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October 2015

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Index

Page

Key procurement issues – third party reliance and the ‘Living Wage’

Angela Konteas 2 – 5

Teckal-ing public-public contracts in the PCR 2015

Lynne Rathbone and Vicky Bills 6 – 7

Portsmouth City Council v Ensign – no good faith

Anja Beriro and Vicky Bills 8 – 11

Employment update

Sarah Hooton 12 – 14

Increase in custodial sentences for fire safety offences

Carl May-Smith 15 – 16

Emergency Services Collaboration – a consultation

Sarah Hooton 17 – 20

Directors’ duties in the context of local authority companies

Peter Ware 21 - 25

The articles in this newsletter are for general information only. They do not represent legal advice. You should always take legal advice before pursuing any course of action discussed in this newsletter. If you would like to discuss any of this issues raised in this newsletter please call us +44 (0)115 976 6000.

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Third party reliance and the ‘Living Wage’

Two Advocate General opinions in September are worthy of mention in this edition. The first follows a

request by a Polish court for the European Court of Justice (ECJ) to advise on the interpretation of Article

48(3) of Directive 2004/18 (the ‘Directive’) which allows a tenderer to rely on a third party’s technological or

professional abilities when tendering for a contract.

The case which gave rise to the questions concerned a tender for a roadway cleansing contract in Warsaw.

One of the tenderers submitted a bid relying in part on the experience of a third party. The third party gave

an undertaking that it would provide the necessary resources, namely training of workers and consultation

advice. The contracting authority was not persuaded that the tenderer would reliably satisfy the contract

requirements without the personal participation of the third party and so excluded the tenderer from the

procedure.

In his opinion, the Advocate General Jääskinen referred to the aim of the Directive in respect of third party

participation, which is to avoid contracts being awarded to economic operators that do not have the

necessary means to properly execute them. The questions asked and opinions given in relation to the

meaning of Article 48(3) are summarised below.

What are the evidential requirements for demonstrating the reliability of the tenderer’s reliance on a

third party?

The onus rests on the tenderer to prove to the contracting authority that the third party’s capacities are, in

fact, available to it. The contracting authority is bound by an obligation to assess that proof and to ensure

that the successful tenderer is actually able to properly execute the contract. Consequently, it is not

sufficient for tenderers to refer to third party capacities solely in order to formally fulfil the minimum

capacity condition set out in the contract notice.

Does the phrase ‘where appropriate’ in Article 48(3) mean that reliance on a third party can be used in

exceptional cases only?

The opinion clarified that Article 48(3) is drafted so as to impose no substantive limitation on when reliance

on another entity may be used. As a general rule there should be no objection to a tenderer’s reliance on a

third party as long as those resources and/or abilities are actually at the tenderer’s disposal to execute the

contract.

There may be an exception to this general right to rely on third party capacity which derives from the case

Swm Costruzioni 2 SpA, Mannochio Luigino DI v Provincia di Fermo (Case C-94/12) in which the ECJ

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acknowledged there may be works with special requirements where a certain capacity is necessary and where

it would be inadequate to combine the capacities of more than one operator to meet the minimum capacity

level. However the capacity requirement must be related and proportionate to the subject-matter of the

contract. These would be exceptional circumstances and cannot be made a general rule under national law.

Where such an exception does apply, the principles of equal treatment and transparency requires that the

contracting authority must state beforehand in the contract notice and/or tender specifications that the

general right under Article 48(3) is excluded.

Do the phrases ‘regardless of the legal nature of the links’ and ‘having at its disposal the resources’

mean there is no need for formal links between the economic operator and the third party?

The Advocate General confirmed there is no need for a particular type of legal relationship between the

economic operator and the third party. What is important is for the tenderer to have the third party’s

capacities at its disposal, not for a particular arrangement to be in place to secure that disposition.

Can the technological and professional capacities referred to be transferable to the economic operator?

It would be a matter of fact in each case whether the relevant technological or professional abilities could

transfer from the third party to the tenderer, for example through consultation and provision of advice, such

that the third party does not actually need to participate in the contract directly. The Advocate General’s

opinion was that some capacities may be transferable whereas others may not; this is a finding to be made by

the national court. There may be some contracts where the degree of technical difficulty is such that it must

be executed personally by the third party if its capacity is relied upon, rather than relying on the transfer of

experience and skills through advice and training.

In the Polish case, the third party was physically located some distance from Warsaw and the contracting

authority questioned whether its technological ability could be adequately transferred to the tenderer. The

tenderer alleged that the contracting authority had failed to specify that the condition relating to relevant

knowledge and experience required personal participation or that the experience must relate to specific

locations and topography.

The second opinion was provided by Advocate General Mengozzi, who considered whether contracting

authorities can require bidders to commit to paying hourly minimum wages for their employees (and those of

their sub-contractors) in the contract awarded pursuant to the procurement process.

This time the request for clarification came from a German court as a result of a case in which the

contracting authority issued a tender which required a declaration from bidders that all employees of the

contractor and its sub-contractors were to be paid a minimum hourly wage. This was due to a law which

stated that public service contracts may only be awarded to undertakings which agree to pay a specified

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minimum hourly wage, although there was no general national minimum wage in Germany at the time. One

of the bidders refused to give the declaration and was subsequently excluded from the bid.

One of the questions on which the Advocate General was asked to give an opinion was whether a national

provision which requires public contract awards to comply with minimum wage conditions is allowed under

Article 26, the effect of such provision being that if an economic operator does not give a declaration as part

of its tender that it will comply with the conditions, then its tender will be automatically excluded. Article

26 provides for contracting authorities to impose special conditions for the performance of a contract.

Issues relating to minimum wages have been previously considered by the ECJ. One of these pre-dated Article

26 (Rüffert, C-346/061) and the other (Bundesdruckerei v Stadt Dortmund, C549/132) involved a minimum

wage condition imposed by national legislation in the contracting authority’s member state which was

intended to apply to the sub-contractor’s workers who were exclusively employed in a different member

state in which minimum rates of pay were lower. In that case the ECJ said that it would be an additional

economic burden on the tenderer in that member state and would therefore constitute a restriction within

the meaning of Article 56 of the Treaty on the Functioning of the European Union (TFEU), which prohibits

restrictions on the freedom to provide services within the European Union (EU).

The Advocate General differentiated the present case from the existing case law and said that member states

should be able to introduce provisions under Article 26 which regulate work conditions such as minimum wage

as long as they are compatible with EU law and are detailed in the contract notice or specifications. He

stated that these provisions should not apply to workers under private contracts as this would effectively

introduce a national minimum wage for everybody, notwithstanding this is not currently required by EU law.

Therefore his view was that it was proportionate to interpret the German law as applying only to public

contract workers in order to protect those workers.

Applying this to the facts, the Advocate General said that Article 26 did allow member states to lay down

special conditions which, in this case, was the requirement for a declaration by bidders that they would

respect the regional law, in particular the minimum wage requirement for public sector workers. The

response to the question was that Article 26 does not preclude national legislation which allows contracting

authorities to exclude bidders who refuse to commit to paying their employees a minimum wage in

accordance with the local laws.

Although seemingly helpful, the Advocate General’s opinion does not mean that contracting authorities can

now specify that employees working on their contracts must be paid the Living Wage. There is a view that the

opinion is flawed in the way it treats and applies the case law and it is possible the European Court may

decide not to follow it.

1 Rüffert v Land Niedersachan C-364/06; [2008] IRLR 467 (ECJ) 2 Bundesdruckerei GmbH v Stadt Dortmund [2014] EUECJ C-549/13

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In the clarification sought by the Scottish Government in 2014 the Commission was clear that a contractual

condition to pay a living wage which is higher than the general minimum wage (in the UK, the National

Minimum Wage) is likely to go beyond the protection provided by the Directive. However the Scottish

Government has just introduced new statutory guidance aimed at “making Scotland a fairer place to work”.

The guidance states that payment of the Living Wage is an indicator of an employer’s commitment to fair

work practices which can be relevant to the delivery of a contract.

The guidance stops short of automatically excluding bidders who fail to pay the Living Wage on the basis that

reserving an element of the overall tender score specifically to the payment of a Living Wage is not possible.

Instead it states that such failure would be a “strong negative indicator” of an employer’s commitment to

fair work standards. Other fair work principles used in the guidance include the unnecessary use of zero hours

contracts. This approach could be adopted outside of Scotland, although whether there is a current political

inclination to do so in the UK is a different question.

Angela Konteas | +44 (0)115 976 6097 | angela.konteas@brownejacobson.com

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The Cabinet Office has released further guidance on the Public Contract Regulations 2015, focusing on public-

public contracts. Regulation 12 codifies the exemptions to public procurement rules provided by the EU cases

of Teckal3 and Hamburg Waste4 and clarifies the tests for using them. It also establishes the circumstances in

which a public body can award a public contract directly to an organisation which it controls jointly with

another public authority and where a public body can award a contract back to its controlling authority, or to

another body under the same ‘parent’ authority.

Teckal (Regulation 12(1)) – vertical agreements

The ‘in-house’ exemption provided for in the case of Teckal removes agreements from procurement rules

where:

a public contractual authority exercises control over an entity that it owns in a similar manner to its

own departments

the entity has no direct private sector capital participation

the entity provides 80% or more of its services under the direction of the public authority.

This allows the public body to procure services without having to submit to the procurement process as long

as the conditions are successfully met. However, there has been difficulty in trying to establish whether the

requirements have been fulfilled.

These criteria have been defined in the guidance to improve clarity on the criteria for this exemption.

‘Control’ has been defined as “an organisation exercising a decisive influence over both the strategic

objectives and significant decisions of the controlled organisation”.

The amount of ‘activity’ is to be calculated “by taking into account the previous 3 years total

turnover, or an alternative activity based measure such as three years of costs connected with the

service, supply or works”. This is intended to prevent distorting the market.

Unless “private capital is made compulsory by national legislation and is non-controlling and non-

blocking and does not confer a decisive influence on the decision of the controlled organisation”

then it is not allowed as it would provide the private entity with an undue advantage over

competitors. The contracting authority awarding the contract may have private capital participation

and this would not preclude it from being exempt from the procurement regime

3 Teckal Srl v Commune di Viano Case C-107/98 [1999] ECR I-8121 4 European Commission v Germany Case C-480/06[2009] ECR I-4747

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This exemption has also been expanded under Regulations 12(4)-(6) to cover ‘joint’ contracts: where they

award a public contract directly to an entity controlled together with another public body). Regulation 12(2)

also extended the exemption by allowing ‘reverse’ contracts (where the public body awards a contract back

to the controlling authority, but only where the entity is owned or controlled by only one contracting

authority), and ‘horizontal’ contracts (where an entity awards a public contract directly to another entity

that is under the control of the same authority). For public bodies, this will help to clarify whether the

contract they are making is subject to procurement rules.

Hamburg Waste (Regulation 12(7)) – horizontal agreements

The ‘co-operation’ exemption can apply when two of more public authorities ‘co-operate’ to perform a

public service that is in the public interest where they perform less than 20% of the total activity on that

market. As well as the case being codified in the PCR 2015, the Crown Commercial Service (CCS) has clarified

that ‘co-operation’ can take any legal form and does not need to be a contract or joint venture. Where the

contract is agreed exclusively between contracting authorities, the conditions of cooperation may be met,

even where there is private capital participation. It should not require all relevant authorities to perform the

main contractual obligations, just to contribute to it cooperatively. This serves as clarification on what

agreements between public bodies can fall under this exemption as there was great doubt surrounding this

before codification. Time will tell whether this has successfully elucidated the criteria.

The impact

The exemptions have been available for a number of years now but this is the first time they have been

codified into EU and UK law. The CCS has stated that the cases were codified because “interpretation of the

EU case law of the European Court has varied, so leaving uncertainty as to whether, for instance, shared

services arrangements between public bodies were excluded or not”. Many public sector bodies have fallen

victim to re-tendering after trying and failing to use these exemptions. Whilst granting some clarification on

Regulation 12, the guidance has also answered many frequently asked questions

regarding the use of both the Hamburg Waste case and Teckal. With a growing number of

public-public contracts due to pressure on public resources, this clarification should assist

public bodies in deciding whether the procurement process is needed.

Lynne Rathbone | +44 (0)1392 458739 | lynne.rathbone@brownejacobson.com

Vicky Bills | +44 (0)1392 458764 | vicky.bills@brownejacobson.com

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The recent case of Portsmouth City Council (PCC) v Ensign Highways Limited (Ensign) was heard in the

Technology and Construction Court over the summer of 20155. It discussed express and implied duties of good

faith in English private finance initiative (PFI) contracts and any other implied duty when there is no express

duty when applying service points. It also deliberated the amount of discretion used when awarding service

points.

Background

In 2004, PCC agreed a PFI contract with Ensign regarding the improvement and maintenance of the highway

system around Portsmouth that would last a total of 25 years. PCC made deductions from Ensign’s monthly

fee for any breaches of the contract by way of service points. To begin with, these service points were

deducted monthly and within a discretionary range to reflect the severity of the breach but, following a

spending review at the end of 2013, PCC began to apply the maximum deduction for all breaches. They also

saved up the points over months so that Ensign received multiple points at once.

Ensign then sought external consultation from an expert who declared that Ensign was generally delivering

the services under the contract and, therefore, PCC had acted in bad faith by imposing fixed tariffs and

preventing long term improvements by not communicating with Ensign about their breaches. Ensign claimed

that:

PCC should have acted in good faith

there was a range in the cost of deductions set out in Schedule 17 of the contract and therefore they

should have exercised discretion on every breach.

The PCC claimed that:

they were under no general obligation of good faith and that the duty did not apply to the contract as

a whole

their ‘best value' duty, imposed by Section 3 in Part I of the Local Government Act 1999 and included

in clause 44.4.1, meant that Ensign was under an express duty of good faith to negotiate

improvements, even if it was at a financial detriment to Ensign. Therefore, they were able to use the

maximum service points to encourage Ensign to improve the delivery of its services and thereby

achieve their Best Value Duty

the service points were for fixed amounts and therefore no more discretion was necessary in this case

than was required in Mid Essex [2013].

5 Portsmouth City Council v Ensign Highways Limited [2015] EWHC 1969 (TCC)

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The council asked the court whether there was an express duty to act in good faith over the whole contract

(from clause 44). If not, they sought clarification on whether there was an implied duty on PCC while using

the service points mechanism and, if so, what that implied duty was. PCC and Ensign both had different views

on what the implied duty was.

The decision

Duty of good faith?

Of course, the English legal system does not automatically imply the principle of ‘good faith’ but Clause

44.4.1 of the contract stated that:

“PCC and [Ensign] shall deal fairly, in good faith and in mutual co-operation with one another and Interested

Parties”.

This term was one of many good faith clauses throughout the contract. It was therefore found that the duty

in clause 44.4.1 was not binding on the contract in its entirety and there was no overriding duty to act in

good faith. Clause 44.4.1, however, does impose a duty to act in good faith for the purposes of that clause.

This means that Ensign is required to deal in good faith with PCC with regards to their ‘best value’ duty and

give “proper and careful consideration to PCC’s needs and statutory obligations and balance those against its

own commercial interests”. The court declared that “the creation of the Service Points regime… constitutes

the discharge of PCC's Best Value Duty” if properly implemented but PCC could not increase the number of

Service Points to ensure achieving Best Value from Ensign: this should only be done by renegotiating the

terms of clause 24 or Schedule 17.

Implied duty?

Mid-Essex6 was cited but the court made a distinction between it and PCC v Ensign. In Mid-Essex they merely

had to decide whether or not to award service points but in the present case the council also had to decide

how many to award. This meant that they had an implied duty as they had greater discretion than the party

in Mid-Essex. The word ‘maximum’ being used in the contract was considered to have a clear meaning that

imposed a scale on the service points, not a fixed tariff, which involved an assessment of the breach and

deduction.

There was declared to be a duty to act “honestly, on proper grounds, and not in a manner that is arbitrary,

irrational or capricious” (upholding the decision in JML Direct7). This was different from the suggested

implied duties from both parties. Clause 24 provided a regime for the award of service points but the courts

believed it could not operate without an implied term covering the manner in which service points could be

awarded. This applied to awarding service points and therefore, while maximum values could have been

6 Mid Essex Hospital Services NHS Trust v Compass Group (2013) BLR 265 7 JML Direct Ltd v Freestat UK Ltd [2010] EWCA Civ 34

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awarded for a breach, they were not intended to be fixed tariffs and the severity of the breach should have

been taken into account.

In the view of Mr Justice Edwards-Stuart, it did not make commercial sense to impose the same sanction on

every breach regardless of the duration or severity of the breach itself. This case follows and upholds the

decision in Rainy Sky [2011]8 which read the contract in a way that reflected commercial common sense. If

the words have clear meaning and make commercial sense then that is how they will be interpreted. A set

tariff for any level of breach did not make sense (but highlights the struggles that authorities face with

budget cuts). However, Arnold Britton [2015]9, the judgment of which was handed down only days before PCC

v Ensign, disagreed stating that while commercial common sense was useful when constructing a contract it

should not be invoked retrospectively or to undervalue the importance of the language of the provision being

interpreted. The decision in this case was made too late to have been mentioned in PCC v Ensign but this

shows a divergence from other judgments and ought to be considered in future cases.

Impact

This case has highlighted the need for clarity when drafting because duties such as honesty can be implied in

the contract if it makes commercial sense. The case also demonstrates the reluctance of the UK courts to

infer a good faith obligation in agreements and therefore, unless it falls within the Yam Seng [2013]10

categories, any duty should be expressly included in the contract and clearly state that it applies to the

entire contract and not just a particular clause.

However, it also shows a willingness of the courts to imply obligations on parties to act honestly and on

proper grounds when exercising discretion as part of a contract. Some lawyers have highlighted the

similarities of applying a duty of good faith and the duty that was inferred in this case but it appears that the

courts have made this distinction to avoid an implied duty of good faith being implemented in English

contract law.

With huge budget cuts in the public sector and criticisms of the expense of PFI, this case is an example of the

disputes that arise around these types of contracts. Many argue that it is more expensive to commit to a

project over a long period of time (when government bodies can borrow cash at a cheaper rate than the

private sector) and the struggling public bodies have to cut costs wherever they can nowadays. Many also

complain that the public authority holds most of the risk because the government body is usually willing to

spend more money rather than let the PFI fail. It is estimated that public authorities will be billions of

pounds in debt to private businesses and banks by 2020 because of PFIs. However, it is also clear that a

number of very important projects would not have gone ahead without PFI. Therefore, the lesson to be

learnt, when drafting high value and long term contract, is to set out clearly how the parties will act in

8 Rainy Sky SA v Kookmin Bank [2011] 1 W.L.R. 2900 9 Arnold v Britton [2015] 2 W.L.R. 1593 10 Yam Seng Pte Ltd v International Trade Corp Ltd [2013] 1 C.L.C. 662

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various scenarios and look at what the ‘worst case’ would be so that you can work backwards from that and

ensure the sensible commercial position is taken.

Anja Beriro | +44 (0)115 976 6589 | Anja.Beriro@brownejacobson.com

Vicky Bills | +44 (0)1392 458764 | vicky.bills@brownejacobson.com

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April and October are the two key months for legislative changes in employment law. A little reminder of the

changes that have come in this month, plus a brief case law round up, are set out below:

National Minimum Wage rises

October is the normal time for increases to the National Minimum Wage. This year, the rises are as follows:

the adult rate has risen by 20 pence to £6.70 per hour

the rate for 18 to 20 year olds has risen by 17 pence to £5.30 per hour

the rate for 16 to 17 year olds has risen by 8 pence to £3.87 per hour

the apprentice rate has risen by 57 pence to £3.30 per hour.

All increases took effect from 1 October 2015.

A further rise to the adult rate to £7.20 per hour is expected in April under the National Living Wage

proposal.

Modern slavery

From October 2015, employers with an annual turnover of £36 million or more will have to publish a modern

slavery statement on their website each financial year stating the steps they have taken to prevent modern

slavery existing in any part of their business or supply chain. There will be some transitional provisions

applicable where a business’ financial year end is close to the date that the duty comes into force.

Sikh safety helmet exemption

The exemption for turban-wearing Sikhs from wearing a safety helmet on construction sites has been

extended to all workplaces, save for a limited number of cases where head protection is still required (such

as for those working in emergency response or members of the armed forces).

Recommendations

An Employment Tribunal will no longer be able to make recommendations that go beyond an employee’s

individual circumstances in discrimination claims. In practice, this is unlikely to have a significant effect since

the power was rarely exercised by the Tribunals.

Smoking restrictions

Company car policies may need to be revised to include reference to the new ban on drivers of private cars

from smoking in them if they are carrying children under 18 as passengers.

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Fit for Work Service

This service will allow employers to seek occupational health advice through the website and helpline.

Employers will be able to refer an employee for a free occupational health assessment when they have been

absent for at least four weeks. However, the employee must have a reasonable likelihood of being able to

return to work within three months and they must not have undergone a Fit for Work assessment in the

previous 12 months. The employee must also consent to the referral. Assessments will normally take place by

telephone with face to face assessments expected to be rare.

A Fit for Work return-to-work plan has the same status as a fit note and so should be accepted by employers

as evidence of sickness absence in the same way as a fit note. Any recommendations made are not legally

binding but, in the case of a disability, a failure to follow a recommendation could lead to a claim that the

employer has failed in its duty to make reasonable adjustments.

Bills

The Trade Union Bill 2015 has had its second reading and will now be considered by a Public Bill Committee

to be concluded by (or before) 27 October 2015.

The Enterprise Bill has been published. This includes provisions in respect of apprenticeships, including

making it a criminal offence to offer an apprenticeship course or training if it is not a statutory

apprenticeship. It also includes a power to introduce (by statutory instrument) a cap on public sector exit

payments of £95,000 which would include any payment in lieu of notice.

Case law round up

Working time

Federación de Servicios Privados del Sindicato Comisiones Obreras v Tyco Integrated Security SL

and another

The European Court of Justice has held that where a worker does not have a fixed or habitual place

of work, travel time between their home and their first and last customers of the day counts as

working time.

HR involvement

Ramphal v Department for Transport

A reminder from the Employment Appeal Tribunal (EAT) that a dismissing or investigating office can

seek guidance or advice from human resources but that such advice should be limited to questions of

law and/or procedure and not go further than this so as to include an opinion on culpability.

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TUPE and Assigned Employees

BT Managed Services Ltd v Edwards

In this case, an employee who had been off work for over five years, with no indication of him ever

returning, was not deemed to be assigned to an organised grouping of employees and so did not

transfer under TUPE. The EAT distinguished permanent inability with long term sickness or maternity

leave, where the absence might be regarded as temporary.

Inex Home Improvements Limited v Hodgkins and others

Laying-off employees before a transfer did not prevent them from being assigned to an organised

grouping. The EAT took a purposive approach of TUPE for the protection of employment and held that

temporary cessations should not prevent TUPE transfers from occurring. However, the EAT did

comment that the purpose, nature and length of any cessation were all relevant factors that would

need to be considered in determining whether the organised grouping of employees continued.

National Minimum Wage and Sleep-ins

Shannon v Clifton House Residential

The EAT held that an on-call worker who lived at his place of work was not entitled to the National

Minimum Wage for all the hours of the night; he was only entitled to the National Minimum Wage for

the hours during which he was awake and working. However, this is a fact-sensitive area; here, for

example, consideration was given to the fact that another person was on duty and that the claimant

was rarely called upon to work.

Tribunal fees

Unison were unsuccessful in the Court of Appeal with both of its appeals against its judicial review

applications challenging the legality of tribunal fees being dismissed.

As before, this is not the end of the fee debate:

Unison has applied for permission to appeal to the Supreme Court

the Government’s review into tribunal fees is continuing

the Scottish Government has announced its intentions to abolish employment tribunal fees.

Sarah Hooton | +44 (0)115 976 6033 | Sarah.Hooton@brownejacobson.com

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On 24 September 2015, Ishaq Hussein was sentenced to four months’ immediate imprisonment at Reading

Crown Court for a number of breaches of the Regulatory Reform (Fire Safety) Order 2005.

Mr Hussein was the landlord of a number of rental properties in Reading. His offences included, amongst

others, failures to comply with an enforcement notice served on him by Royal Berkshire Fire and Rescue

Service requiring improvement to fire safety arrangements at one of his properties.

His sentence came despite the judge acknowledging that he was an experienced landlord with a number of

other properties at which there had been no issues as well as a number of points of personal mitigation. Mr

Hussein was described as a 58 year old man with no previous convictions and an ‘exemplary character’.

Mr Hussein’s sentence is illustrative of an apparent increase in the severity of sentences imposed in recent

years for fire safety offences where they involve sleeping accommodation.

There is no reliable record of fire safety sentences but it takes little research to uncover over a dozen

examples of sentences of imprisonment or suspended imprisonment imposed on landlords and hoteliers.

Many of these cases do not involve a fire, let alone any injury. Courts are increasingly heeding the words of

the court of appeal in the New Look case that they need not await human tragedy before expressing their

displeasure at persons being put at risk from fire.

One hotelier, Peter Metcalf, was sentenced to 18 months’ immediate imprisonment at Preston Crown Court in

just such circumstances. These sentences appear to represent a trend of much greater use of custodial

sentences for fire safety as compared with previous years.

With a view to consistency, a national record of fire safety enforcement outcomes would assist courts and

fire authorities alike. In the meantime it will be incumbent on those prosecuting on behalf of fire authorities

to make the court aware of previous sentences in similar cases.

As well as the increasing bank of previous sentences, there exist Court of Appeal authorities in relation to fire

safety sentencing. These include a number of cases where sentences of immediate or suspended

imprisonment or very large fines have been upheld in sleeping accommodation cases.

With new sentencing guidelines for health and safety offences expected later this year, it may be that the

courts will be provided with some assistance in judging appropriate sentence levels.

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The draft guidelines produced for consultation suggest a starting point of custodial sentences for individuals

convicted of offences leading to a risk of death, unless their culpability is particularly low. The vast majority

of fire safety offences in sleeping accommodation involve such a risk.

Only time will tell whether these guidelines will assist in creating long-awaited consistency in fire safety

sentencing. What is clear is that some courts are sending a message to those responsible for sleeping

accommodation – pay attention to fire safety or you face jail.

Carl May-Smith | +44 (0)115 934 2024 | carl.may-smith@brownejacobson.com

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On 11 September 2015, a consultation was opened entitled ‘Enabling closer working between the Emergency

Services’ and we look at the main proposals below:

The scope only applies to England; although Dyfed-Powys Police and Crime Commissioner (PCC) Christopher

Salmon has called for similar plans to be adopted in Wales, we understand that the Welsh Government does

not believe giving PCCs responsibility for the fire service in Wales as being the best way to achieve greater

co-ordination between the emergency services.

Statutory duty of collaboration

There are already many examples of cooperation and collaboration between the emergency services across

the country. However, the Government has expressed concern that it believes it is not as widespread or as

wide-ranging as it could be. To address this, it has proposed a statutory duty on the three emergency services

(police, fire and ambulance services) to collaborate with one another to improve efficiency and

effectiveness. The duty is intended to be broad to allow greater flexibility to the emergency services and,

given the current extent of collaborative working, and the current pressures to make efficiencies, this is

likely to be relatively uncontroversial – certainly the least controversial of the other key proposals made.

PCC governance

The Government proposes to remove the legislative barrier currently in place to allow PCCs to take on

responsibility for the fire and rescue authority in their area where it is in the interests of economy, efficiency

and effectiveness or public safety, and where a local case is made.

Under this proposal, the PCC would become the employer of all fire service personnel. The chief fire officer

role would remain intact and would report to the PCC.

The process for this envisages that the PCC and the fire authority work together to prepare a business case

where the PCC is interested in taking on governance of the fire and rescue service. The PCC would then be

required to consult locally. If the PCC and fire authority are in agreement, and subject to the outcome of the

public consultation, the PCC would request that the Government introduces secondary legislation to allow

the transfer.

Where the fire authority does not agree, the PCC would be able to submit the business case to the Home

Secretary and Secretary of State for Communities and Local Government for them to reach a view on whether

the governance change was in the interests of economy, efficiency and effectiveness or public safety. In light

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of the Government’s views expressed in this consultation document of the perceived benefits of PCC

involvement, this may not prove to be a high threshold to meet.

The Secretaries of State ‘could’ (but do not appear to be obliged to) seek an independent assessment before

reaching their decision. However, the consultation document then states that they ‘would’ take their

decision based on the findings of that independent assessment; it is not, therefore, clear as to how

compulsory such an independent assessment would be.

Integration

A step further from PCC governance is to allow the PCC to put in place a single employer under the

governance of the PCC. The same process referred to above is envisaged to enable this.

The consultation document is not quite clear as to who the employer would be in these circumstances – it

states that the single employer would be ‘led by’ a chief officer but also that the chief officer (rather than

the employer) would employ all fire and police personnel. The chief officer would need to hold the rank of

chief constable but the proposal is that this position would be open to both senior police officers and senior

fire officers, as they would both have the relevant experience. To allow this, the requirement to have

previously been a constable would be removed.

The consultation goes on to state that the Government would work with the College of Policing to ensure

senior fire officers have access to the necessary training to allow them to apply; there is no mention of senior

police officers requiring, or being provided access to, relevant fire service training. If senior fire officers are

deemed to require additional training to carry out the role, but senior police officers are not, the inevitable

question in any recruitment process is whether senior police officers would be deemed to be more

qualified/experienced/suitable than senior fire officers for the chief officer role.

Associated issues

The consultation documents goes on to raise a number of other ancillary issues:

Boundary changes

Around two thirds of fire and rescue authorities have coterminous boundaries with police forces. Where

boundaries do not align changes could be included within the business case for governance/integration

changes.

Performance reviews

No conclusive process is suggested for reviewing the performance of fire and rescue services under PCCs but

instead views are sought.

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Scrutiny

The proposal is for the remit of the Police and Crime Panel (currently responsible for scrutinising PCCs) to be

expanded to include scrutiny of a PCC’s fire responsibilities.

Complaints

Where a PCC takes over governance of a fire and rescue service but there is no employment integration (i.e.

the police personnel continue to be employed by a chief constable), the proposal is that the current regime

for dealing with complaints within the fire service remains in place. This regime allows for the majority of

complaints to be dealt with internally, with recourse to the Local Government Ombudsman or the Health and

Safety Executive, where appropriate.

Where there is integration between the police and fire services, the proposal is that complaints and conduct

matters should be treated in the same way as for the police. The detail of this proposal remains unclear as

the police complaints and disciplinary systems are currently being ‘overhauled’ by the Government.

Workforce issues

The Cabinet Office Code of Practice ‘Staff Transfers in the Public Sector’ would apply, which would require

provision to be made for staff to transfer on the same basis as under the Transfer of Undertakings (Protection

of Employment) Regulations 2006 (‘TUPE’). Employed fire service personnel would therefore transfer either

to the PCC or to a chief officer. The consultation is silent as to what would happen to any workers, to whom

TUPE would not be deemed to apply.

The Government proposes that PCCs should have the ability to negotiate changes to terms and conditions of

employment at a local level whilst also being able to approach the National Joint Council if they wish to

become members.

Enhanced collaboration

Where fire services remain the responsibility of the fire authority, the Government proposes that the PCC

should be given the opportunity to be represented on the fire and rescue authority or its committees,

together with voting rights. Where a fire service remains the responsibility of a county council, voting rights

would be restricted only to matters affecting the fire and rescue service.

London/Manchester

The Government’s proposals are to abolish the London Fire and Emergency Planning Authority and to enable

the Mayor of London to take direct responsibility for fire and rescue. In a similar way, in Manchester, the

proposal is to abolish the Greater Manchester Fire and Rescue Authority and to allow the Mayor of Greater

Manchester to take on the role of the PCC.

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Ambulance trusts

There is a much lower level of cooperation/collaboration envisaged between the ambulance trusts and the

PCCs than that for the fire services but there is an ‘encouragement’ for them to consider their engagement

with the PCCs and whether to have PCC representation on their council of governors.

Union reaction

David Lloyd, of the Association of Police and Crime Commissioners has stated that they support the current

proposals and many PCCs have publicly expressed their interest in taking on this new responsibility.

Matt Wrack of the Fire Brigades Union, on the other hand, has described the proposals as “badly thought out”

and that there was “absolutely no case” for PCCs to take on the responsibility for fire and rescues services.

Both the Chief Fire Officers Association (CFOA) and the Association of Ambulance Chief Executives have

previously set out their support for closer working between the emergency services. However, CFOA has also

mentioned its concern in respect of any proposals to put fire and rescue services under the control of the

PCCs.

Will Riches of the Police Federation also expressed concern that the proposals pointed “towards ways to do

things cheaper rather than better” and stated that it felt like “musical chairs”.

Chief Constable Lynne Owens, lead on emergency services collaboration for the National Police Chiefs’

Council, expressed surprise that a chief fire officer would be eligible to apply for the chief officer position

given that this would require a “fundamental change” to the requirement to have held the office of

constable.

Consultation

Consultation on the Government’s proposals is now open and will close on 23 October 2015. A link to the

consultation document which sets out how responses can be submitted can be found here.

Sarah Hooton | +44 (0)115 976 6033 | Sarah.Hooton@brownejacobson.com

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Introduction

As local authorities are incorporating and participating in more and more private companies, and appointing

their members and/or officers to represent their interests as directors of those companies, we are

increasingly asked to provide those directors with training on their duties, responsibilities and (potential)

liabilities in that context.

Following the article regarding wrongful trading and the duties of directors in the context of insolvency last

month’s Public Matters newsletter, it seems timely to provide a more general summary of directors’ duties.

Director’s duties have existed for the past 300 years and were codified by the Companies Act 2006 (the

‘Act’). These duties are, of course, owed by directors of private companies but also extend to shadow

directors and any person performing the same functions without having been formally appointed as a

director. Duties are owed to the company and it is only the company who can bring an action against a

director for breach of duty, breach of trust or negligence. In very limited circumstances, a minority

shareholder can bring a derivative action claim against directors if the breach amounted to a fraud on the

minority however the criteria needed to bring a valid claim are onerous.

The remedies for breach of a director’s duties include damages, an injunction, setting transactions aside,

accounting for profits and the return of the company’s property. There could also be grounds for terminating

a director’s service contract or disqualification as a director.

The general duties

The Act sets out seven general duties:

Duty to act within powers (section 171)

A director must act in accordance with the company’s constitution and must only exercise powers for their

proper purpose.

Duty to promote the success of the company (section 172)

A director must act in good faith and in a way which would be most likely to promote the success of the

company for the benefit of its members as a whole. The Act contains six factors that must be considered:

1. the likely consequences of the decision in the long term

2. the interests of the company’s employees

3. the need to foster the company’s business relationships with suppliers, customers and others

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4. the impact of the company’s operations on the community and the environment

5. the desirability of the company maintaining a reputation for high standards of business conduct

6. the need to act fairly as between the members of the company.

This is not an exhaustive list, other factors such as profitability can also be considered, and the factors are in

no particular order, indeed there is no guidance on which should take priority in the event of a conflict. In

order to demonstrate compliance with this duty, directors should document the factors that have been

considered for each decision in the minutes of meetings.

Duty to exercise independent judgment (section 173)

A director must exercise their own judgment, independent of the views of others on the board. This duty

does not prevent a director from taking advice but their own judgment must be used in deciding whether to

follow the advice.

Duty to exercise reasonable care, skill and diligence (section 174)

A director must act as a reasonably diligent person, this takes into account:

1. the general knowledge, skill and experience that may reasonably be expected of a person carrying

out the same functions as that director

2. the specific general knowledge, skill and experience of that particular director.

The first element is an objective test and the second analyses a director’s particular expertise. For example,

a director with accountancy qualifications or experience would be expected to exercise greater scrutiny of

the company’s accounts.

Duty to avoid conflicts of interest (section 175)

A director must avoid situations where there could be an interest which conflicts with the interests of the

company although the directors who are not conflicted may be able to authorise a director to continue to act

despite there being a conflict. This duty is interpreted widely and applies to the use of any property,

information or opportunity available to the company. The duty will be breached even if a director exploits an

opportunity which the company considered but decided not to pursue and continues to apply after a person

ceases to be a director.

Duty not to accept benefits from third parties (section 176)

A director must not accept any benefit from a third party which is given due to their position as a director or

their actions (or omissions) as a director unless the benefit cannot reasonably be regarded as likely to cause a

conflict of interest. The benefits covered by this duty include financial and non-financial benefits. It is

important to consider what would be regarded as ‘normal’ in the circumstances and whether the benefit is

excessive.

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Duty to declare an interest in a proposed transaction or arrangement with the company (section 177)

There is no duty to avoid interest in transactions or arrangements with the company however a director must

disclose to the other directors the nature and extent of any interest in a proposed transaction or

arrangement with the company whether direct or indirect. Such a declaration must be made before the

company enters into the transaction or arrangement at a board meeting, by written notice or by general

notice and must be updated should the interest change. There is also a duty under section 182 of the Act to

declare any interest in an existing transaction or arrangement.

There are certain exemptions where declaration of an interest is not required, including the following:

the director is unaware of the interest or of the transaction however ignorance is not a complete

defence and the director will be deemed to be aware of matters which they ought to reasonably be

aware of

there is no reasonable possibility of a conflict of interest

the other directors know of the interest (therefore no disclosure is required if the company has only

one director). It will be for a director seeking to rely on this exemption to prove that the other

directors knew, or ought reasonably to have known, of the interest. It is therefore best to declare an

interest in order to avoid any doubt

the transaction is a service contract between the company and the director.

The Act sets out certain types of transaction where a conflict of interest is likely to arise which includes

substantial property transactions, directors’ loans, payment for loss of office and directors’ service contracts

for more than two years. In general, should these circumstances be met, the transaction will need to be

approved by an ordinary resolution of the shareholders.

Additional duties

Directors will owe a number of other duties under company law, including ensuring that the company

complies with filing requirements and other legal duties. In addition to company law, directors will also owe

duties under specific legislation. For example, directors will owe specific duties in relation to insolvency,

health and safety, environmental, anti-bribery, competition and pension issues.

Directors’ protection

The vast majority of people who are directors of companies carry out their roles without any problems.

Directors’ indemnity insurance is available to offer some protection in the event of a claim being made and

where proceedings are brought against a director, the court has the discretion to relieve them of their

liability if it considers that the director acted honestly and reasonably and, considering all the circumstances,

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they ought fairly to be excused. In addition, shareholders can in some circumstances ratify the conduct of a

director by way of an ordinary resolution (unless otherwise stated in the company’s articles of association).

Difficulties facing local authority nominees

The most important point to bear in mind for local authority appointed directors is that although the council

makes the initial nomination/appointment, after appointment the director holds office according to the

constitution of the company. Once an individual (whether officer or elected member) accepts an

appointment as a director then they take on all the responsibilities of that position and their duty when

acting as a director is to the company, not to their appointing council. They must therefore act in accordance

with what they consider to promote the success of the company.

It would, for example, in theory be a breach of a director’s duty to the company to disclose confidential

company information to their appointing council, even if it were relevant to something that the council was

discussing. This applies both ways and it would be equally wrong to disclose confidential information

belonging to a council to the company.

The duty towards the company only applies when the member is acting in their capacity as a director. When

at council meetings or acting in a role as a local authority officer or elected member, he/she must act in the

best interests of the council (subject to the above point about confidentiality). It is therefore very important

that directors have a clear understanding of ‘which hat they are wearing’ at any time.

It may often be the case that a director has been appointed to an outside body because he/she has a

particular interest in the subject matter. In those circumstances it would not be unusual if the director’s own

views and those of the particular organisation were closely aligned.

Alternatively, a director may have gained particular knowledge about a subject because of their involvement

on another body. It is perfectly proper that the director should express those views/use that special

knowledge during council debates because they are his/her own views.

However, a director should never be seen to use their position as a council officer or elected member to act

as an advocate on behalf of an outside organisation, because that would be putting the other organisations

interests ahead of the council’s. This applies regardless of whether or not they were appointed by the

council.

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Where local authority officers or elected members serve as members or directors of outside bodies, it is

inevitable that conflicts will arise, from time to time, between the duties they owe to the outside body, and

the duties they owe to the council. Conflicting interests should be declared on every occasion and the rules

in the company’s articles or in relevant council codes of conduct in terms of conduct in the event of conflict

should be carefully followed.

Peter Ware | +44 (0)115 976 6242 | Peter.Ware@brownejacobson.com