Local authorities and commercial contracts Guy Adams, St John s Chambers 1. This is a very big subject. What I am not going to do is dive deep into the technicalities of the various procurement regimes, which local authorities are required to adopt in relation to various different types of dealing. Rather I am firstly going to attempt an overview of a local authorities common law obligations, when entering into any private arrangement with a contractor. Secondly I will be looking at what matters it can raise in its defence and when those matters might be successful, if and when something has gone wrong with the procurement process and the local authority is being sued in the civil courts. In doing so I will also be considering the capacity of a local authority and will touch on the potential effect of the general power of competence in the Localism Act 2011. 2. I chose this subject because I am currently very familiar with it due to being in a case where all these issues are raised, other than anything arising out of the Localism Act 2011 as the case pre-dated the passing and implementation of the relevant provisions in February this year. It would have been nice to have been speaking against the background of a comprehensive victory in the Court of Appeal. As matters turned out the judgment, which was handed down just over 2 weeks ago on 13th November 2012, went the other way and the notice of appeal is on the point of being lodged with the Supreme Court, if it has not already been done. I will therefore have to be circumspect about expressing any opinions I might hold on some of these issues, as, depending upon whether permission is granted for an appeal, they may be re-argued in due course and in any event remain live. I can however explain some of the background to the case and the issues that arose in it, particularly as the approach taken by the Court of Appeal is bold and not without significance. It will also provide a useful framework for this talk. Page 1 of 11
Charles Terence Estates Ltd v Cornwall Council - the factual background 3. The case is Charles Terence Estates Ltd v Cornwall Council. It concerns 30 long leases seemingly entered into by Cornwall Council's predecessor authorities Penwith District Council and Restormel Borough Council. The circumstances in which those leases came to be sealed are unusual to say the least and hopefully unique. Charles Terence Estates, which I will refer to as "CTE", is a property developer. It shares shareholders and directors with another company PAS Ltd, which provides property management services and support services specifically tailored to housing vulnerable homeless adults, who in particular may have drug or alcohol addictions. PAS Ltd were promoting a scheme, which would allow intensive support to initially be provided to homeless persons placed in temporary accommodation with a view to enabling those persons to move on to other accommodation, with a much lower level of support and at an affordable rent, which would enable those persons to reenter the workplace without facing a formidable benefits hurdle to doing so. The funding for the support would come from the Supporting People programme, their proposal for the funding of the accommodation and property management was more innovative. 4. Housing benefit could at the time be claimed by way of rent-rebate subsidy of up to 100% of a relatively high cap set by central government for temporary accommodation in properties leased by local authorities outside the Housing Revenue Account regime. Appreciating the level of housing benefit which could be claimed, if not the details of the HRA regime, the proposal was that if the full amount of the housing benefit could be reclaimed and approximately 1/3 deducted to cover voids and maintenance, then 120 per week per bedsit would be available to pay rent for the properties. At this rate properties could be purchased by CTE to provide HMOs, which would provide the accommodation with high levels of support, and let for 25 year terms to the councils. Further rents at this level would generate a sufficient cashflow to provide an "investment mechanism" to buy further properties which could be let to the councils and the occupants at area reference rents, which were about 55 a week ("move-on" accommodation). Page 2 of 11
5. This seemed an attractive solution to Penwith and Restormel (perhaps too good to be true), which both had difficulty in housing the homeless and had a high spend on bed and breakfast accommodation, for which it was not possible to reclaim 100% of the cost of the accommodation up to the cap, rather only 10% over the specified threshold and would help the officers meet government targets. The officers overlooked the rather obvious point that non-hra RRS was only available for accommodation leased for terms of up to 10 years. In their enthusiasm they presented reports to the relevant committees, which particularly in the case of Penwith were described by my learned leader as "woefully inadequate, indeed misleading", but in any event both sets of reports envisaged that the scheme would also involve the purchase of specified number of units of "move-on" accommodation at affordable rents, which was reflected in the resolutions of the relevant committees. 6. In the event the officers of each council entered into the leases at multiples of 120 per week per unit without obtaining any commitment from CTE to providing any move-on accommodation, perhaps placing unwarranted trust and confidence in the private sector supplier because this was regarded as "partnership working". The scheme was a great success, at least from CTE's point of view, and CTE rapidly bought up 6 HMOs in Restormel, 5 of which were formerly council owned stock which the housing association had been unable to keep in repair, and in Penwith a large number of ordinary 4 or 5 bedroom properties, purchased for sums in the order of 300-350,000, converted into HMOs and let to Penwith on 25 year leases for rents of between 30,000 and 50,000 per annum increasing with RPI. Not only that, the purchases and conversions were in part funded by substantial grants made by the authorities, seemingly without regard to what powers they had to make such grants. 7. When Cornwall took over from its predecessor authorities these transactions were flagged up as potentially problematic. The matter ultimately came before the courts because, Cornwall, unable to get an account, which it considered satisfactory, from PAS Ltd in relation to monies spent on management, stopped paying the rent and Cornwall raised in its defence the fact that it did not consider its predecessor Page 3 of 11
Fiduciary duty authorities had lawfully entered into these transactions at all and counter-claimed to have them set aside and for restitution. 8. In its defence Cornwall had raised a full panoply of public law reasons as to why the decisions to enter into the leases were not lawfully taken. The only ground on which it succeeded at trial before Cranston J: [2012] PTSR 790; [2012] LGR 813 was on the basis that the predecessor authorities were in breach of fiduciary duty in entering into the leases, which the judge considered had the effect of making the leases void from the outset. 9. Before turning to what are a local authority's fiduciary duties, it is worth making a couple of very obvious points. Firstly a local authority is a corporation, it is a body created by law that cannot do anything itself, rather it can only act through its officers and staff. Secondly it can only exercise its powers for the purposes for which they were granted. 10. Leaving aside for the moment the general power under the Localism Act 2011, it can only do that which it is authorised by statute to do. It has been said in relation to a private company that: "the money of a company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot [in a court of equity] say that he is not a constructive trustee" - per Jessel MR in Russell v Wakefield Waterworks Company (1875) LR Eq 474 at 479. The Company, or that person, may also be able to say in law that there was in fact no transaction and therefore it or he is entitled to restitution. There are parallels with public corporations, indeed the early cases on private companies drew heavily on the case law in relation to earlier corporations that were often incorporated for Page 4 of 11
public purposes and expressly regarded in the courts as trustees for public purposes 1. As we will see the issues have now almost gone full circle. 11. The directors of a company must carry on the business of a company in good faith in a businesslike manner having regard to the interests of the shareholders as a whole. In a not wholly dissimilar manner there is a long line of authority in which it has been held that the members of a council, whether they are members of a party, majority or minority, owe a collective legal duty "through the ordinary procedure of debate and resolution, to make choices of policy and of action that they believe to be in the best interests (weighing, where necessary, one against the other) of all those categories of persons to whom their collective duty is owed" - per Lord Diplock in Bromley LBC v Greater London Council [1983] AC 768 at 828E. One of those classes of persons will generally be the interests of the public as a whole - i.e. the public interest. In the case of expenditure, however, the interests of the taxpayers that contribute the funds must also be considered and balanced against other interests - ibid. Per Lord Atkinson in Roberts v Hopwood [1925] AC 578: "a body charged with the administration for definite purposes of funds contributed in whole or part by persons other than the members of that body, owes... a duty to those latter persons to conduct the administration in a fairly businesslike manner with reasonable care, skill and caution, and a due and alert regard to the interests of those contributors who are not members of the body." 12. If a council is entering into a commercial arrangement then the council's concern will generally be simply to obtain value for money. It is generally not obvious as to what other legitimate object the council could have other than to negotiate in a businesslike manner with reasonable skill and care a proper price for whatever is being offered. 1 see e.g. Fairtitle dem. Mytton v Gilbert (1787) 2 TR 169, Horton v Westminster Improvement Commisssioners (1852) 7 Ex 780 Page 5 of 11
13. The facts of Roberts v Hopwood, albeit in circumstances that would surprise modern attitudes, is a good illustration of this. The council as a matter of policy wished to pay all its staff a minimum wage, which was above prevailing rates and would be applied irrespective of sex, when there was in fact a marked differential in the market place between rates of pay for men and women. There was no statutory authority to do so and the House of Lords regarded such wages as containing an element of unauthorised gratuity in the circumstances. The Council "put aside all these aids to the ascertainment of what was just and reasonable remuneration to give for the services rendered to them, and allowed themselves to be guided in preference by some eccentric principles of socialistic philanthropy, or by a feminist ambition to secure equality of the sexes in the matter of wages in the world of labour". - Lord Atkinson at 594. 14. Similarly in Prescott v Birmingham Corporation [1955] Ch 210 the provision of free travel for a limited class of the public, in that case senior citizens, would amount to "making a gift or present in money's worth to a particular section of the local community at the expense of the general body of taxpayers" - Jenkins LJ at 235-6. Such philanthropy therefore required specific authority, which is now provided by statute. 15. In CTE v Cornwall, Cranston J found that the councils had never had regard to what was the market rent for the various properties leased. " 120 was not a market rent and no attempt was made to discover what a market rent would be. Rather the rent was formulaic." And "Given that market rents would vary from property to property, and over time from unit to unit within each property, a formulaic approach was incapable of producing market rents." Consequences of want of authority 16. Cranston J found that the consequence of this breach was that the leases were void. The Court of Appeal: [2012] WLR(D) 326, [2012] EWCA Civ 1439, analysed Cranston J's judgment on a narrow basis, finding that his conclusion depended upon construing section 17 Housing Act 1985, which provides the power for local Page 6 of 11
authorities to acquire houses for housing purposes, as being read as a power to acquire at a reasonable price, which itself required the councils to have regard to market rents before entering into any commitment - Maurice Kay LJ para 10. That it would rarely be appropriate to read a statutory power as being subject to any such limitation - para 21 and in any event the evidence fell short of establishing that there was a failure to have regard to market rents, the evidence being of a wholly different character to the sort of evidence which would justify the intervention of a court - para 24-25. Moore-Bick and Etherton LJJ agreed. 17. Both Maurice Kay LJ and Etherton LJ however went on to consider what the consequence would have been, if there had been a breach of fiduciary duty (or other public flaw in the decision making) and in particular revisited the obiter dicta of Neill LJ and Hobhouse LJ in Credit Suisse v Allerdale BC [1996] QB 306. 18. In a nutshell Neill LJ held that following Anisminic Ltd v Foreign Compensation Commission [1969] 2 AC 147 there was no authority for categorising the ultra vires decisions of local authorities into categories of invalidity and that once the decision was found to be ultra vires the decision is void at law and there is no room for judicial discretion. Hobhouse LJ on the other hand held that in private law matters, the issues must be decided in accordance with the private law. Want of capacity ("pure ultra vires") is a defence, but whether breach of duty, fiduciary or otherwise, provided a defence would depend on the circumstances. 19. Both Maurice Kay LJ and Etherton LJ preferred Hobhouse LJ's approach. Maurice Kay LJ held that the breaches in the case simply did not go to capacity, the tenor of his judgment being that breaches of fiduciary duty that amounted to an abuse of power might be sufficient, but mere negligence or other conduct in excess of power would not be - para 37. Etherton LJ could see no reason why the law should be any different between local authorities and companies, as laid down in Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246 at 302-4 and that; Page 7 of 11
"If the transaction was within the capacity of the statutory corporation and was within the apparent authority of its agent, then, even if the transaction was a breach of duty by the corporation or by its agent, the transaction is not void. Depending on the facts, the corporation may have legal or equitable rights against the third party, such as for mistake, unjust enrichment or as a constructive trustee, but the transaction itself is not a nullity." 20. These views are controversial. Dyson J in Bedfordshire CC v Fitzpatrick Contractors Ltd [2001] LGR 397 at 407 considered that even Hobhouse LJ did not simply follow Rolled Steel, but if there was any difference in practice he preferred Neill LJ's analysis. More recently in Birmingham City Council v Qasim [2010] PTSR 471 Lord Neuberger MR expressed the view that both passages supported the view that the fact that a procedural course taken by a public body which is unlawful in the sense of being susceptible to judicial review does not mean that any action taken by the body on the basis of that procedure must be outwith the capacity of, or ultra vires, the authority - at para 28. 21. Even in private law, principles of apparent authority are generally regarded as a estoppel principles 2. In other words the question at trial, both in public law and private law is whether the parties entered into a lawful contract, because the parties entered into the arrangement with authority and were ad idem, or are estopped from denying that they entered into a lawful contract, even though on a strict legal analysis they did not because it would not be fair to allow them to rely on the vitiating factor. If there was no contract then proprietary and restitutionary remedies follow as of right, subject to any defence arising out of the subsequent conduct of the parties, if the parties entered into a contract or are adjudged in the circumstances pertaining at trial to be taken to have entered into a contract, then no such remedies are available - see in particular per Lord Nicholls in Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846 at paras 2 and 4. 2 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd, [1964] 2 QB 480 at 503; North West Leicestershire DC v. East Midlands Housing Association Ltd [1981] 3 All ER 364 at 370h; Kelly v Fraser [2012] 3 WLR 1008 at para 15 Page 8 of 11
22. Further in private law no such estoppel can arise if the party seeking to rely upon the estoppel was at all material times on inquiry as to the vitiating factor. If the transaction is not within the usual authority of the persons acting on behalf of the authority or if there are other circumstances giving rise to suspicion then the other party will be on inquiry - Hopkins v TL Dallas Group Ltd and another [2005] 1 BCLC 543 at para 94. Further any unusual transaction by a local authority would generally require a valid resolution of the relevant committee of the council and the party dealing with the authority will be on notice of that fact - North West Leicestershire DC v. East Midlands Housing Association Ltd ibid. at 368g. 23. Further still the question of when an estoppel will arise against a public authority at all is not without controversy. In public law cases the courts prefer to speak of legitimate expectation, the principles of which take due regard of the public interest and the public authority's primary role in judging where the public interest lies. It may be that, if there is really no public interest in the matter, then the principles of legitimate expectation would merge with private law estoppel, but this is not an easy area. Whether or not an estoppel or legitimate expectation might arise may also depend on the relationship of the parties. The position may not be the same for a commercial party with access to legal and other advice to that of a private individual. It may be that the latter may reasonably rely upon the fact that the council employees appear to know what they are doing, when the former ought not to. Capacity 24. The question of whether an authority was acting in good faith or within or without its formal statutory capacity may therefore be of critical relevance. 25. Just to finish off, it is therefore worth considering whether the general power of competence in the Localism Act 2011 will have any impact in this area. 26. The expressed intention of Part 1 Chapter 1 Localism Act 2011 is to reverse the presumption that local authorities can only do what is authorised by statute. Rather a local authority is empowered by the general power of competence in section 1 to Page 9 of 11
do "anything that individuals generally may do" unless expressly limited. As individuals can do anything that the law does not prohibit, on its face, this gives local authorities the power to do anything. 27. This general power does however have both boundaries and limits. The boundary is expressed in section 2 in terms of a Venn diagram. Specifically: " 2 Boundaries of the general power (1) If exercise of a pre-commencement power of a local authority is subject to restrictions, those restrictions apply also to exercise of the general power so far as it is overlapped by the pre-commencement power. (2) The general power does not enable a local authority to do (a) anything which the authority is unable to do by virtue of a precommencement limitation, or (b) anything which the authority is unable to do by virtue of a postcommencement limitation which is expressed to apply (i) (ii) to the general power, to all of the authority's powers, or (iii) to all of the authority's powers but with exceptions that do not include the general power." As powers are generally expressed to be for particular purposes, what I think this means that if there is an existing statutory power for a particular purpose, which is limited then, no greater power is granted by the general power for such purposes. In essence therefore the general power is infill for a local authority to do things for lawful purposes, which it is not currently authorised by statute to do. Page 10 of 11
28. The limits are in sections 3 and 4, which prevent a local authority using the general power to undertake any commercial activity with a view to a profit, except through a company. 29. Section 5 is a Henry VIII clause which allows the Secretary of State to amend primary legislation to move the boundaries and authorise local authorities to do anything by statutory order, within certain (somewhat vague) limits, one of which is that the provision he intends to repeal is not of "constitutional significance". 30. In general terms for those dealing with local authorities, if the authority is carrying out a statutory purpose, then the primary legislation, as amended by any order of the Secretary of State, will remain the enabling power. It will only be if the local authority decides to do something that it is not currently authorised by statute, that it will rely on the general power. Almost by definition, any such activity will at least initially not be part of the usual business of a local authority, and even assuming that ordinary agency principles of apparent authority apply, any person dealing with the authority would probably be on inquiry as to whether such activity had been properly authorised by an appropriate resolution of the council. If, of course, the activity is being carried on by a company, then ordinary company and agency principles will apply. Guy Adams 4th December 2012 guy.adams@stjohnschambers.co.uk St Johns' Chambers Page 11 of 11