Scottish Court of Session Decisions

Pursuers:  Howie QC;  Gillespie Macandrew LLP

Defenders:  Balfour;  BLM

1 July 2014

[1]        The pursuers seek payment by the defenders of £812,718, all in respect of damages for an alleged breach of contract.  In order to carry out road maintenance work, Tayside Contracts purchased crushed stone from the defenders to be used in the surface dressing of roads.  The claim is that loss was caused by the stone being disconform to contract.  However the defenders have asked the court to dismiss the action on the basis that Tayside Contracts does not have an independent legal personality, and thus the action is incompetent.  Counsel for the defenders, Mr Balfour, observed that although three local authority councils are named in the instance, they are not designed separately, but rather as the collective entity “Tayside Contracts”.  He accepted that there must be some way in which any valid damages claim arising from the contract can be enforced, perhaps by reference to the councils as a partnership.  However, given that their counsel has disclaimed such an approach, Mr Balfour was compelled to take the point and move the court to dismiss the action.

[2]        For Tayside Contracts, Mr Howie QC submitted that statute allows the councils to combine together and form a joint committee, here namely Tayside Contracts, which has the power to enter into commercial contracts.  It must be implicit that the contracts can be enforced, thus, whether viewed as a joint committee or a combination of councils, the form of the present action is appropriate and valid. 

Tayside Contracts

[3]        At the outset it is appropriate to explain the background to the formation of the joint committee and the nature and purpose of the organisation known as Tayside Contracts.  Before local government reorganisation, regional councils operated direct labour organisations.  After the creation of unitary authorities, Dundee City Council, Angus Council and Perth and Kinross Council appointed a joint committee under section 57(1) of the Local Government (Scotland) Act 1973 for the discharge of certain of their functions as authorities maintaining direct labour and services organisations.  This was to allow for the execution of works contracts or functional work under the Local Government Act 1988, together with non-statutory work, which would otherwise have been carried out separately by each council.  The relative minute of agreement between the three councils sets up a joint direct labour and services organisation committee known as “The Tayside Contracts Joint Committee.”  The operations under the control of the committee are carried out by a joint direct labour and services organisation known as “Tayside Contracts”.  Eighteen councillors form the committee (five from Angus, six from Dundee, and seven from Perth and Kinross).  The joint committee has adopted its own standing orders, and has power to undertake any of the delegated functions.

[4]        The work previously carried out by Tayside Contracts as a department of Tayside Regional Council has been transferred to the new committee.  In addition, the committee can undertake work for another council, or indeed for anyone else.  It has a convenor, vice convenor and a clerk.  The minute of agreement provides for Tayside Contracts to have a managing director who is responsible to the committee for the undertaking of the works, all under the instruction and supervision of the committee.  The committee can appoint other necessary senior staff and pay them reasonable remuneration.  The previous employees of Tayside Contracts in its pre-1994 guise were transferred to Dundee City Council.  Those employees were placed at the disposal of the joint committee in terms of section 65 of the 1973 Act.  Additional staff appointed by the managing director have become employees of Dundee City Council.  The agreement provides “The joint committee shall in all respects act as though it were the sole employer of said staff and employees”. 

[5]        Heritable property formerly owned by Tayside Regional Council and related to the direct labour organisation was transferred to the constituent councils according to location, and made available for use by the joint committee.  The same applied to moveable property.  The three councils have reached an agreement as to their percentage share of the value of the moveable assets and of the business employed in carrying out the functions managed by the joint committee, taking into account the turnover in respect of each division of Tayside Contracts.  Financial administration is undertaken by an officer assigned to Tayside Contracts and answerable to the joint committee through the managing director.  Treasury services are supplied by one of the councils.  Tayside Contracts’ financial year ends on 31 March.  Accounts are kept of all financial transactions, including current and capital accounts.  As necessary, a reserve fund, capital fund, etc can be kept to assist the joint committee.  There is an annual audit of the Tayside Contracts accounts. 

[6]        The agreement provides for a trading organisation as required in terms of the relevant competition legislation, meeting internally all revenue expenditure through income generated from the trading activities.  Any surplus or deficit is shared between the three councils on the basis of the said agreed percentage and adjusted against each council’s appropriate reserve fund.  Any deficit in excess of the balance on a reserve fund is to be funded by the appropriate council.  The use of any remaining surplus in the reserve funds is available at the discretion of each council and is either dispersed or held in the appropriate reserve fund.  There is an annual revenue budget.  Any capital expenditure is to be funded by the particular council which owns or will own the relevant property.  If it is decided that the funding of moveable property should be by loan capital, the joint committee funds the purchase having obtained consent in terms of section 94 of the 1973 Act. 

[7]        If a council decides to withdraw from the agreement, the entitlement of it (whether credit or debit) is to be paid to it or paid by it on an equitable basis in respect of moveable property, or money, or both, to meet the full financial value of the agreed percentage share attributable to that council.  Any dispute or difference between the joint committee and any of the constituent councils, or amongst the councils, is to be referred to the arbitration of the Sheriff Principal of Tayside, Central and Fife, or any person appointed by him.  In a variation of the agreement, the joint committee was granted power to delegate any function to a sub-committee or to an official. 

The averments in the summons

[8]        It is averred that, as a joint committee or combination of councils, and pursuant to the minute of agreement, the three local authorities carry on business together under the name and style of “Tayside Contracts”.  This is as a civil engineering contractor undertaking road maintenance work for local authorities in eastern and central Scotland.  Tayside Contracts also performs the functions under the Roads (Scotland) Act 1984 of the constituent councils to the extent that prior to 1995 they would have been carried out by the former regional council, plus any additional work as instructed by any of the councils.  The action is a damages claim arising out of a breach of contract which occurred in connection with the conduct of the business.  It is explained that the pursuers, as a combination of councils, have been statutorily authorised to litigate in a case such as the present, all under reference to the 1973 Act and to the Local Authorities (Goods and Services) Act 1970.

[9]        For the purpose of carrying out its road maintenance work, Tayside Contracts requires to have supplies of the various materials used in the repair of roads.  This includes crushed stone for use in the surface dressing of roads in order to protect against abrasion and reduce the likelihood that traffic will skid.  In mid-March 2010 Tayside Contracts sought supplies of surface dressing chippings for those purposes.  The defenders were advertising high quality stone hewn from its Waulkmill Quarry, and in due course a large quantity was purchased by Tayside Contracts.  It is unnecessary to set out the details of the alleged disconformity to contract, but suffice to say that the pursuers offer to prove that the stone was not of the specified quality and that as a result substantial losses were incurred in respect of the relaying of the surface of various roads. 

[10]      The contracts on which Tayside Contracts sue in the present action concerned the purchase of goods and materials necessary for supply to the constituent councils for the purpose of the surface dressing works.  The acquisition of stone chippings was an activity calculated to facilitate, and be conducive or incidental to the carrying out of a function remitted to Tayside Contracts, namely the maintenance of public roads, all as required under a series of informal contracts with each of the councils.  Tayside Contracts was in breach of the implied terms regarding fitness for purpose of the road surfaces, so it came to be liable in damages to each of the councils for the cost they would incur in securing that the roads were resurfaced to the correct standard.  To avoid this, Tayside Contracts had to undertake the relaying of the surface of the roads at its own expense.  The cost of the chippings bought from the defenders was wasted expenditure.  The loss is estimated at the sum sued for. 

[11]      Tayside Contracts had capacity to enter into contracts with each of the councils and could therefore become liable to those councils.  Reference is made to the 1970 Act.  Failing that, it was executing the roads authority maintenance function of those councils, and, in so far as sustaining loss caused by the defenders’ breach of contract, it is entitled to damages from the defenders therefor. 

Counsel’s submissions on behalf of Tayside Contracts

[12]      Mr Howie QC submitted that Tayside Contracts are entitled to sue and be sued by necessary implication arising from certain statutory provisions.  He noted that it had not been suggested that the contract with the defenders was illegal or unenforceable.  The terms variously used in the relevant legislation of “joint committee” and “combination of councils” are synonymous.  According to Mr Howie, Tayside Contracts is a “sui generis beast”.  Parliament has given it the power to contract, therefore it must be able to sue and be sued.  Were it otherwise, Parliament would have allowed a series of unenforceable contracts. 

[13]      The intention was to keep the previous direct labour organisation of Tayside Regional Council in existence.  Tayside Contracts keeps separate accounts.  The constituent councils can take their share of any profits.  However each council cannot sue for a share of any damages awarded against the defenders.  There are tight accounting regulations in respect of direct labour organisations, which are designed to ensure that they enjoy no benefit over private companies.  Any income generated by Tayside Contracts cannot proceed directly to the constituent councils, or any of them.  At the end of any financial year Tayside Contracts might be operating at an overall loss, even if the income for that year includes a large sum by way of recovered damages.  If Tayside Contracts is successful in this action, the damages paid by the defenders will have to be accounted for through Tayside Contracts.  Whether the councils obtain any direct benefit therefrom will depend upon the trading performance of the organisation. 

[14]      Mr Howie referred to various provisions in the 1973 Act, including sections 1, 10, 56 and 235.  They demonstrate that a combination of two or more councils can contract with anyone for maintenance work in connection with roads or for supplying goods/materials.  As a combination of councils, Tayside Contracts amounts to a union of the three councils pursuing a common purpose.  Mr Howie confirmed that he does not rely upon the Local Government (Contracts) Act 1997.  It is the councils in combination who are suing.  Mr Howie asked, how do they lose their legal personality?  However, under the accounting rules it is necessary to recover a single sum of money to be accounted for through Tayside Contracts. 

[15]      Mr Howie submitted that in terms of section 56(5)(b) of the 1973 Act a combination of councils is treated as though it were a local authority, therefore section 189 of the 1973 Act provides direct authority for the present proceedings.  This analysis provides support for non-statutory work, that is private work for private bodies, though in the present case, the contract was for the purchase of stones to be used for the maintenance of local authority roads. 

[16]      Mr Howie does not claim that Tayside Contracts is a joint board within the terms of the relevant legislation.  That mechanism has not been used.  Though not an incorporated body under the Companies Acts, Tayside Contracts has power to contract, therefore it must have power to sue to enforce the contract or recover damages for breach of it – and be sued upon the contract.  Tayside Contracts is not a partnership, nor a joint venture.  Property held by the constituent councils is not held as common stock.  The joint committee and the related trading organisation is a purely contractual arrangement between the councils.  There is no suggestion of any form of trust.  There is no need to struggle to place some existing legal framework upon this particular entity.  “Parliament can do what it likes”.  It is a joint committee or combination of councils carrying on business under a particular name or style. 

Counsel’s submissions on behalf of the defenders

[17]      Mr Balfour submitted that Tayside Contracts is not a legal person, and thus cannot raise legal proceedings.  He noted that the three councils are designed as a collective entity, but not as a partnership.  Tayside Contracts is described as a joint committee, which is a creature of statute.  Reference was made to sections 56 and 62A of the 1973 Act.  There is no suggestion that such committees enjoy a separate legal personality.  This is confirmed by the definition of “joint committee” in section 235, which can be contrasted with that for a “joint board”, the latter expressly being made a body corporate. 

[18]      Reference was made to the relevant provisions in the 1970 Act, and to the phrase “a combination of councils”.  Again none of this creates a new legal person.  According to Mr Balfour, the contract entered into by the defenders with Tayside Contracts is not authorised by section 1 of the 1970 Act.  That statute regulates existing legal bodies.  It does not imbue joint committees with legal personality.  By the use of the term “combination of councils”, the straightforward explanation is that Parliament had in mind a partnership consisting of two or more councils.  A partnership, at least in Scotland, enjoys a separate legal personality.  Reference was made to section 100J(2) of the Local Government Act 1972, and to sections 118 and 119 of the Local Government (Scotland) Act 1947.  A joint committee can be set up as a joint board, a company, or a partnership, but none of that would avoid the difficulty presented by the absence of authorisation under the 1970 Act. 

Discussion and decision

[19]      Section 56(5) of the 1973 Act allows two or more local authorities to discharge any of their functions jointly.  They may arrange for this to be done by a joint committee or by an officer of one of them.  All of this includes anything which facilitates or is incidental to the discharge of any of their functions.  It is expressly provided that the operation of the 1970 Act is unaffected by these provisions.  Section 235 of the 1973 Act defines a “joint committee” as meaning “a body, not being a body corporate, constituted for the purpose of a combination of local authorities under this Act or by or under any other enactment, consisting exclusively of persons appointed by the local authorities” (emphasis added).  “Joint board” means “a body corporate, constituted for the purposes of a combination of local authorities under this Act or by or under any other enactment, consisting exclusively of persons appointed by the local authorities” (emphasis added).  This distinction between a joint committee and a joint board was well established in previous local government legislation. 

[20]      While the earlier description of the body known as Tayside Contracts demonstrates that it is a sophisticated trading organisation, with many of the appearances and attributes of an independent legal body, I am satisfied that Mr Balfour is correct in submitting that Parliament did not intend that a joint committee, such as Tayside Contracts, would have an independent legal personality separate from its constituent councils.  In my opinion this must follow from the terms of the respective definitions in section 235.  It can also be noted that section 62A of the 1973 Act allows for the incorporation of a joint committee into a joint board, with subsection (4)(c) providing for the transfer to the joint board of the property, rights and liabilities of the relevant local authorities.  Only the state can create a corporation with a legal personality separate from the aggregate of its members (sometimes by providing a statutory mechanism for incorporation, for example as under the Companies Acts).

[21]      While the creation of unitary authorities increased the likelihood of the use of such arrangements (see Himsworth “Local Government in Scotland” 1995 page 71), joint committees and joint boards are both long established methods whereby two or more local authorities can combine to discharge one or more of their functions.  However, it is only joint boards that are made bodies corporate, with a common seal and enjoying perpetual succession;  and with the power to hold land, and to sue and be sued in their own name. 

[22]      Given that Tayside Contracts is not a separate legal body with its own corporate personality, does it follow that this action must be dismissed?  It is brought by three named councils.  Each enjoys legal personality and the right to bring legal proceedings, and they are designed as carrying on business together under the name and style of “Tayside Contracts”.  The law has mechanisms for permitting voluntary associations, trade unions, and trusts, none of which have a separate legal personality, to sue and be sued in respect of debts owed to or by such bodies.  Such are sometimes called quasi-corporations, for example, see Professor T B Smith’s Short Commentary at pages 272ff.  (Professor Smith speaks of the legislature intervening “for their regulation and assistance”).  Why should the same not apply to direct labour trading organisations such as Tayside Contracts?  And if so, what is wrong with the action being raised in the name of the three constituent councils acting in combination for the recovery of a single sum payable to the body with whom the defenders contracted?  To my mind, there would be something wrong with our law if the claim could not proceed as presently framed. 

[23]      Recognising this, Mr Balfour suggested that the summons could be redrafted on the basis that the councils have formed a partnership.  No doubt for good reason, Mr Howie expressly disclaimed this approach, stating that the councils did not intend to form a partnership;  they created a joint committee under the relevant statutory powers.  And I can imagine that unforeseen complications could well arise if an artificial partnership framework was imposed where none was intended by the participant councils. 

[24]      Mr Howie’s straightforward submission is that Parliament has allowed councils to combine and contract through a body known as a joint committee, therefore it must follow that Parliament intended that the joint committee could sue and be sued in respect of those contracts.  Thus if a joint committee enters into a contract with a third party, and wishes to recover damages from it, the constituent councils in the name of the joint committee should be entitled to seek recovery of that sum from that party.  If that is correct, and if the joint committee is not a separate legal personality, and is not a partnership, there is no alternative to the constituent councils raising an action in the name of the joint committee.  That would allow any entitlement to be paid by the defenders to the joint committee and thereafter accounted for in accordance with the financial arrangements agreed between the councils. 

[25]      In support of his submission that Parliament has authorised the contract between Tayside Councils and the defenders, Mr Howie relied upon the Scottish version of section 1 of the 1970 Act.  The wording of this provision is complex and difficult to follow.  I can understand why Mr Balfour insisted that no such authorisation emerges from its terms.  However, I am satisfied that the overall meaning and effect is that a combination of councils, of the kind represented by Tayside Contracts, can enter into an agreement with a third party for the supply of goods or services if, amongst other things, this is for the purpose of the supply of goods or services to a local authority or to any other party. 

[26]      The building blocks of this conclusion include the broad definition in section 1(4) of “a local authority” as covering a council constituted under the 1994 Act or any joint board or combination of two or more such councils.  I consider that the last part of this definition includes a joint committee such as Tayside Contracts.  Section 1(1A) recognises that a local authority, which, as defined, includes a combination of councils, can be a trading operation.  Section 1, if read as a whole, allows contracts with non-public bodies, subject to a statutory limit regarding the income from commercial services. 

[27]      During the hearing a degree of puzzlement was expressed as to the intended meaning of section 1(2).  However I have reached the view that the effect of subsection (1)(2)(b) is that a local authority, which includes a combination of councils, is authorised to be supplied with goods or services from a third party, if that is for the purpose of allowing the onward supply of goods or services to another authority, for example, here Dundee City Council, or either of the other constituent councils.  The underlying contracts with those councils are authorised by the combined effect of the various parts of section 1(1).  If the above is correct, Tayside Contracts had statutory power to enter into the contract with the defenders.  I accept Mr Howie’s submission that it follows that it can sue or be sued on the contract. 

[28]      The result is that Tayside Contracts, though not having its own legal personality, can enter into contracts with third parties and carry out other acts in discharge of its functions, all as authorised by sections 56 and 57 of the 1973 Act.  In these circumstances it makes sense that any litigation of the present kind should be framed in the name of the constituent councils acting together under the designation of Tayside Contracts.  I see no difficulty with the three councils, on that basis, seeking payment of a single sum by way of damages, which will be payable to the joint committee and thereafter accounted for in the agreed manner.  No individual council has any right to an identifiable share or part of the damages, but rather the whole sum is payable to the joint committee as the contracting party.  I consider that all of this is implicit in and authorised by the relevant statutory provisions.  It may be that Tayside Contracts can be thought of as “a legal entity” similar to that described by Lord Keith of Avonholm in the context of a trade union in Bonsor v The Musicians Union [1956] AC 104 at 150ff.  That said, if the suit was at the hand of the contracting third party, I doubt if the claim would be constrained to exclude diligence against the property of the member councils.  Having decided that the action as framed is competent and appropriate, I shall repel the defenders’ first plea-in-law and put the case out for a hearing in terms of Rule of Court 47.12 in order to determine further procedure.