Mutual on the basis of the pre-tender considerations set out in sections 3-5 of the report and gives approval to officers to evaluate tenders on the basis of the evaluation criteria set out in section 5 of the report.

Under the heading “Detail”, paragraphs 3.1.3, 3.1.9 and 3.1.10 stated:

3.1.3

The steering committee and the LCE commissioned Charles Taylor Consulting PLC (CTC) to carry out a feasibility study using data from 26 authorities – London Boroughs, the City of London and the GLA. CTC reported that a mutual would offer its members savings of between 15% and 20% on average on insurance premiums for liability and property insurance and accumulate surpluses between £8.3 million and £15 million over the first five years of trading. The surpluses would be available to members and could be used to reduce premiums further.

3.1.9

In principle, these thresholds would remain, and the Mutual would only carry risk above these levels. The exact levels would be subject to the discussion on commercial terms between the Mutual members. In addition, the Mutual would reinsure the very highest level risks – for example, catastrophic risks where claims involve very large sums of money – with a commercial insurer, after a procurement exercise benefiting from the extra purchasing power of a group of local authorities. Therefore the Mutual itself would only have to cover mid-range claims, above the deductible limits and below the level for reinsurance. These would be met from the premiums paid to the Mutual and the capital held by it, or, if that should prove insufficient, by contributions from the participating authorities who have placed insurance with the Mutual that year. The Maximum amount levied on a participating authority in respect of any one financial year without a special resolution passed by the authorities at an annual or extraordinary general meeting is 50% of the premium paid by each authority in relation to that financial year. This right by the board of directors to raise additional premium income is considered to be very much a last resort. The intention is that the reinsurance protection afforded to the Mutual covers the risk of adverse years, therefore this right is not one expected to be exercised in practice.

3.1.10

The advantage for the authority in participating in a Mutual is the economic benefit both to the authority itself and to its area as a result of the reduction in premiums which frees up council money for other spending. There is an additional advantage for all the participants, because the Mutual can develop risk management standards for its members to encourage better risk management practice, and reduce unmanaged risk. The Mutual could offer financial inducements to participating authorities that met these standards.

Under “Capitalisation”, the report stated:

3.3.1

FSA registration requires the Mutual to be able to access a capital fund sufficient to cover its prospective liabilities. The size of the fund will depend on the number of members, but it is anticipated that the initial fund will be in the region of £5 million.

3.3.2

Authorities which become full members will be required to provide a financial guarantee of no more that £1m. It is believed from advice taken that the amount of the guarantee will not need to be provided for in the accounts of the authority. It would be regarded as a contingent liability with a note to the Council’s annual accounts explaining this. LAML will decide the basis on which authorities joining the Mutual will at a later time contribute their share to the on-going capitalisation requirements of the Mutual and such basis will recognise the benefits to the Mutual on the initial contributions.

“Financial implications” included:

The council would also seek to benefit from improving its risk management, with support from the Mutual. This will not only lessen the financial risk to the Mutual, but also help to reduce payments out of the Council’s self insurance Fund.

In relation to “Risk analysis”:

4.10.1

Risk: the risk of the cost of capitalisation

Advice from the Financial Services Authority is that initial capitalisation can be provided in the form of a guarantee by each authority which would be treated as a contingent liability rather than having to ‘tie up’ additional capital in the vehicle.

4.10.2

Risk: How will the Mutual guard itself against the risk of recapitalising?

The Board of Directors of the Mutual have the powers to require members to make supplementary calls in the event that the Mutual has or is considered to be likely to need additional resources.

It will be necessary for the Board of Directors to ensure that the Mutual, will underwrite prudently and will structure its reinsurance protection in such a way that will mean that the Mutual’s net assets are unlikely to be insufficient to meet its retained liabilities.

The Mutual will be exposed to the risk of failure of its reinsurance programme but will be placing its reinsurance with reinsurance markets whose Standard & Poor’s financial rating is A or above.

The legal implications of the proposal were addressed in part 6 of the report, of which paragraphs 6.1 and 6.5 are the most important.

Counsel instructed by those leading on the project and who specialises in local government law has advised that it is within the power of local authorities to participate in the Mutual. The primary source of legal power identified is section 2 of the Local Government Act 2000. Under section 2, a local authority has power to do anything which it considers is likely to achieve the promotion or improvement of the economic, social or environmental well-being of its area. The power may be exercised in relation to, or for the benefit of, the whole or part of the local authority’s area, or all or any persons resident or present in that area. A local authority may act outside its own boundaries provided the intention is to benefit its own area. The two limitations on the section 2 power set out in section 3 do not apply as there is no legal prohibition, restriction or limitation preventing the establishment of the Mutual, and the authorities are not establishing the Mutual to raise Money (whether by precepts, borrowing or otherwise). Counsel has advised that “person” includes the authority itself and that the promotion of the economic well being of the authority (through a reduction in the cost of insurance premiums which frees up council money to be spent for other purposes) is sufficient for the section 2 power to be available. This is a very broad interpretation of the section and is not based on any decided cases. The Borough Solicitor is seeking a further opinion on whether section 2 can be relied upon in these circumstances. It is anticipated that this further advice will be obtained on a joint basis with some other of the London Boroughs.

6.5

This authority therefore needs to satisfy itself that the anticipated financial and risk management benefits from participation in the Mutual are likely to achieve the promotion or improvement of the well-being of the authority, and, from the application of savings to other services or to a reduction in local taxation, the economic, social and/or environmental well-being of the area or of the persons resident or present in it.

The relevant part of the minutes of the meeting of the Executive of 9 October 2007 is as follows:

14.

London Authorities Mutual Insurance and Procurement of Insurance Services

This report described the proposal to establish a “Mutual” insurance company controlled by, and run for the benefit of, participating London authorities. They would pool their risks and the costs of administration, whilst retaining the current levels of self-insurance. The Mutual will reinsure high-level risk and issue policies to its members annually. It would register with the Financial Services Authority as an insurance company and it will need to capitalise (by guarantees from member authorities) and appoint experienced non-executive directors as well as London Finance Directors to ensure it was run properly. The report asked for approval to explore further the option of joining the proposed Mutual. Officers would report back to the executive once the options have been explored further and legal advice has been obtained. It also asked for approval for the carrying out of a tender process in parallel with examination of the Mutual, should the Mutual proposal not proceed or not be ready to issue insurance contracts by 1^st April 2007.

The Borough Solicitor referred to an addendum, circulated at the meeting, which amended section 5 of the report relating to the procurement timetable so that the process commences following the submission of a further report requesting final approval to be presented to the November meeting of the executive.

RESOLVED:

(i)

That approval be given in principle to participating in the Mutual but subject to receiving a further report back from officers once they have fully explored this option and once external legal advice is obtained;

(ii)

That it be noted that the proposal is that the Council would become a full member of the company and would agree to the purchase of Brent’s corporate Property, Liability and Motor insurance requirements for a minimum period of one year through the Mutual with effect from 1^st April 2007. In the event that the Mutual is unable to assume risk by that date the Council would obtain interim cover through the tendering process as described below;

(iii)

That it be further noted that the proposal also is that the Council would participate in capitalising the company by way of a financial guarantee of no more than £1m;

(iv)

That approval be given to officers to inviting tenders for insurance services as an alternative to joining the London Authorities Mutual on the basis of the pre-tender considerations set out in sections 3-5 of the report from the Director of Finance and Corporate Resources and approval be also given to officers to evaluating tenders on the basis of the evaluation criteria set out in section 5 of the report.

The Executive met again on 13 November 2006. Mr McLeod’s report recommended that the Executive agree to participate in establishing LAML provided the Borough Solicitor confirmed that satisfactory amendments to its constitutional documents had been agreed, as set out in the section of the report on legal implications. Paragraphs 3.3 and 3.4, under the heading “Capitalisation” and paragraph 4.1, under “Financial Implications”, stated:

The premium payment to Zurich in 2006/7 for the coverage that will be provided by the Mutual is £932k. A Minimum saving of 15% of this sum will accrue in 2007/8 under the terms of the Mutual. The amounts to £140k and the financial modelling assumes this will also occur in future years. The reduction can be utilised within the 2007/8 budget and beyond to fund priority growth, as agreed in the Corporate Strategy, or reduce overall expenditure and hence the level of Council Tax. It is hoped and expected that as underwriting profits are retained for the benefit of Members through lower premiums the savings will increase. This arrangement will therefore be of general benefit to Brent residents and link to the key objectives in the Community Strategy.

The paragraphs of the report on the legal implications of the proposal that are relevant to the present issues were the following:

6.1

The external legal advice referred to at the October Executive meeting has now been obtained in the form of two Counsel’s Opinion. One Opinion was from Nigel Giffin QC, on the subject of local authority powers to participate in the Mutual and the application of the EU Public Procurements rules, while the other was from Stephen Kenny QC, who specialised in insurance.

…

6.3

Nigel Giffin identified two separate legal powers as authorising participation in the Mutual. The first is section 111 of the Local Government Act 1972, which empowers a local authority to do any thing “which is calculated to facilitate, or is conducive or incidental to, the discharge of any of” its functions. Counsel considers that this power is firstly available to permit the arrangement of insurance against those losses and liabilities arising in the discharge of any local authority function, using a conventional insurer. He then concludes that section 111 also permits insurance through a mutual.

6.6

The second power identified is section 2 of the Local Government Act 2000, otherwise known as the well-being power. It allows a local authority to do any thing which the authority considers is likely to achieve the promotion of improvement of the economic, social or environmental well-being of its area. It is a very widely stated power. Clearly insuring against liability does not in itself promote or further well-being, but as it is hoped there will be around 15% savings in premiums, there will arguably be indirect promotion of well-being in the form of additional resources available for existing or new services. Paragraph 4.1 above indicates how indirect benefit will accrue to residents.

6.7

In conclusion … Nigel Giffin considered that section 111 was a better power to rely on than the well-being power, but that both could be relied upon (though not clear cut). In relying on the well-being power, the legislation states that it is necessary to have regard to government guidance on the exercise of the well-being power, and to Brent’s own community strategy. In relation to the guidance, it is noted that this refers to the power as “encouraging innovation” and also refers to the well-being power being used to allow the establishment of companies. There is nothing else in the guidance that renders doubtful reliance on this power. In relation to the community strategy, while the proposed Mutual does not specifically link in with any Key Objective, it does not undermine or contradict any part of it.

The meeting of the Executive on 13 November 2006 began at 7.00 pm and ended at 9.00 pm. The minutes show that 24 items were considered: an average of 5 minutes per item. In relation to LAML, the resolutions passed by the Exec, as recorded in the minutes, were as follows:

15.

London Authorities Mutual Insurance

At the Executive meeting on 9^th October a report entitled London Authorities Mutual Insurance and Procurement of Insurance Services was considered. This report gave further legal advice and sets out more information on the commercial terms. As a result of this updated information the report recommended the Council participate in establishing London Authorities Mutual Limited as a full member.

The Director of Finance and Corporate Resources advised that since the last meeting further legal advice had been received and that some further drafting changes may be required.

RESOLVED:-

i)

That approval be given to participate in establishing London Authorities Mutual Limited as a mutual insurance company provided that the Borough Solicitor confirms that satisfactory amendments to its constitutional documents have been agreed as set out in the legal implications;

ii)

That approval be given to purchase Corporate property, liability and motor insurance requirements for a minimum period of one year through the Mutual with effect from 1^st April 2007 and that an exemption to the tendering requirements of the Council’s contract standing orders be authorised for good operational and/or financial reasons as set out in paragraphs 3.1.2 – 3.1.3 and 4.1 -4.3 of the report from the Director of Finance and Corporate Resources;

iii)

That the Director of Finance and Corporate Resources be appointed as Brent’s member representative and be empowered to represent the interest of Brent at general meetings of the Mutual and to vote on behalf of Brent;

iv)

That approval be given to participate in capitalising the company by way of a financial guarantee of no more than £1m and the Director of Finance and Corporate Resource be authorised to take all necessary steps to achieve this;

v)

That the possibility of the Mutual not being operational in readiness to issue contracts for 1^st April 2007 be noted, and that a further report may be submitted to the February meeting to award a contract for insurance following a tender exercise that will run in parallel with the start-up and registration of the Mutual.

This minute was with minor changes copied from Mr McLeod’s second report. The minutes do not record how long was the discussion of this item; nor do Mr McLeod’s witness statements.

It was as a result of the decision of the Executive on 13 November 2006 that on 18 January 2007 Mr McLeod signed the Memorandum and Articles of Association of LAML. Brent thereby became a Member, but not yet a Participating Member, of LAML.

However, because it was uncertain whether LAML would be able to provide cover from the expiration of Brent’s current insurance policies, Brent issued the tender invitations referred to below, to which RMP responded.

As has been seen, the authority conferred by the executive of Brent related to the giving of a guarantee (in effect a binding financial undertaking) of £1 million; it did not authorise any payment by Brent to LAML by way of provision of capital (although of course if a call was made under the guarantee Brent would be obliged to pay it). However, on 14 March 2007, Mr McLeod requested the Chief Executive to authorise payment of the sum of £160,500 “on grounds of extreme urgency”, on the basis that Croydon, as lead borough, required that sum, as capital for LAML, in cleared funds by 16 March in order to complete the FSA registration process and to enable the company to place reinsurance and to issue insurance policies to Brent. The Chief Executive, in the exercise of his delegated powers, authorised that payment, and on 16 March 2007, after LAML had obtained the necessary authorisation from the Financial Services Authority, Brent paid the sum of £160,500, which Mr McLeod describes as “the capitalisation amount”, to LAML.

By a guarantee dated 27 March 2007, Brent undertook to pay sums on demand to LAML up to an aggregate amount of £609,500. On 30 March 2007, Brent paid four premiums totalling £520,328.14 for terrorism, liability, property and contents insurance. Brent, and Harrow, became Participating Members of LAML as of 1 April 2007.

On 9 April 2007, Brent issued a press notice announcing that LAML had opened for business. The only benefit it identified from Brent’s and Harrow’s placing business with the company was the reduction in premiums and therefore value for money.

Ten other authorities did not immediately become Participating Members, but they became Members; and they provided the capital contribution and the guaranteed capital contribution that enabled LAML to satisfy the capital requirements and to obtain the necessary authorisation of the Financial Services Authority to commence carrying on its insurance business.

On 7 November 2006, a pre-tender meeting was held between RMP and Marsh, who were Brent’s insurance brokers. RMP was advised that Brent “had committed to going into the Mutual”, but that there were hurdles to be overcome in relation to its formation, that in addition there was uncertainty as to whether LAML would be able to provide cover from 1 April 2007, and that there were certain insurance services that would not be covered by it in any event. For those reasons, a full tender exercise would be held.

In December 2006, Brent invited tenders for the provision of insurance cover from 1 April 2006. However, that tender exercise was abandoned by Brent because Marsh had used incorrect documentation.

On 1 February 2007, a replacement invitation to tender was issued. It was received by RMP on 21 February 2007. It required tenders by 23 February. RMP duly submitted its tender on that date. LAML did not participate in the tenders.

On 7 March 2007, Lynne Thorne of Marsh told Pam Saville of RMP, informally, that Brent would be awarding the insurance contract to LAML. As a result, Mr Janowicz of RMP searched Brent’s website, and learnt of the meeting of 13 November 2006. By letter sent on 19 March 2007, (but misdated 19 April 2007) RMP sought confirmation of the position. In her reply dated 27 March 2007, Candace Bloomfield of Brent stated, so far as relevant to the present issues:

I confirm that the contract award procedure for lots 1, 2, 3, 4, 6 and 7 as set out in the contract notice 2007/S 24-028970 has now been abandoned. The reason for this is that the Council are in the process of awarding these insurances to the London Authorities Mutual Limited (LAML), a mutual insurance company set up by a number of London local authorities. The one exemption to this is Lot 1, which the Council has decided to self-insure.

…

You were advised at our open day in November of the Council’s position in relation to the Mutual and of the possibility of some lots not being awarded as a result of the tender process.

There is no evidence that Brent ever compared RMP’s tender with the premiums required by LAML, and therefore no evidence that it considered the differences between the total actual and contingent financial exposure (by way of premium and the other liabilities referred to in paragraph 12 above) of Brent to LAML and the premiums required by RMP. This is, perhaps, because Brent regarded itself as committed to LAML by the decisions made on 13 November 2006.

By letter dated 4 May 2007, RMP’s solicitors raised the question of Brent’s breach of the Public Contracts Regulations 2006; they did not make any allegation of ultra vires. The Council’s reply, dated 23 May 2007, was similarly restricted. The issue of ultra vires was first raised in RMP’s solicitors’ detailed letter before claim dated 5 June 2007.

Both the judicial review claim and the Queen’s Bench Division claim were commenced on 6 June 2007.

Section 111 of the Local Government Act 1972 bears the side note “Subsidiary powers of local authorities” and is as follows:

(1)

Without prejudice to any other powers exercisable apart from this section but subject to the provisions of this Act and any other enactment passed before or after this Act, a local authority shall have power to do anything (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions.

(2)

…

(3)

A local authority shall not by virtue of this section raise money, whether by means of rates, precepts or borrowing, or lend money except in accordance with the enactments relating to those matters respectively.

In conjunction with section 111 it is necessary to consider section 1 of the Local Government (Contracts) Act 1997:

Contracts for provision of assets or services

1 Functions to include power to enter into contracts

(1)

Every statutory provision conferring or imposing a function on a local authority confers power on the local authority to enter into a contract with another person for the provision or making available of assets or services, or both, (whether or not together with goods) for the purposes of, or in connection with, the discharge of the function by the local authority.

(2)

Where–

(a)

a local authority enters into a contract such as is mentioned in subsection (1) (“the provision contract”) under any statutory provision, and

(b)

in connection with the provision contract, a person (“the financier”) makes a loan to, or provides any other form of finance for, a party to the provision contract other than the local authority,

the statutory provision also confers power on the local authority to enter into a contract with the financier, or any insurer of or trustee for the financier, in connection with the provision contract.

(3)

…

(4)

In this Act “assets” means assets of any description (whether tangible or intangible), including (in particular) land, buildings, roads, works, plant, machinery, vehicles, vessels, apparatus, equipment and computer software.

(5)

…

Section 2 of the Local Government Act 2000 confers what is known as the “well-being” power:

2 Promotion of well-being

(1)

Every local authority are (sic) to have power to do anything which they consider is likely to achieve any one or more of the following objects—

(a)

the promotion or improvement of the economic well-being of their area;

(b)

the promotion or improvement of the social well-being of their area, and

(c)

the promotion or improvement of the environmental well-being of their area.

(2)

The power under subsection (1) may be exercised in relation to or for the benefit of—

(a)

the whole or any part of a local authority's area, or

(b)

all or any persons resident or present in a local authority's area.

(4)

The power under subsection (1) includes power for a local authority to—

(a)

incur expenditure,

(b)

give financial assistance to any person,

(c)

enter into arrangements or agreements with any person,

(d)

co-operate with, or facilitate or co-ordinate the activities of, any person,

(e)

exercise on behalf of any person any functions of that person, and

(f)

provide staff, goods, services or accommodation to any person.

(5)

The power under subsection (1) includes power for a local authority to do anything in relation to, or for the benefit of, any person or area situated outside their area if they consider that it is likely to achieve any one or more of the objects in that subsection.

(6)

Nothing in subsection (4) or (5) affects the generality of the power under subsection (1).

Section 2 is subject to the provisions of section 3:

3 Limits on power to promote well-being

(1)

The power under section 2(1) does not enable a local authority to do anything which they are unable to do by virtue of any prohibition, restriction or limitation on their powers which is contained in any enactment (whenever passed or made).

(2)

The power under section 2(1) does not enable a local authority to raise money (whether by precepts, borrowing or otherwise).

(3)

The Secretary of State may by order make provision preventing local authorities from doing, by virtue of section 2(1), anything which is specified, or is of a description specified, in the order.

(4)

Before making an order under subsection (3), the Secretary of State must consult such representatives of local government and such other persons (if any) as he considers appropriate.

(5)

Before exercising the power under section 2(1), a local authority must have regard to any guidance for the time being issued by the Secretary of State about the exercise of that power.

(6)

Before issuing any guidance under subsection (5), the Secretary of State must consult such representatives of local government and such other persons (if any) as he considers appropriate.

(7)

…

(8)

In this section “enactment” includes an enactment comprised in subordinate legislation (within the meaning of the Interpretation Act 1978).

Section 4 makes provision for the preparation by local authorities of their strategy for the exercise of their well-being power:

(1)

Every local authority must prepare a strategy (referred to in this section as a community strategy) for promoting or improving the economic, social and environmental well-being of their area and contributing to the achievement of sustainable development in the United Kingdom.

(2)

A local authority may from time to time modify their community strategy.

(3)

In preparing or modifying their community strategy, a local authority–

(a)

must consult and seek the participation of such persons as they consider appropriate, and

(b)

must have regard to any guidance for the time being issued by the Secretary of State.

(4)

…

During the course of argument, reference was also made to section 151 of the Local Government Act 1972 Act. It is as follows:

Without prejudice to section 111 above, every local authority shall make arrangements for the proper administration of their financial affairs and shall secure that one of their officers has responsibility for the administration of those affairs.

This provision does not confer any powers on a local authority, but imposes a duty for the purpose of ensuring that its financial affairs are properly conducted. Any doubts as to the effect of section 151 are allayed by sections 113 and 114 of the Local Government Finance Act 1988. Section 113 requires the officer appointed for the purposes of section 151 to be a qualified accountant; section 114 imposes on him specific duties to report any unlawful expenditure. This view of the section is also confirmed by Lord Ackner’s statement in Hazell v Hammersmith LBC [1992] 1 AC 1 at 47C:

Section 151 is … concerned with administrative matters ... I am not persuaded it provides any “function” within the meaning of section 111.

It therefore adds nothing to the question whether section 111 or section 2 conferred on Brent the power it sought to exercise.

I have had the benefit of substantial skeleton arguments on behalf of the Claimants, Brent and Harrow and LAML itself. Since I am probably no more than the juge rapporteur for the Court of Appeal, who will have both these skeleton arguments and additional skeleton arguments pointing out my errors, I hope I shall be forgiven if I do not set out in what will in any event be a long (and perhaps over-long) judgment every point that has been raised.

It is common ground that Brent, as a body constituted by statute, has only such powers as may be vested in it by enactment as a body owing its constitution to a statute which defines its objects and powers: see for the general principle Amalgamated Society of Railway Servants v Osborne [1910] AC 87, 94 which was applied to the council of a London Borough in Hazell v Hammersmith LBC [1990] 2 QB 697 at 779. The municipal corporation of the borough similarly has only such powers as are vested in it by statute: see the decision of the House of Lords in Hazell v Hammersmith LBC [1992] 1 AC 1 at 39c-43d.

It is also common ground that it is for the Council to show affirmatively that its acts in issue are authorised: Attorney-General v Fulham Corporation [1921] 1 Ch 441 at 450.

On behalf of Brent, Mr Giffin QC relied first on section 111 of the Local Government Act 1972, and secondly on section 2 of the Local Government Act 2000. Perhaps more logically, Mr Goudie QC put section 2, which confers substantive powers, first, and section 111, which confers incidental or subsidiary powers, second. (Section 111 is declaratory of the common law, but it is convenient, if somewhat inaccurate, to refer to its conferring powers rather than confirming that local authorities have such powers.) Mr Giffin’s and Mr Goudie’s different orders reflected, I think, their different views as to the respective strengths of their cases under those provisions. Initially only Mr Giffin relied on section 1 of the Local Government (Contracts) Act 1997, but Mr Goudie subsequently supported his submissions on it.

At a high level, the issues before me are:

There is a significant difference between section 111 and section 1 of the 1997 Act on the one hand and section 2 on the other. The powers conferred by section 111 and section 1 are generally independent of the intentions of the local authority. The local authority either has, or has not, the power in question. The test for the existence of the power is objective: in section 111 the statutory wording is “calculated to facilitate …”, not whether it is intended to facilitate etc.. The power may be incidental to a substantive function that can only be exercised if the local authority has a particular intention or opinion, but that complication is irrelevant in this case.

The power conferred by section 2, on the other hand, is dependent on the local authority considering that the exercise of the power in question “is likely to achieve” one or more of the objects specified in subsection (1). In relation to section 2, therefore, two subsidiary questions arise:

In their skeleton argument, counsel for Brent stated the general issue to be whether Brent has the vires to participate in the establishment of LAML. While it may not affect the outcome of the present claims, I think that this formulation overstates the issue. As a matter of fact, Brent was one of the founding members, and one of the first two Participating Members, of LAML, and therefore it is right to say that it participated in its establishment. However, it seems to me that the questions of vires I have to consider apply equally to a decision to become a Participating Member of a company such as LAML that has already been established.

Very sensibly, neither Mr Giffin nor Mr Goudie pressed me to refuse permission on the ground of delay on the question of vires. Now that the vires of a local authority to become a Participating Member of LAML has been questioned, it is essential to those concerned in its management and the local authorities insured by it, as well as the FSA, to have the matter settled one way or another. No one has suggested that RMP’s case is unarguable: after four days of serious submissions, no one could make that suggestion. Moreover, the implication of RMP’s case is that public moneys (i.e., the payment of £160,500 on 16 March 2007) have been misapplied and contingent liabilities unlawfully, and invalidly, incurred. It would not be appropriate for the Court, by refusing permission, to close its eyes to a possible misapplication of public funds.

However, Mr Giffin submitted that it would be inappropriate to grant any extension of time to RMP if its case ultimately depended on whether Brent had formed the requisite opinion to enable it to rely on the well-being power. In that event, Brent’s participation in LAML would not be outside the powers available to it; there would have been only a defect in the steps required validly to exercise those powers.

I do not think that there has been delay on the part of RMP such as should debar it from obtaining permission. Brent contends that time began to run on 9 November 2006, when its Executive gave approval to participation in establishing LAML subject to satisfactory amendments to its constitutional documents and to participation in capitalising the company by way of a financial guarantee of no more than £1million. It is true that proceedings for declaratory or prohibitory relief could have been commenced immediately after that decision, or indeed immediately after the pre-tender meeting of 7 November 2006. However, I accept Mr Howell’s submission that the date from which time starts to run for the purposes of CPR Part 54 is the date of the unlawful act, not from a resolution to do it, particularly if it is (as this one was) subject to conditions: see R (Burkett) v Hammersmith and Fulham LBC [2002] UKHL 23, [2002] 1 WLR 1593. It was unclear whether in practice LAML would be effective until it received authorisation from the Financial Services Authority (which it did not receive in writing until March 28 2007): hence the tender process. RMP were not kept informed of what was happening in respect of LAML, and the fact that it was asked to tender again in February 2007 suggested that Brent would place its insurance on the basis of the tenders received. RMP did not receive formal notice that the contract award procedure had been abandoned and that Brent was progressing arrangements for insurance with LAML until it received Brent’s letter dated 27 March 2007. It is not surprising or excessive that, in a case raising issues as substantial as the present, proceedings were not commenced until June 2007.

For these reasons, I grant permission to RMP to apply for judicial review on the ground that Brent did not have the power, whether under section 111 or section 2 or otherwise, to become a Participating Member of LAML. What relief is appropriate in the light of my judgment will be determined after the parties have had an opportunity to consider it and to make their submissions on the question of relief.

Although Mr Howell went first, it is more convenient to summarise the contentions of Brent and the Interested Parties first, since the burden of showing vires is on them.

For Brent, Mr Giffin’s principal submissions were as follows:

Mr Giffin’s submission on section 1 of the Local Government (Contracts) Act 1997 as summarised in his skeleton argument is as follows:

In any case, whilst Brent’s preferred analysis is that the entirety of its arrangements with LAML should be considered as a whole, and are together authorised by s 111 of the 1972 Act, it would not assist RMP even if the contract of insurance itself were to be treated as a distinct and discrete element of the arrangements. That is because the contract of insurance would be a contract for the provision of (insurance) services, entered into for the purposes of, or in connection with, Brent’s discharge of its functions. As such, it would now be expressly authorised by s 1(1) of the Local Government (Contracts) Act 1997. Applying the approach of Lord Templeman in Hazell (that is, that the word “functions” embraces all the duties and powers of a local authority – “the sum total of the activities Parliament has entrusted to it”), entering such a contract with LAML under s 1 of the 1997 Act would itself be a “function” of the authority for the purposes of s 111. It then follows that the other steps which Brent had to take in order to become a Member of LAML, and to allow LAML to do business, were steps which were incidental or conducive to, or calculated to facilitate, Brent’s function of entering that contract.

Mr Giffin’s submissions were adopted by the Interested Parties. In addition, in their detailed grounds the Interested Parties relied on section 151 of the Local Government Act 1972. This provision was not relied upon in oral submissions.

Mr Howell’s principal submissions were the following:

On section 2, Mr Goudie submitted:

Mr Giffin’s submissions on section 2 were broadly similar. However, he understandably placed emphasis on the rationale for the establishment of LAML and for Brent’s decision to participate in its establishment, being that they would bring about both cost savings and better risk management practices which Brent considered would lead to direct and indirect benefits to its area. Better risk management would benefit the area economically, both by reducing the cost of insurance to Brent and thereby enabling it to spend more on local services, and also by reducing losses and accidents, to the benefit of its area and persons in it. Hence its participation was authorised by section 2.

For RMP, Mr Howell submitted:

In considering the issues before me, I start from the position that the transactions of an elected local authority are if possible to be upheld. Both section 111 and section 2 should be given sensible and liberal interpretations and applied generously. That is in accordance with authorities extending back over a century. In Crédit Suisse v Allerdale Borough Council [1997] QB 306, at 331, Neill LJ, in a judgment with which Peter Gibson LJ agreed, said:

The genesis of section 111 is well known. It seems clear that when the doctrine of ultra vires was first being considered in the 19th century in relation to the powers of railway companies which had been incorporated by statute the vires of the company were construed strictly. In the course of time, however, a more liberal approach was adopted. In  Attorney-General v. Great Eastern Railway Co.   (1880) 5 App. Cas. 473, 478 Lord Selborne L.C. said that the doctrine of ultra vires “ought to be reasonably, and not unreasonably, understood and applied, and that whatever may fairly be regarded as incidental to, or consequential upon, those things which the legislature has authorised, ought not (unless expressly prohibited) to be held, by judicial construction, to be ultra vires.” Lord Blackburn's speech, at p. 481, was to the same effect, and both these passages were cited by Lord Templeman in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1, 29.

The two most recent authorities relied upon by Mr Giffin and Mr Goudie, namely Akumah v Hackney LBC [2005] UKHL 17, [2005] 1 WLR 985, and Re Northern Ireland Human Rights Commission [2002] UKHL 25, [2002] HRLR 35, support Brent’s and the Interested Parties’ submission as to the liberal approach required when applying section 111; but they also show its limitations. In Akumah, the House of Lords held that “The regulation and control of parking on a local authority's housing estate was inherent in the management, regulation and control of the houses on the estate, pursuant to section 21(1) of the Housing Act 1985, and facilitated and/or was conducive or incidental to the local authority's discharge of its function of the management of the estate, pursuant to section 111(1) of the Local Government Act 1972”. Lord Carswell gave the only substantive opinion of the Appellate Committee. He held that parking control was within the scope of the local authority’s statutory function of the management, regulation and control of (the) local authority’s houses”, and that the matter was put beyond doubt by section 111:

23.

… Even without the benefit of previous expressions of judicial opinion, I should have no hesitation in holding that the regulation and control of the parking of vehicles in a housing estate facilitates and/or is conducive or incidental to the council's discharge of its function of the management of houses in the estate. My grounds for so holding are those which I have expressed in para 22 of this opinion, which, put shortly, are the running of an important part of the day-to-day life of the estate, the facility for tenants and their visitors to park vehicles in an orderly manner and the prevention of unauthorised persons from parking on the estate.

He referred to previous authority on the scope of section 111:

24.

In deciding this issue one has to determine what are the relevant functions of the council. In Hazell v Hammersmith and Fulham London Borough Council [1992] 2 AC 1, 29 your Lordships approved the statement of Sir Stephen Brown P in that case in the Court of Appeal [1990] 2 QB 697, 785, when he said:

“We agree with the Divisional Court that in [section 111(1)] the word 'functions', which is accompanied by no statutory definition, is used in a broad sense, and is apt to embrace all the duties and powers of a local authority: the sum total of the activities Parliament has entrusted to it. Those activities are its functions. Section 111(1) confirms that, subject always to any contrary statutory provision, a local authority has power to do all the ancillary things requisite for carrying out those activities properly. This construction accords with the codifying purpose for which the subsection was enacted.”

Lord Templeman, with whose speech the other members of the House agreed, also stated in the immediately preceding passage that section 111(1) embodies the principles relating to the powers of a company set out in  Attorney General v Great Eastern Railway Co  (1880) 5 App Cas 473. Lord Selborne LC said in that case, at p 478, that the doctrine of ultra vires:

“ought to be reasonably, and not unreasonably, understood and applied, and that whatever may fairly be regarded as incidental to, or consequential upon, those things which the Legislature has authorized, ought not (unless expressly prohibited) to be held, by judicial construction, to be ultra vires.”

Lord Blackburn said, at p 481:

“where there is an Act of Parliament creating a corporation for a particular purpose, and giving it powers for that particular purpose, what it does not expressly or impliedly authorize is to be taken to be prohibited … those things which are incidental to, and may reasonably and properly be done under the main purpose, though they may not be literally within it, would not be prohibited.”

25.

Applying these principles, I consider that the functions of a local housing authority can properly be said to include the activities of regulating and controlling the parking of vehicles on housing estates, in order to safeguard and improve the amenity of life for its tenants and to facilitate their access to and enjoyment of their houses and flats.

With respect to the contrary argument advanced in that case, the conclusion of the House of Lords, in agreement with the lower courts, is unsurprising. The control of parking on a housing estate is inherent in the management of the estate. The distance between the function and the ancillary power was miniscule.

In the Northern Ireland Human Rights Commission case, the Commission had among its express functions the obligation to “promote understanding and awareness of the importance of human rights in Northern Ireland”. It proposed to intervene in an inquest to make submissions on human rights principles. The coroner refused its intervention, on the basis that it had no power to intervene in an inquest. The House of Lords held that such an intervention was within its incidental powers. I should have thought that its proposed intervention was intended to promote the understanding of the coroner and those involved in the inquest of the relevant human rights principles and their importance, and was therefore clearly within its incidental if not express powers. That would, however, be to take an over-liberal approach to the principle that a statutory body has such powers as are incidental to the performance of its functions, because Lord Hutton thought the argument finely balanced, and that the outcome depended on whether a strict or a liberal approach should be taken to the application of the ancillary powers principle, and Lord Hobhouse dissented from the majority of the Appellate Committee. As I read Lord Nolan’s speech, he also considered that it was only because the principle is to be applied “in a liberal and not in a narrow way” that he upheld the power of the Commission to intervene in the inquest. To my mind, this case demonstrates that the liberal approach to section 111 may not go very far.

Furthermore, to the extent that one can discern a legislative policy, the enactment of section 2 indicates expressly a Parliamentary intention to extend the powers of local authorities.

In addition, the Court should accept the commercial judgment of Brent that it was in its financial interests to become a member of LAML and take insurance from it. The question is whether it had legal power to do so. Lastly, I am conscious of the complications that would arise from a finding that Brent acted ultra vires. The doctrine that a corporation’s powers are confined today has fewer admirers than once it did. Only too often, losses suffered as a result of a finding of ultra vires are those of innocent third parties. In the case of companies incorporated under the Companies Acts, the doctrine has been emasculated by statute. But it survives in relation to local authorities.

I accept many of Mr Giffin’s and Mr Goudie’s submissions under this head. In this connection, I have already referred to the proper approach to the application of section 111. I accept that early nineteenth century authorities must be considered with caution, because the incidental powers principle came to be more liberally applied in the course of the century. I accept that common practice may be taken into account in deciding whether a power is incidental, and that the Court should consider benevolently any power the exercise of which would be beneficial for a local authority. However, these submissions only go so far.

Mr Giffin pointed out that in the absence of a statutory duty to insure, a local authority may choose to self insure, and thereby expose itself to the risk of considerable losses. Similarly, a local authority may choose to accept an excess under any insurance policy it takes, which represents an amount which is self-insured; the amount of any excess may be discretionary, and unless the local authority’s decisions are perverse they cannot be challenged.

“Self insurance” is, however, a misnomer. Self insurance is no insurance. Furthermore, self insurance does not involve incurring liability for the losses of others. A decision to self-insure does not involve the incurring of any liabilities, but only the retention of the financial burden of the local authority’s own losses and liabilities.

I similarly accept that the size of the premium that a local authority agrees to pay for insurance is a matter for its commercial judgment, and its decision cannot be impugned in judicial review proceedings, save possibly on the ground of perversity, which is not suggested in this case. Furthermore, premiums payable to a commercial insurer are likely to increase if the claims experience of the insured is relatively high. Moreover, the premium payable by the insured is liable to be increased in subsequent insurance periods in the event of bad claims experience not simply in relation to the local authority insured in question, but generally in relation to other insureds. Thus the local authority insured is liable to share, to some extent, in the misfortunes of other insureds. However, the insured is free to change insurers from time to time, and market forces may prevent an insurer from increasing premiums, or at least limit its ability to increase them.

Nonetheless, if I try to consider the financial realities, I find that there is a fundamental difference between the creation of or participation in LAML and normal commercial insurance. An ordinary insurance policy confers cover in return for a fixed or determined premium. During the period of the insurance, the insured’s liability to its insurer is normally fixed, and even if not fixed (as where there is provision for a reduction of the premium in the event of there not being a claim, or where the premium depends on the amount or value of specified transactions) it is nonetheless determined by the contract of insurance. The insured bears no financial liability for the adequacy of the capitalisation of the insurer or the maintenance of its capital, and during the currency of its policy its liability is not liable to increase on account of losses suffered by the insurer on other accounts.

These features of commercial insurance contrast with the position of Brent as a Participating Member of LAML. Quite apart from its liability to pay a Supplementary Call, which may double the amount of its premium, it is liable to provide Paid Capital Contributions and Guaranteed Capital Contributions. Those liabilities are incurred so that LAML can carry on business as an insurer. They are not the price of insurance cover; they are not payable under the insurance contract but pursuant to the contract constituted by the Memorandum and Articles of Association of LAML and Brent’s status as a Participating Member of the company. Any guarantee executed by a Participating Member is itself a separate contract. Quite apart from the provisions of the Memorandum and Articles of LAML, this point is demonstrated by the fact that Brent paid the sum of £160,500 to LAML not as premium but as “the capitalisation amount”. As a Member, a local authority is obliged to pay a Paid Capital Contribution irrespective of whether or not it takes insurance from LAML and becomes a Participating Member.

These differences arise from the fact that by becoming a Member of LAML Brent has become involved, albeit through a separate legal entity, in the provision of insurance rather than the taking of insurance. Brent has purported to incur legal liabilities that will be directly affected by any losses suffered by LAML on other accounts, if those losses affect its satisfaction of the capital requirements of the FSA or its solvency. Conversely, if the claims experience of LAML is good, Brent stands to benefit from a reduction in the premiums it pays, and even, if sufficient reserves can be built up, a reduction in its Paid Capital Contributions or its Guaranteed Capital Contributions.

It is clear that a local authority has power to take insurance, generally under section 111 and in some cases by virtue of a specific power. Some of those specific powers were referred to during the hearing before me. They are powers are to insure, i.e., to obtain insurance cover, not to provide insurance. Even the specific powers are conferred as incidental powers. Thus, section 2(2) of the Local Authorities (Land) Act 1963 confers power to insure buildings or works erected, constructed or carried out under the power conferred by subsection (1); section 7(1)(c) confers power to insure buildings or works on land acquired by a local authority under the power conferred by section 7(1)(a), but not on other land. Section 140 of the Local Government Act 1972 confers power to enter into a contract of accident insurance against risks of any member of the authority meeting with a personal accident while engaged on its business, but does not authorise the authority to provide the insurance itself.

The effect of section 111 was considered by the Court of Appeal in the “swaps” case, Hazell v Hammersmith and Fulham LBC [1990] 2 QB 697. Giving, the judgment of the Divisional Court, Woolf LJ (as he then was) said, at 722:

This subsection puts in a statutory form the long-established principle that local authorities have implied power to do anything which is ancillary to the discharge of any of their functions.

The fact that subsection (1) is expressly made subject to “the provisions of this Act” make it clear that it is important to construe section 111(1) in its context. The reference to expenditure, borrowing or lending, etc., within the brackets in the subsection do not themselves confer any power to expend, borrow or lend money, etc., but only make it clear that the fact that those activities are involved does not prevent the activities being within the power of the authority which are authorised by this subsection.

The critical part of the subsection are the words “calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions.” Before the subsection can authorise an activity which is not otherwise authorised there must be some other underlying function which is authorised, to the discharge of which, the activity will facilitate or be conducive or incidental.

What is a function for the purposes of the subsection is not expressly defined but in our view there can be little doubt that in this context “functions” refers to the multiplicity of specific statutory activities the council is expressly or impliedly under a duty to perform or has power to perform under the other provisions of the Act of 1972 or other relevant legislation. The subsection does not of itself, independently of any other provision, authorise the performance of any activity. It only confers, as the sidenote to the section indicates, a subsidiary power. A subsidiary power which authorises an activity where some other statutory provision has vested a specific function or functions in the council and the performance of the activity will assist in some way in the discharge of that function or those functions.

It is also convenient to refer again to the judgment of Neill LJ in the Allerdale case:

It is clear from the speech of Lord Templeman in  Hazell’s case [1992] 2 A.C. 1 and from the speech of Lord Lowry in  Reg. v. Richmond upon Thames London Borough Council, Ex parte McCarthy & Stone (Developments) Ltd.  [1992] 2 A.C. 48 that in considering the implied powers of a local authority under section 111 of the Act of 1972 it is first necessary to identify the relevant statutory functions. The word “functions” embraces all the duties and powers of a local authority, that is, the sum total of all the activities Parliament has entrusted to it: see Lord Templeman in  Hazell’s case [1992] 2 A.C. 1, 29F. In Hazell’s case the question was whether a swap transaction was calculated to facilitate or was conducive or incidental to the discharge of the local authority's function of borrowing. In the Richmond  case [1992] 2 A.C. 48 the question was whether charging for pre-application planning advice facilitated or was conducive or was incidental to the council's planning functions.

Save where the taking of insurance is expressly authorised by statute, the taking of insurance is a paradigm subsidiary power or function within the meaning of the sidenote and that adopted by Woolf LJ. A local authority does not exist in order to be insured; it takes insurance in order to assist its fulfilment of its substantive functions: in the words of the statute, because the taking of insurance is “calculated to facilitate, or is conducive or incidental to, the discharge” of one or more of those functions. The establishment of or participation in an insurer for the purposes of taking an insurance policy from it is at best subsidiary to the subsidiary, or, to use the phrase more often used, ancillary to the ancillary. Even where there is an express power to insure, I do not think that participating in LAML is authorised by section 111. In Hazell, Lord Woolf at 724F referred to the payment of interest as an incident of borrowing. Similarly, the payment of a premium is an incident of insuring. Participating in LAML so as to reduce the amount of premiums, which involves paying Paid Capital Contributions and giving a guarantee of a Guaranteed Capital Contribution, is not incidental to the taking of insurance. In Hazell, Lord Templeman at 30A thought it relevant that a swap transaction was “a separate collateral contract which may be undertaken long after a borrowing has been effected”. The Memorandum and Articles of Association of LAML are a separate contract from the contract of insurance; Paid Capital Contributions may be required of and paid by a Member who is not an insured, and Paid and Guaranteed Capital Contributions may be required of a Participating Member after a policy of insurance has been issued. The amounts of such contributions and the timing of a demand for them are independent of any insurance policy or the individual claims experience under that policy.

It is clear that if a local authority has power to do something, it may do so in association with other authorities. But this does not assist if what is being done is outwith the powers of that authority.

Similarly, if I assume that a local authority may form a company to carry out its functions, this again does not assist if the business of the company is not an authorised function of the local authority. In fact, the power to carry out functions through a company has been circumscribed by section 70 of the Deregulation and Contracting Out Act 1994 and the regulations made under it. Section 70(2) provides:

If a Minister by order so provides, a function to which this section applies may be exercised by, or by employees of, such person (if any) as may be authorised in that behalf by the local authority whose function it is.

It follows that, apart from any other statutory restriction, absent an applicable order under this subsection, a local authority cannot exercise any of its functions by means of a company. There is no order applicable to this case.

I do not think that any of the contentions put forward by Brent and the Interested Parties (whether under section 111 of the 1972 Act or section 1 of the 1997 Act or section 2 of the 2000 Act) depends on LAML being a mutual insurance company membership of which is restricted to other local authorities. If section 111 authorises a local authority to become a member of an insurance company on terms similar to those contained in the Memorandum and Articles and Rules of LAML, the power extends to a mutual the membership of which is not so restricted. The fact that LAML is a mutual of London local authorities evokes sympathy but in my judgment is irrelevant to the legal issues before me.

Mr Giffin’s submission that the cases in which something has been held to be unauthorised by section 111 are generally cases in which the action of the local authority was incompatible with an express or implied legislative restriction on its powers is well founded. However, that fact is adventitious. Section 111 does not authorise a local authority to do whatever is not prohibited. Section 111 requires a relationship between the incidental power and an authorised function of a local authority. (I use the adjective “incidental” to denote that which is calculated to facilitate, or is conducive or incidental to, the discharge of a function.) The submissions of Mr Giffin and Mr Goudie that (to quote Mr Goudie’s skeleton argument) “the Courts … may only hold an authority’s activities outside the ambit (of section 111(1)) where those activities are contrary to some statutory provision or are designed to circumvent some restriction placed on their powers” is inconsistent with the statutory wording.

As I have stated, the taking of insurance is clearly incidental to the functions of a local authority. The provision of insurance to others is not. In becoming a member of LAML, and becoming a Participating Member, Brent became involved in the provision of insurance. In my judgment, becoming a member of LAML went beyond the incidental, and was not within the power conferred by section 111.

In Small v Smith 10 App Cas 119, a building society had advanced money on a second mortgage. Subsequently, the borrower’s estates were sequestrated. In order to prevent a sale of the mortgaged property at a loss to the society, it gave a guarantee to the first mortgagee of the repayment of his mortgage. The grant of the guarantee was held to be ultra vires the society, as being beyond its incidental powers. Lord Selborne and Lord Blackburn, whose dicta as to the liberal application of the ancillary powers principle are so often cited, were parties to the decision. Lord Watson said, at 139:

It is said, however, that they have that power by implication in the special case of realization, whenever it becomes expedient and desirable on the part of the society that they should purchase time from the prior bondholder. Now, I quite admit that circumstances might render that a very proper and a very expedient step in the case of an individual sui juris, or in the case of directors who have unlimited powers to conduct business according to the rules which guide individuals; but that is not the question here. Is it in any fair sense of the word incidental, in the sense of being necessarily incidental, to the realization of the security? The rules, as the Lord Chancellor has pointed out, contain a great many very specific provisions upon the subject of realization. None of those provisions point to the exercise of such a power as this; and it humbly appears to me that the purchase of time by granting an obligation of guarantee is a transaction altogether independent of, and quite separate from, the realization of a security.

In Attorney-General v Manchester Corporation [1906] 1 Ch 643, the local authority had power to use its tramways “for the purpose of conveying and delivering animals, goods, minerals, or parcels.” The corporation worked a large system of tramways. They had commenced, or advertised their intention to commence, a general parcels delivery business within and beyond the area covered by their tramways, not confined to parcels and goods carried on their tramways. The Attorney-General challenged their power to do so. Whether they had the requisite power depended on the common law principle that a corporation has implied power to do that which is incidental to its express powers: the principle which, in relation to local authorities, has been enacted in section 111. Farwell J held that the proposed activity was ultra vires the local authority. He said, at 656:

The question, as is pointed out in Attorney-General v. London County Council [1901] 1 Ch. 781, is not whether the business can be conveniently or advantageously conducted with the tramway business, but whether it is by necessary implication incidental or accessory to it, and I think that it is not. To collect and deliver parcels for the tramway is fairly incidental; to collect and deliver parcels outside the radius of the tramway, and without any connection with the tramway, is not incidental to the tramway business, but distinct from it. At the best it could only be said to be incidental to the incidental, and such reasoning would authorize a railway company to carry on a coal merchant's business, because they must buy coal; but this was restrained in  Attorney-General v. Great Northern Ry. Co. (1889) 23 Q. B. D. 492. For the same reasons I hold that the corporation cannot act as general agents for the railway companies, but only in respect of tram-borne goods.

The principle that the implied power does not extend to the incidental to the incidental has been restated in relation to section 111. In McCarthy & Stone (Developments) Ltd. v Richmond upon Thames LBC [1992] 2 AC 48, developers challenged the legality of a decision by the local planning authority to levy a charge on developers for inquiries relating to speculative development or redevelopment proposals. The charge was held to be ultra vires. Lord Lowry said, at 74H:

As the Court of Appeal have said, … the power to give pre-application advice is neither a duty nor a discretionary express power, but is a subsidiary power arising by virtue of section 111(1) (which has codified the common law), because it is calculated to facilitate, or is conducive or incidental to, the discharge of one of the council's functions. To charge for the exercise of that power is, at best, incidental to the incidental and not incidental to the discharge of the functions.

See to similar effect Hobhouse LJ in Crédit Suisse v Allerdale Borough Council [1997] QB 306 at 361E.

It follows from these cases that an incidental power, conferred by section 111, cannot itself be a “function” for the purposes of that provision. If it were, of course, there could be a perpetuum mobile, or infinite regression, from incidental power to incidental power, as each in turn was converted into a function.

In my judgment, to establish or to become a member of a mutual insurance company such as LAML for the purpose of obtaining insurance is at best incidental to the incidental power to insure (in the sense of obtaining insurance cover), and is not incidental to the discharge of any function of a local authority. The financial guarantee (the subject of the resolution of 9 October 2006) and the payment of £160,500 made to LAML, comparable to the transactions struck down (in the sense of declared ultra vires) in the Allerdale, Waltham Forest and Morgan Grenfell cases referred to below, highlight this, notwithstanding that they were provided pursuant to the obligations contained in LAML’s memorandum and articles. Brent could not provide financial assistance to a company for it to do what Brent could not lawfully do, i.e., to provide insurance.

In Attorney-General v Fulham Corporation [1921] 1 Ch 440, the local authority had power to establish baths, wash-houses and open bathing places. It established a wash-house at which persons coming there had facilities for washing their clothes. A public notice was issued by the corporation inviting persons to become its customers in a new enterprise, and setting out a new scheme under which persons could bring a bag of clothing to the wash-house, and call for them when washed. Alternatively, customers could at a small additional charge have their bags collected and returned by the corporation's van. The local authority was restrained from implementing the scheme described in the notice, which was held to be outside the power to establish, and therefore to operate, wash-houses. In a famous passage, Sargant J said, at 453:

Under the new system which has been inaugurated what has been provided for the persons who become customers is, in my judgment, not facilities for doing their own washing, but the washing itself. It seems to me that, in view of the fact that the control of the articles in question is entirely parted with, that the articles are washed up to a certain point absolutely and entirely irrespective of the labours or attention or care of the customers, and that the articles when that process has been gone through are redelivered in their semi-finished state to the customers, it is impossible to say that the Council have been doing anything else except the washing of the clothes down to a certain point for the particular customers. Now is that something which may fairly be regarded as incidental to or consequential upon the provision of facilities for washing? In my judgment, it is not. It appears to me to be a completely different enterprise, namely the business of washing to a particular degree or stage.

It is clear to me that what the Council is doing is not only the carrying on of a business of a kind, but something - which is the real point - which is not ancillary to or consequential upon that which it is entitled to do under these Acts of Parliament. It has been contended that what is being done is not a business or the carrying on of a business, and cannot be regarded as such, because it has not been carried on at a profit. This is of no consequence …

It seems to me that participation in LAML is far less ancillary or consequential to the substantive functions of Brent than was the business contemplated and restrained in that case.

In Crédit Suisse v Waltham Forest LBC [1997] QB 362 and in Morgan Grenfell v Sutton LBC [1996] EWCA Civ 797, (1996) 25 LGR 574, guarantees and indemnities given to banks that had provided finance to a company (in the Waltham Forest case) and to a housing association (in the Morgan Grenfell case) that had entered into arrangements with local authorities to acquire housing and to let it to the local authority so that it could discharge its housing functions were held ultra vires. This was in part because the schemes amounted to attempts to evade statutory restrictions on local authority guarantees and finance, but also (and independently) because the grant of the guarantees and indemnities were not within the scope of section 111, because the power to do so would be ancillary to the ancillary power of renting housing for it to be let by the local authority. In these cases, and also in the Allerdale case, in which the Court of Appeal was identically constituted to that in the Waltham Forest case and gave judgment on the same day, schemes were struck down the object of which was to enable the local authority to fulfil a function. Mr Howell submitted that the present case is a stronger case for the scheme being ultra vires the local authority, since the object of the present scheme is to enable the company, LAML, to provide insurance not only to Brent but also to other local authorities.

In Morgan Grenfell v Sutton LBC, Peter Gibson LJ refuted the suggestion that the decision in Waltham Forest depended on the finding that the council’s motivation was to avoid local authority financial and funding controls. He added, at 584 to 585:

When Parliament intended to confer a power on a local authority (or a statutory body with housing functions like the Housing Corporation) to give a guarantee or an indemnity, it did so expressly. It is simply inconceivable that Parliament ever intended by s.111 (which does no more than put in statutory form what would be implicit at common law) to confer on a local authority power to incur a financial obligation to an unlimited extent by granting a guarantee or indemnity when it has so clearly and in such detail regulated the local authority's powers of expenditure and borrowing and the granting of financial assistance. It is only in cases covered by specific provisions expressly allowing guarantees and indemnities that the local authority can do so. If the local authority cannot bring the case within such a provision, to grant a guarantee or indemnity is beyond its powers.

…

Mr. Mann drew attention to the surprising fact that Sutton had at the start of this appeal not challenged the finding of the judge that the guarantee and the indemnity were incidental to Sutton's duty to house the homeless and so prima facie were within s.111, and taken out of it only by ss.58 and 60 and s.73. With prompting from the court Miss Appleby belatedly applied to serve a respondent's notice challenging that finding and we gave leave. On this point I cannot agree with the judge. First, it is inconsistent with the statutory scheme, as already explained. Secondly, to adopt what Hobhouse L.J. pointed out in the Waltham Forest case at p.188, the only thing which was incidental to the actual discharge of such a function, viz. the letting out of housing to the homeless, was the renting by Sutton of the properties from WHA. The guarantee and the indemnity were at best incidental to the incidental and that is too remote (see R v Richmond L.B.C, Ex p. McCarthy & Stone [1992] 2 A.C. 48).

In Hazell, the Waltham Forest and the Morgan Grenfell cases, the transactions of the local authorities in question were criticised as speculation. They were not, of course, speculation in the sense of being intended to gain large profits at high risk. They were speculative because they exposed the local authorities to the losses of a business other than their own. There is an echo here of the old authority of Colman v Eastern Counties Railway Company (1849) 10 Beav 1, in which the defendant company proposed to guarantee the dividends and capital of a steam packet company that would operate between the terminus of the railway in Harwich and Europe, on the basis that its operations would bring traffic to the railway and add to its profits. The guarantee was held to be ultra vires. The Master of the Rolls, Lord Langdale, said:

Ample powers are given for the purpose of constructing and maintaining the railway, and for doing all those things required for its proper use when made; but I apprehend, that it has nowhere been stated that a railway company, as such, has power to enter into all sorts of other transactions. Indeed, it has been very properly admitted that railway companies have no right to enter into new trades or businesses not pointed out by their Acts; but it has been contended that they have a right to pledge, without limit, the funds of the company for the encouragement of other transactions, however various and extensive, provided that the object of that liability is to increase the traffic upon the railway, and thereby to increase the profit to the shareholders. There is, however, no authority for anything of that kind.

Colman was referred to in Allerdale. It was one of the early cases on what became section 111. Lord Langdale formulated the principle as follows:

. . . I am clearly of opinion, that the powers which are given by an Act of Parliament, like that now in question, extend no farther than is expressly stated in the Act, or is necessarily and properly required for carrying into effect the undertaking and works which the Act has expressly sanctioned.

This formulation is perhaps narrower than section 111, but no doubt has been expressed as to the correctness of the decision in Colman. I do not think that there is any relevant distinction between establishing or participating in a company in order to increase one’s own profits and doing so in order to reduce one’s costs, and specifically the cost of insurance.

Cases such as Allerdale, Waltham Forest and Morgan Grenfell, as well as Small v Smith, show that a transaction may be ultra vires although it forms part of a larger scheme parts of which are intra vires. A local authority may rent homes to the homeless; but it nonetheless could not enter into an arrangement with a company or housing association that provided such homes to it under which it guaranteed their liabilities to third parties. While, therefore, I accept Mr Giffin’s submission that it is necessary to have regard to the entirety of a scheme, it is also necessary to consider whether individual transactions within it are authorised.

I accept that Brent expected to reduce its insurance costs when it decided to participate in LAML. It intended that the company would be prudently and ably administered, with an appropriate reinsurance programme designed to limit the exposure of the Participating Members. But there is no such thing as a business without risk. Indeed, I was informed that a major insured loss has already been incurred by Harrow. By participating in LAML, Brent speculated on its success as an insurance company. The concerns expressed in Colman, Hazell, Waltham Forest and Morgan Grenfell seem to me to be applicable in the present context.

Turning to section 1 of the Local Government (Contracts) Act 1997, that Act was passed in order to remove uncertainty as to the enforceability of private finance initiative arrangements, which as far as I am aware did not involve the creation of insurance companies. It was not referred to in either Mr Davies’s report referred to in paragraph 15 above or in Brent’s reports. Mr Giffin relies on it in effect to promote an incidental power (to insure) into a function to which section 111 applies.

The first question is whether a contract of insurance is “a contract … for the provision or making available of assets or services, or both”. Mr Giffin accepted that it is not a contract for the provision or making available of assets: money is not an asset within the meaning of the section. He submitted that an insurer does provide services, by way of dealing with contract renewals, claims handling, and the like. However, I do not think that a contract of insurance is a contract for the provision or making available of such services within the meaning of section 1. Such activities are incidental or consequential to the primary provision of the contract, which is to provide a financial indemnity or to pay an ascertainable sum of money in defined circumstances; and this is often the only obligation of the insurer. In other words, the contract is to provide money (which for these purposes is not an asset) in the event of the occurrence of the insured contingency. Many insurance contracts contain no obligation on the part of the insurer to deal with renewals or to assist in claims handling. In relation to the latter, what the insured wants, and what he contracts for, is payment of his claim, and the insurer may not be involved in handling the claim in any other way than agreeing or negotiating its payment. The policy wordings of LAML, which were disclosed at a late stage, contain no relevant contractual obligation on its part. They confer rights on LAML, for example to take over negotiations of any claim made against an insured that is the subject of indemnity under the policy, but a right conferred on LAML is not a service provided or made available to the local authority under the contract.

It is true that a number of statutory provisions refer to insurance services. In some cases, “insurance services” is a defined term, as in section 18 of the Disability Discrimination Act 1995 (since repealed) and section 11 of the Disability Discrimination Act 2005, which inserts an interpretation of “group insurance arrangement” into section 68(1) of the earlier Act. Such use of the term is not of assistance where there is no such definition. Section 22 of the Consumer Protection Act 1987 refers to “the provision of insurance services”. However, its context is very different from the present. The danger of deriving a meaning of services in section 1 from another statute is demonstrated by that provision, which also refers to banking services, yet I do not think that it could not be suggested that a contract under which a bank makes a loan is a contract for the provision of services for the purpose of section 1 of the 1997 Act. The same comment applies to the Public Contracts Regulations 2006, and the Directive which similarly refer to both banking and insurance services. I make it clear, however, that neither Mr Giffin nor Mr Goudie sought to rely on any other statutory provision for these purposes.

The effect of section 1 in a case in which the contract is a contract for the provision or making available of assets or services is, I think, not clear, but in view of my conclusion as to its inapplicability to a contract of insurance I need arrive at no final view. It may well be that, just as an incidental power is not a function for the purposes of section 111, it is not a function for the purposes of section 1; or, to put it another way, section 111 is not a statutory provision for the purposes of section 1(1) properly construed. Mr Giffin put the matter conversely: he submitted that “entering a contract (of insurance) pursuant to s 1 is indeed discharging a function within s 111, because (per Lord Templeman) an authority’s functions for the purposes of s 111 include all its powers and duties – the only likely exception being that the use of s 111 itself cannot be regarded as a function for the purposes of s 111, because of the unending regression that would entail.” This submission too promotes an incidental power into a function, something I doubt Parliament would have intended. It also faces the hurdle that, in my judgment, even where there is an express power to insure, participating in LAML, and the entering into of guarantees such as a Guaranteed Capital Contribution, are not authorised by section 111.

In connection with section 1, Mr Howell sought to rely on what was said by the Minister for Local Government and Housing, Hilary Armstrong, on 8 July 1997 in the debate on the third reading of the Local Government (Contracts) Bill on the scope of what became section 1. Mr Giffin submitted that this evidence was irrelevant and inadmissible. It is unnecessary for me to resolve this issue.

Lastly in connection with section 111, both Brent and the Interested Parties relied on the history of Municipal Mutual Insurance Ltd. Its first appearance was in Municipal Mutual Insurance Ltd v Pontefract Corporation (1917) 116 LT 671, a claim by the company against the local authority for payment of insurance premiums. In his judgment, Sankey J set out the history of the company. In 1902 it had been started, like LAML, with the object of getting a cheaper rate of insurance, originally at least of public buildings. By 1917 some 500 public authorities were insured with the company. Interestingly, the insurance policy that was the subject of the Pontefract case was for a period of 5 years, and was extended for a further period of 5 years. The claim for the premiums was disputed on the ground that the contract of insurance was ultra vires the local authority, not because it had no capacity to enter into such a contract, which was not suggested, but on the ground (so far as a legally arguable ground can be discerned) that it was an unreasonably improvident contract: what would later be referred to as Wednesbury unreasonable. The defence failed.

The Company appeared again in the decision of the House of Lords in Municipal Mutual Insurance Ltd v Hills (1932) 48 TLR 301, [1932] All ER Rep 979. Since 1913, the business of the company had extended to other forms of insurance, and in particular employers’ liability insurance. The issue was whether the surplus arising from its insurance business was subject to income tax. That depended on whether the surplus arose from mutual insurance. The House of Lords held, affirming the decision of the Commissioners for the Special Purposes of the Income Tax Acts and the courts below, that it did not. It was not suggested that any question of ultra vires arose. The report in the All England Reprint, from which the following extracts have been taken, includes both the case stated and the first instance decision of the Commissioners:

There is no doubt that those concerned in the promotion and in the subsequent extension of the scope of this company intended it to be (a) an association of owners or occupiers of buildings carrying on business mainly for the purpose of the mutual insurance of its members against damage by or incidental to fire, and (b) an association of employers carrying on business mainly for the purpose of the mutual insurance of its members against liability to pay compensation or damages to workmen employed by them. But, in the fast instance, no provision was made for the establishment of any identity between the members of the insuring association and the persons insured, and though in 1918 it was provided that members of the association must be holders of either fire or employers' liability policies there is still no necessity that policy holders of either class should be members of the association. The articles of association make and maintain throughout a distinction between members and fire policy holders, and make no mention of employers' liability policy holders except as being eligible for membership. The position is thus different from that considered in the cases of New York Life Insurance Co v Styles (1889) 14 App Cas 381, Cornish Mutual Assurance Co, Ltd v IR Comrs [1926] AC 281 and Jones v South-West Lancashire Coal Owners' Association [1927] AC 827 in which the policy holders dealt with were ipso facto members of the association and interested in its funds.

Membership of this company is a barren honour. The members have no privileges except a possible liability to pay 10 pounds on winding-up, and a smaller voice in the management than is given to the fire policy holders. As members they cannot receive any benefit from any surplus of contributions except protection against a call under their guarantee.

It is common ground that the fire business is a purely mutual business. The fire policy holders, irrespective of membership, have votes, they can appoint trustees, who form the majority of the managing trustees, they are entitled to have the surplus assets divided amongst them on a winding-up, and they receive progressive reductions of their premiums according to the age of their policies. On the other hand, it is admitted that any surplus arising on miscellaneous business done by the company with persons who are not members, fire policy holders, or employers' liability policy holders is a trading profit, and, as such, assessable to income tax.

… In our opinion no distinction can be drawn between the miscellaneous business and the employers' liability business, or between the different classes of persons taking out policies under these heads. In no case is any redundant part of the premiums returnable to the contributors, as contributors, either in the shape of a reduction of premiums or in cash on cessation of the policy or on winding-up. The fire policy holders may receive a portion of a surplus of miscellaneous or employers' liability premiums, but only as fire policy holders and not as contributors of those premiums, and any benefit that the miscellaneous or employers' liability policy holders may receive from the accumulation of a surplus of premiums is indirect only and of the same nature as the advantages which any insured person may receive from the accumulation of reserve by an ordinary trading company. They accordingly hold that the surplus arising from employers' liability and miscellaneous business was taxable as a trading profit.

Lord Warrington approved the judgment of the Special Commissioners and of Rowlatt J. His speech includes the classic definition of mutual insurance:

Mutual insurance business is now perfectly well known. It consists essentially in the association of a number of persons who insure each other against certain risks by contributing by way of premiums to a common fund to be used, together with further contributions if necessary, for the purpose of indemnifying any member or members who may have suffered injury in consequence of a risk insured against, any surplus being either carried forward or used to reduce future premiums as the members may determine.

It is now settled by the decisions above referred to and is not disputed that the mere carrying on of such a business is not a trade, nor are the surpluses profits for the purposes of income tax.

Lord Thankerton said:

The accounts of the company show that the fire policyholders alone receive progressive reductions of their premiums according to the age of their policies, and, as already stated, the fire policy holders are alone interested in any surplus assets arising on the winding-up of the company, such surplus being divided among the holders of such policies at the commencement of the winding-up in proportion to the amounts of the aggregate premiums paid by them on fire policies at any time effected by them with the company.

The appellants contended that, it being admitted that the fire policy holders in substance were the members of the company, any business done by them with the company whether it was fire, employers' liability or miscellaneous, was mutual business …

I find myself quite unable to reconcile the disposal of the surplus arising on the employers' liability and miscellaneous policies held by fire insurance policy holders in the present case with the tests of mutuality ... The premiums on these policies are fixed and not fluctuating; the fire policy holders, as holders of employers' liability or miscellaneous policies, have no interest or share in any surplus arising on such policies; such surplus belongs to all the fire policy holders, irrespective of whether they hold any other policies or not. The surplus arising on employers' liability and miscellaneous policies held by fire policy holders is dealt with in exactly the same way as the surplus arising on such policies held by persons who are not fire policy holders, which is admittedly subject to income tax. I agree with Rowlatt, J, when he says:

“I cannot see the slightest distinction between what is made out of a member in respect of non-fire business and what is made out of a stranger in respect of non-fire business; qua that business the member is a stranger. He is not, as a miscellaneous policy holder, getting any share in the miscellaneous policy business.”

Lord Macmillan said:

The appellant company carries on several branches of insurance business, classified as fire insurance, employers' liability insurance and miscellaneous. Notwithstanding its name, it is admitted that some of its business is not conducted on a mutual basis, and the constitution of the company differs in several respects from that of the ordinary mutual insurance company. In particular its policy holders do not by the mere fact of taking out policies become members of the company, and membership is limited to the original subscribers of the memorandum of association and such persons as may be admitted on approved application in writing. The position of a member seems indeed to offer little attraction, for apart from certain voting power, his only privilege consists of a possible liability to contribute 10 pounds in the event of liquidation. If the contributions of policy holders yield a surplus after meeting claims, the members do not benefit by it except as a protection against the remote possibility of a call under their guarantee. The actual business of the company is conducted by a board of managing trustees. A feature of the constitution is the distinctive and predominant position accorded to the holders of fire policies, who form a privileged class by themselves. Their names are entered in a special register and in addition to rights in the matter of voting and appointing trustees they are entitled to have the surplus assets divided among them on a winding-up while they and they alone benefit directly by any surplus arising in the conduct of any branch of the company's business.

It appears therefore that the position of the policy holders of Municipal Mutual Insurance Ltd was very different from that of Brent as a Participating Member of LAML. Many of them were not members of the company. Even the members had no liability other than to pay up to £10 on a winding up. (This may well have been a reason for Municipal Mutual’s failure to satisfy its solvency margin). It appears from the speech of Lord Thankerton that the company had been exempted by the Board of Trade from the statutory deposit in respect of its employers’ liability insurance business when it first undertook such business, and there may well have been no statutory capital requirement when it first commenced business in 1903. The members did not guarantee the liabilities of the company; they did not guarantee to pay it any sum required by it to carry on its business; there is no evidence that they paid any sum in order to incorporate the company, although it may be assumed that a nominal sum was paid by the 8 local authorities whose members or officers were, as appears from the speech of Lord Warrington, the original members of the company. It is not surprising, in these circumstances, that there was no challenge to the capacity of local authorities to take their insurance from the company.

The last appearance of Municipal Mutual Insurance was in Attorney-General v. Crayford Urban District Council [1962] Ch 575. The local authority had entered into an arrangement with the company for the collective insurance of its tenants' household goods and certain personal effects and fixtures and fittings of the tenants or for which they were responsible, and invited the tenants to join the scheme. A number of tenants joined the scheme and their premiums were collected weekly with the rent by an officer of the authority which forwarded them monthly to the insurance company. Most tenants did not insure their effects independently and such tenants, if they lost their effects, were likely to default in payment of their rent. The Attorney-General, at and by the relation of a trade union the members of which were employees of another insurance company, challenged the power of the local authority to establish and to administer the scheme. The Court of Appeal held that the scheme was within the powers of the local authority. The primary basis of the decision, it seems to me, was that the activity challenged was within the express power of “general management, regulation and control of houses provided by” the authority. Be that as it may, Mr Goudie commented that if the Attorney-General had considered that the local authority’s participation in the Mutual was ultra vires, he would have so submitted. I agree; but in view of the differences between its constitution and that of LAML, I can infer nothing from that.

I conclude that Brent had no power under section 111 to participate in establishing LAML or to become a Participating Member of that company, or to make the payment of the capitalisation amount or to grant the guarantee to the company.

Section 2 of the Local Government Act 2000

The terms of section 2 are very wide, and designedly so. The Explanatory Notes to the Act issued by the Department of the Environment, Transport and the Regions (DETR), with the Office of the Secretary of State for Wales, state:

4.

Part I of the Act gives local authorities powers to take any steps which they consider are likely to promote the well-being of their area or their inhabitants. It also places authorities under a duty to develop community strategies, together with other local bodies, for this purpose. These provisions are intended to give local authorities increased opportunities to improve the quality of life of their local communities.

…

14.

Section 2 provides local authorities with a power to take any steps which they consider are likely to promote or improve the economic, social or environmental well-being of their local community, subject to the restrictions contained in section 3.

15.

Together, these sections allow local authorities to undertake a wide range of activities for the benefit of their local area and to improve the quality of life of local residents, businesses and those who commute to or visit the area. This is intended to clear up much of the uncertainty which currently exists about what authorities can do. Sections 2 and 3 allow authorities to take any action, unless it is subject to statutory prohibitions, restrictions or limitations specifically set out in legislation. The intention is to broaden the scope for local authority action while reducing the scope for challenge on the grounds that local authorities lack specific powers.

16.

Amongst other things, section 2(3) means local authorities must consider the objectives and priorities contained in their community strategy before they take action under the power in section 2(1). This is in no way meant to limit the scope of the power in section 2(1). Rather it is designed to encourage authorities to think about the broad goals and objectives contained in the community strategy, before deciding how best to use their well-being power.

17.

Additionally, section 2(4) makes clear that the power in section 2(1) enables authorities to work in partnership with other bodies. For example, it allows authorities to assist other statutory bodies to discharge their functions, or to exercise those functions on their behalf. This is intended to help local authorities and other statutory service providers to work together to provide services in ways which meet the needs of communities.

The Explanatory Notes were referred to by Silber J in R (Theophilus) v Lewisham LBC [2002] EWHC 1371 (Admin), [2002] 3 All ER 851 and by the Court of Appeal in R (Khan) v Oxfordshire County Council (Office of the Deputy Prime Minister intervening) [2004] EWCA Civ 309, [2004] LGR 257 for the purposes of clarification and as an aid to construction of the statutory provisions, but I do not think that the statements in them go beyond the provisions of the Act itself. Silber J in Theophilus, and Elias J in R (J) v Enfield LBC, Secretary of State for Health intervening [2002] EWHC 432 (Admin), [2002] LGR 390 similarly referred to and relied upon the Guidance issued by the Secretary of State under section 3(5) and entitled “Power to promote or improve economic, social or environmental well-being”. It is convenient to refer to some extracts from the guidance:

7.

The new power is wide-ranging, and enables local authorities to improve the quality of life, opportunity, and health of their local communities. …

10.

The breadth of the power is such that councils can regard it as a “power of first resort”. Rather than searching for a specific power elsewhere in statute in order to take a particular action, councils can instead look to the well-being power in the first instance and ask themselves:

•

Is the proposed action likely to promote or improve the well-being in our area? …

•

Is the primary purpose of the action to raise money? …

•

Is it explicitly prohibited on the face of other legislation?

•

Are there any explicit limitations and restrictions on the face of other legislation? … If the answer to the first question is 'Yes' and to the next two questions 'No', then a council can proceed with the proposed action, subject to the answer to the fourth question, i.e. any restrictions or limitations that may apply by virtue of being spelt out on the face of other legislation.

14.

It is obviously not possible at this stage to envisage every way in which authorities might choose to exercise the power. A power that encourages innovation has an inherent potential to be used in new and unforeseen ways

If I consider the last two questions posed in paragraph 10 of this Guidance, Brent’s participation in LAML was not prohibited by other legislation or subject to any relevant explicit statutory limitations or restrictions. I do not think that its primary purpose was to raise money: its primary purpose was to save money, by reductions in the cost of insurance. Saving money, by reducing expenditure, is not raising money, which involves obtaining money from someone else.

However, it is also, as stated above, a pre-condition to the section 2 power that the local authority consider that the transaction in question is likely to achieve the promotion or improvement of the economic, social or environmental well-being of its area. Brent was originally advised that it was itself a possible beneficiary of that power: i.e., that section 2 empowered it to do anything that it considered likely to achieve the promotion or improvement of its economic well-being. Mr Giffin expressly did not submit that the well-being of a local authority is a sufficient object of the section 2 power, and Mr Goudie did not make such a submission, and in my judgment he was correct not to do so. This contention, rightly questioned in Mr McLeod’s report for the meeting on 9 October 2006, in my judgment does not accord with the natural reading of section 2. The financial well-being of a local authority is not the same as the economic, social or environmental well-being of its area. I reject the submission made that on the basis that a local authority is a “person”, and is present in its area, it is a legitimate object of the well-being power. The natural reading of section 2 is that a person who is the object of the power is a person other than the local authority. I cannot read section 2 as authorising a local authority to do whatever it considers likely to promote its own economic well-being. When I consider the consequences of this contention, I conclude that they are so unreasonable that Parliament could not have intended them. If well founded, this interpretation would mean that a local authority would have the power to engage in any business (or indeed any speculation) anywhere of any kind alone or with anyone else provided it thought it would be profitable. If Parliament had intended to confer such an unlimited power, it would have done so in very different terms.

It follows that the fact that Brent expected that its insurance would be less costly if it participated in LAML cannot, without more, justify the power under section 2. I also think that Mr Goudie’s submission, summarised at paragraph 64(f), is too widely expressed. It is one thing for a local authority to give financial assistance to a company so that it can carry out activities that benefit the local authority’s area; it is another to give financial assistance to a person in order to obtain a financial reward which can in turn be used to benefit its area; and it is a yet further step away from the well-being power if there is no assurance that the profits will be so used.

In any event, I must consider whether the evidence establishes that Brent considered that participation in LAML was likely to achieve the promotion or improvement of the economic, social or environmental well-being of its area. It relies on the resolution passed on 13 November 2006. Regulation 3(2)(b) of the lengthily named Local Authorities (Executive Arrangements) (Access to Information) (England) Regulations 2000 required a written statement to be made as soon as reasonably practicable after the meeting, to include a record of the decision and of the reasons for the decision. That record, in the shape of the minute set out under paragraph 26 above, did not mention that consideration. It is true that paragraph 6.6 of Mr McLeod’s report for that meeting of the Executive referred to an arguable benefit in that lower premiums could result in additional resources being available for services, but the resolution passed does not reflect that, and apart from the witness statement of Mr McLeod to which I refer below there is no evidence that the Executive accepted that. The report did not inform the Executive that it should consider the matters specified in section 2(1), or ask them to decide which of the paragraphs of that subsection might be applicable. The primary legal basis for the proposal set out in that report was section 111, and the Executive may have accepted that that was sufficient without considering the arguable ground under section 2. Moreover, they had previously been advised that it was sufficient that Brent itself would benefit financially. The duration of the meeting and the substantial business transacted at it add to the difficulties of inferring that the Executive must have considered and agreed this basis for their decision.

Mr McLeod, in his witness statement of 7 November 2007, refers to paragraph 6.5 of the report for the meeting of 9 October 2006 and states that “it was certainly my understanding that members of the Executive were satisfied as set out in that paragraph”. He does not set out the basis for his understanding. A difficulty is that that report indicated that it was sufficient if the proposed transaction would promote the economic well-being of Brent itself. Another is that when the matter came back before the Executive on 13 November 2006 the legal advice had changed: section 111 had become the primary source of the local authority’s power; and so one cannot know if any prior satisfaction continued. Similarly, in relation to the meeting of 13 November 2006, Mr McLeod states that nothing was said to suggest to him that members of the Executive did not wish to rely on both the statutory powers, or that they took a different view from that he understood them to take on 9 October; but that may simply be because nothing was said. I regret that this evidence does not establish that Brent formed the requisite opinion.

I do not consider the absence of an appropriate reference to one or more of the pre-conditions for a section 2 power in the minutes of the meeting of 13 November 2006 of itself precludes Brent from proving that it did satisfy one of those pre-conditions; however, the requirements of the 2000 Regulations lends weight to the contention that they did not do so. I have considered the evidence as a whole; but the absence of the statement required by the 2000 Regulations adds weight to the Court’s reliance on the minutes as an accurate and comprehensive statement of the decision reached and the reasons for it.

It follows that Brent has not established that its participation in LAML was made in the exercise of the power conferred by section 2.

In these circumstances it is I think unnecessary for me to decide whether Brent’s transactions with LAML, if otherwise valid, were unauthorised by reason of the matters referred to in paragraphs 68 and 69 of RMP’s skeleton argument.

It is also strictly unnecessary for me to consider whether a local authority may participate in LAML pursuant to its well-being power, but I feel that I should express my opinion. I do not think that it follows from my above finding that no local authority has power to participate in LAML. I think that a local authority could pursuant to its well-being power enter into a contract with a company for the provision of advice as to the avoidance of damage to property in its area through fire or accident, or for the avoidance of accidents to persons living or working there. In other words, a local authority could purchase what has been referred to as risk management services. If so, it could enter into a contract with a mutual insurance company under which such services and insurance would be provided; and for that purpose it could provide guarantees and otherwise provide financial assistance to the company pursuant to section 2(4). The local authority would have to consider seriously whether its agreement with the company would be likely to achieve one or more of the statutory objects and decide that it would do so: in a case in which the effect of a transaction on well-being of the local authority’s area is not obvious (where the primary object of the transaction is insurance of the liabilities of the local authority itself) a vague and unspecific assumption, such as that referred to in the reports prepared for Brent, may be insufficient. There is no evidence before me that LAML undertook to provide any specified services in this respect, and no evidence as to who, with what qualifications, was to provide the risk management service on behalf of LAML or as to its proposed content. Nor is there any evidence that any such services have in fact been provided.

It is a principle of local authority finance that it should be conducted on an annual basis. This year’s council tax payers should pay for this year’s expenditure. Of course, this does not mean that a local authority cannot incur liabilities that it will have to meet in the future. If it did, no local authority could enter into a substantial building contract, or borrow money on any medium or long term. The liabilities of a Participating Member of LAML cannot be determined on an annual basis, since insurance years may remain open for several years; until they are closed, the liability for a Supplementary Call, which may amount to the total of the premiums already paid, continues. In addition, losses in any year may lead to subsequent increases in Paid or Guaranteed capital contributions. However, no statutory restriction or limitation that limits the well-being power in a relevant respect has been cited, and in these circumstances I see no basis for the statutory power to be restricted by this general principle.

The decision as to the relief to be granted on the basis of my above judgment has been left over for further argument, on a date to be fixed.