Chief Legal Officer:

Mirza F.N. Ahmad MBA LLM Barrister

Ingleby House,

11-14 Cannon Street,

Birmingham B2 5EN




This briefing is designed to bring to the attention of officers engaged in procurement significant changes that have been shaping this key Council activity since March 2002.

The application of best practice and the knowledge of up to date proposals are necessary if the Council’s procurement is to be economic, efficient and effective. Officers need to read it so that they can identify key commercial issues and take advice where necessary.

Colleagues in the commercial world will be more confident of dealing with and competing for contracts with an authority that understands and applies best practice in procurement.

The bulletin covers: -

PART I I Local Government Act 1988

  1. DTLR issued guidance to local authorities on Part II Local Government Act 1988 (‘ 1988 Act’) on 22nd February 2002. This focused on the use of approved lists, in particular Constructionline, and the position of contractors who are members of an industry or trade association. The Secretary of State's view on the issues included the following:-

  1. Contracting authorities should not effectively delegate the selection of tenderers to the list providers. It is the contracting authority who must take this decision although, in reaching its decision, it can take account of relevant information from a list provider.
  2. DTLR also reviewed one particular non commercial matters which can be taken into account in selecting a tenderer in Section 17 (5) (f) 1988 Act namely:-

"Any political, industrial or sectarian affiliations or interests of contractors or their directors, partners or employees."

  1. The Secretary of State does not consider the 1988 Act should be interpreted as excluding tenderers from the tender process simply because they are members of an industry body. However whilst membership of a trade association may be taken as fulfilling certain pre-qualification conditions, local authorities should be aware that this route cannot be used to exclude non-members from a contracting process if they can demonstrate the ability to meet the same conditions. This is in the absence of any other statutory requirement on contractors to hold membership of an industry scheme.


  3. The Office of the Deputy Prime Minister ("ODPM") published on 23rd July 2002 a Consultation Paper on the draft circular on Best Value Performance Improvement. It is intended that ETC Circular 02/2001 is superseded by the new circular when that comes into force. The draft circular at Annex B addresses under the heading of Best Value and Procurement: Handling of Workforce Matters in Contracting a number of issues including the principles of good procurement practice. This Annex when finalised will become guidance issued by the Secretary of State under Section 19 (4) Local Government Act 1999. The content of Annex B is not fundamentally different from Parts I I and I I I of ETC 02/2001. The following however are key differences: -

Two Tier Workforce

  1. On 26th March 2002 the Secretary of State for Transport, Local Government and the Regions issued a letter proposing changes which are designed to be effective in stopping abuse in local authority contracting out process and to create a fair approach which would recognise the legitimate interests of all sides. The proposals would ensure that if local authorities select private or voluntary sector partners, it would be on the basis of their ability to deliver high-quality services, not by cutting costs by driving down staff terms and conditions. It would also prevent good contractors with high employment standards from being undercut by those willing to abuse the system. The proposals are:-


Proposed Code of Practice

  1. The principles espoused in the Two Tier Workforce document are expanded on in the Consultation Paper on the draft circular on Best Value and Performance Improvement published by the ODPM on 23rd July 2002.
  2. The Code of Practice is proposed to apply where in a local authority service contract there is either: -

It is intended then that the Code would form part of the service specification and conditions for all such contracts. Therefore its enforcement will be contractual.

  1. The Government now intends to legislate to make the statement in the Cabinet Office Statement of Practice on Staff Transfers in the Public Sector statutory within local government. The principal requirement of the statement is that staff will transfer and that TUPE should apply, even though whether or not it applies will as always be a matter of law.
  2. The Code therefore addresses treatment of new joiners to an outsourced workforce as follows:-

  1. The service provider is then required to offer new recruits taken on to work beside transferees one of the following: -

  1. Monitoring is achieved through the service provider providing the local authority with information as requested to allow the authority to monitor compliance with the Code. This would include terms and conditions for transferred staff and the terms and conditions for employees recruited to work on a contract after the transfer.
  2. The code advises on an escalating procedure to secure enforcement.


  1. Councils will then have a duty in their Best Value Performance Plan to certify that individual contracts comply with best value requirements including workforce requirements in this code and the accompanying statutory guidance.
  2. Where a service provider transfers staff originally in the authority’s employment to a sub-contractor in consequence of the terms of the service provider’s obligations to the authority, the service provider is then responsible for the observance of this code by its sub-contractor.



  1. Modern commercial contracts need to have a range of dispute resolution procedures, one of which is likely to be Alternative Dispute Resolution ("ADR").
  2. Alternative Dispute Resolution

  3. The landmark judgement in the case of Frank Cowl -v- Plymouth City Council (2001) in the Court of Appeal sets out the paramount importance of avoiding litigation whenever this is possible. The Lord Chief Justice in that case gave a warning that:-
  4. "The parties do not today, under the CPR [ the Civil Procedure Rules], have a right to have a resolution of their respective contentions by judicial review in the absence of an alternative procedure which would cover exactly the same ground as judicial review. The court should not permit, except for good reason, proceedings for judicial review to proceed if a significant part of the issues between the parties could be resolved outside the litigation process."


  5. The Legal Services Office has in July 2002 updated its standard Adjudication Scheme for use on construction contracts. The main changes are:-


Judicial Review and Protocol

  1. Section 31 Supreme Court Act 1981, the Pre-Action Protocol for Judicial Review and Rule 54 CPR sets out the framework for challenging a decision of a public authority by way of Judicial Review. Judicial Review had suffered in the past on account of unmeritorious claims being granted leave only to fail at the next stage once the respondent had been allowed to submit its defence.
  2. The Pre-Action Protocol should concentrate claimants’ attention on the merits of their claim and enable judges at the permission stage to weed out unmeritorious inappropriate challenges.

  3. The Pre-Action Protocol for Judicial Review (‘the Protocol’) applies to all claims made under Rule 54 on or after 4 March 2002. The Protocol sets out a code of good practice and contains the steps which parties should generally follow before making a claim for Judicial Review.

However the following points are significant:-

  1. The Protocol directs claimants to send a letter to the defendant before making a claim. The purpose of the letter is to identify the issue in dispute and establish whether litigation can be avoided. A standard format is provided. The letter should contain:-

  1. The claimant’s letter needs to be sent to the appropriate address. Where the claim concerns a local authority, then the Protocol directs that the letter of claim is sent both to:-

  1. The defendant, following the receipt of a letter before claim, should normally respond within 14 days using the standard format set out in the Protocol. Failure to do so will be taken into account by the Court and sanctions may be imposed unless there are good reasons.
  2. Where it is not possible for the defendant to reply within the proposed time limit, the defendant should send an interim reply and propose a reasonable extension. Where an extension is sought, reasons should be given by the defendant and where required, additional information requested. It is important to note that:-

  1. If the defendant’s letter of response is conceding the claim in full, it should say so in clear and unambiguous terms. The same applies if the claim is being conceded in part or not at all, in which case the letter should:-


Charging and Trading by Local Authorities

  1. The new proposed powers in relation to charging and trading are set out in the draft Local Government Bill published in June 2002.
  2. The ability of English local authorities to benefit from the new powers is dependent upon the outcome of their Comprehensive Performance Assessment ("CPA"). The Bill proposes that the Audit Commission will produce reports on the performance of local authorities in exercising their functions. Where the Secretary of State receives such a report he may then categorise all English local authorities in accordance with their categorisation in the report. Such an order will have effect from the time specified in it and for the period indicated in the order. The Council’s CPA outcome will be published on 12 December 2002.

    Power to Charge for Discretionary Services

  4. The Council may not charge for the provision of a service without a statutory power which authorises it to charge.
  5. The Bill proposes a new power for a best value authority to be able to charge for a service. A local authority cannot charge for a service which it is under a statutory duty to provide. Also the person charged has to have agreed to the provision of that service under any other provision.
  6. The new power does not apply if a local authority may charge for the service under any other provision. An authority cannot charge under the new Bill where it is expressly prohibited from charging for the provision of the service.
  7. The amount which a local authority will be able to charge is then determined in accordance with regulations which have still to be published. It is proposed that the regulations will limit a local authority from exceeding what will be defined as the "proper costs" of carrying on the function of providing that kind of service.
  8. Before the Secretary of State makes regulations under the new power he will have first to have consulted with such persons as appear to him to represent best value authorities. In addition the power will obligate a best value authority to have regard to such guidance as the Secretary of State may issue.
  9. The Bill then provides for the Secretary of State to be able by order to disapply effectively the charging power in relation to certain best value authorities. This means that authorities which do not achieve a particular CPA grading will not benefit from the new charging regime.
  10. Further, the Secretary of State can disapply the charging power for a particular kind of service either for all best value authorities or for particular best value authorities or particular descriptions (e.g. gradings) of best value authorities. Therefore it could preclude charging for particular types of service e.g. for welfare related functions.

    Power to Trade in Function Related Activities

  12. The Council and any public body designated by the Secretary of State may (including any local authority) enter into an agreement under Section 1 of the Local Authorities (Goods and Services) Act 1970 ("the 1970 Act") for all or any of the following purposes: -

  1. It has long since been recognised that the 1970 Act does not authorise the Council to trade as widely as it would wish.
  2. Under another power in the Draft Local Government Bill it proposed that the Secretary of State may make an order which will authorise best value authorities to trade with other persons (i.e. to contract with other persons). However this power to trade has to be for the performance of carrying on any of the authority’s ordinary functions. Ordinary functions means any functions of the authority which are not functions under the new power.
  3. This essentially means that the authority could not use the new power to deliver services for third parties, that it does not have power to provide for the performance of its own functions. The order will also make provision about the persons with whom authorities may trade.

  4. The new trading power will not regulate the performance of statutory duties by local authorities. Nor will it authorise a local authority to do anything which is authorised by another statutory function.
  5. The order also may be made to apply to all best value authorities, particular best value authorities or particular categories of best value authority e.g. by reference to their CPA grading. It may also relate to all activity in relation to a function, particular activities or descriptions of activity. The order may also impose conditions as to how the power to trade is exercised.
  6. Finally, the exercise of the power to trade has to be subject to such statutory guidance as the Secretary of State may issue.

    Modification of Enactments in Connection with Charging or Trading

  8. The draft Bill proposes that the Secretary of State has a similar power to that which he has under Section 16 Local Government Act 1999. If the Secretary of State considers that an enactment prevents or obstructs best value authorities: -

  1. Further, the Secretary of State can use the proposed modification power to modify or exclude the application to best value authorities of other enactments which make provision for or in connection with power to charge for the provision of a discretionary service.


  3. The issue of whether the Competition Act 1998 ("the 1998 Act") applies to local authorities has been the subject of debate.
  4. The case of Bettercare Group Limited –v- The Director General of Fair Trading (2002) which was decided by the Competition Commission Appeal Tribunal determined that a public authority could be an undertaking within the 1998 Act.
  5. In that case the North & West Health and Social Services Board ("North & West") in Northern Ireland was both a provider of residential homes and a purchaser of nursing care services and accommodation under an annual contract. Bettercare Group Limited ("Bettercare") complained to the Office of Fair Trading that North & West had abused its dominant position as the sole purchaser of care services from Bettercare by offering unreasonable low contract prices and unfair terms contrary to the Chapter I I prohibition in the 1998 Act.
  6. Section 18 1998 Act provides that: -

"Conduct may, in particular, constitute such an abuse if it consists in: -

    1. directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
    2. limiting production, markets or technical development to the prejudice of consumers;
    3. applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
    4. making the conclusion of contracts subject to the acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts."

  1. The Tribunal decided that North & West’s activities in running its statutory residential homes and the engaging in the contracting out of social care to independent providers are for the purposes of the 1998 Act to be regarded as economic activities for the purpose of deciding whether North & West is an undertaking within Section 18 (1). It is therefore now for the OFT to determine whether North & West abused its dominant position.