Failure to follow public procurement regime left local authority development agreement ineffective

In overturning the first instance decision, the Court of Appeal has held that a development agreement was to become a "public works contract" and was therefore subject to the public procurement regime. The Court of Appeal judgment is also the first declaration of ineffectiveness in England following the issue of a VEAT notice.

Implications of the case

The 2016 case of Faraday Development Ltd v West Berkshire supported an emerging argument, initially proposed in both Helmut Muller (2010) and Midlands Co-operative (2012) that, in the absence of any legally enforceable obligation to develop, the underlying contractual arrangements were unlikely to constitute a "public works contract" for the purposes of the relevant EU Directives.

The decision offered a further steer, to both procuring authorities and developers alike, as to circumstances under which a development scheme could fall outside of the public procurement rules. Not that this gave parties a free rein to artificially structure their developments to do so. The courts, in the Faraday case, placed significant emphasis on the fact that the council had taken an informed decision not to communicate their requirements as falling within the public procurement regime based on a clear, consistent and objective audit trail and supported by robust external advice.

However, emerging commentaries sensibly warned against the blanket application of those principles: the claimant had immediately sought permission to appeal the decision. Two years on and the Court of Appeal has subsequently handed down what can only be described as another key ruling in this complex area of public procurement law (Faraday Development Ltd v West Berkshire Council [2018] EWCA Civ 2532).

The judgment pulls back from the previous decisions in the Helmut Muller and the Midlands Co-operative cases. Instead it suggests that electing to give effect to "contingent obligations" to carry out works at a later stage may, in itself, give rise to a breach of the public procurement rules. This, in practice, removes any temptation to formulate contracts which include "contingent obligations" with a view to circumventing the application of the Public Contracts Regulations 2015 (PCR 2015).

Furthermore, this is the first declaration of ineffectiveness in England and under circumstances where the local authority had issued a voluntary ex ante transparency notice. It highlights the importance of drafting detailed notices which set out the true nature of any transaction in line with the requirements of PCR 2015.

Brief re-cap of the facts

The key facts of the case are as follows:

  • Faraday Development Limited (Faraday) initially challenged West Berkshire District Council's (WBDC) decision to award a development agreement (DA) to St Modwen Developments Limited (SMDL) in September 2014.
  • The DA was to regenerate 26 plots, three of which were held by Faraday under long leasehold arrangements, with a further site subject to a similar option. Faraday had already secured planning permission for a mixed-use redevelopment for its four plots (known as the "Faraday Plaza Scheme") and had also entered into a related JV arrangement with Wilson Bowden Developments Limited (WBDL).
  • Furthermore, a new consolidated ground lease for a 250 year term, in relation to all four plots, had been negotiated and by April 2011, heads of terms had been agreed and a lease drafted. However, in 2011 WBDC withdrew from those negotiations.
  • The withdrawal was triggered by the outcome of a Strategic Feasibility Study (SFS) commissioned by WBDC in early 2011 which recommended a more strategic plan for the whole site, comprising the 26 plots, as opposed to the limited restructuring of the existing ground leases with Faraday. The recommendations of the SFS were to develop the site with a view to not only meeting WBDC's overall planning objectives for the area, but also maximising its potential financial return.
  • With the assistance of external support, WBDC issued an "Opportunity Document" in January 2013 which looked to gauge both market interest in the site and the potential levels of return. The document did not prescribe any specific form of procurement route for developer selection, instead describing the market engagement exercise as a precursor to WBDC disposing of its interests under a "land transaction".
  • An informal tendering exercise was subsequently held with three shortlisted bidders, two of which were SMDL and WBDL/Faraday (under a joint bid). Following an assessment process, which included considerations relating the levels of return and developer expertise and experience, a recommendation was made to proceed with SMDL.
  • The DA that followed imposed a number of obligations, or "Master Planning Services" on SMDL which included the preparation of project plans, assembly of the necessary land interests, preparation of infrastructure cost budgets, securing planning permissions, followed by the development of a detailed planning strategy and appraisal for those plots to be taken forward. Most notably however, although SMDL could elect to enter into further obligations to acquire and develop any of those plots, it was under no legal obligation to do so from the outset.
  • To provide itself with some extra comfort, WBDC also elected to issue a voluntary ex ante transparency (VEAT) notice prior to contract award. This referred to the main object of the DA as being "an exempt land transaction", placing no binding obligation on SMDL to develop the site.

The 2016 challenge

Faraday subsequently pursued both a judicial review and public procurement challenge on three grounds:

  1. WBDC was in breach of its section 123 Local Government Act (s123) duty to secure best consideration in relation to the site;
  2. The DA was a public works/public services contract within the meaning of the PCR 2015 and as a result, WBDC's failure to run a compliant tender process was unlawful; and
  3. WBDC had acted unlawfully in deliberately seeking to avoid imposing any enforceable obligations on SMDL to secure any works.

The courts dismissed each of these claims:

  1. It was clear that the key driver for the development was to maximise financial return which was in line with WBDC's s123 duty;
  2. The argument that the DA was a public contract under PCR 2015 was also rejected. In the court's view the DA was merely a contract to facilitate regeneration by the carrying out of works and to maximise WBDC's financial receipts. It had lawfully decided not to impose enforceable obligations to carry out the redevelopment. Furthermore, the provision of the Master Planning Services did not satisfy the "main object" test, but again simply facilitated the regeneration and financial objectives;

  3. The court also rejected the argument that it was unlawful to avoid imposing enforceable obligations. Instead, it reminded parties that WBDC's decision to enter into the DA was based upon external advice and a proper assessment of SMDL's expertise and past performance. These matters were entirely for the judgement of WBDC; the court would not look to interfere in, or dissect a public body's decision making process.

The 2018 Appeal

Upon appeal Faraday raised four grounds, all of which related to the second ground of challenge in the first instance:

  1. Was the development agreement a "public works contract" as defined in Directive 2004/18/EC?
  2. Was it unlawful for WBDC to enter into the development agreement and by doing so, had it committed itself to entering into a "public works contract" without following the procedure for public procurement?
  3. If the development agreement was not a "public works contract" was this because the public procurement regime was deliberately and unlawfully avoided?
  4. If the development agreement was not a "public works contract" was it a public services contract?

WBDC also separately asked the Court of Appeal to uphold the decision in the first instance on additional grounds, which amongst others, involved consideration as to whether Faraday's claim for a declaration of ineffectiveness was precluded by the issuing of a VEAT notice.

The Court of Appeal determined that:

  1. The DA was not a "public works contract" when concluded; in order to fall within the definition, SMDL must have assumed an obligation to carry out works at that stage. Contingent obligations did not suffice for these purposes, as they were only fulfilled upon accepting the obligations to acquire and redevelop the land;
  2. However, by entering into the DA, WBDC had essentially agreed to act unlawfully in the future. If and when SMDL did elect to enter into the obligation to acquire the land and develop the same, a public works contract would crystallise, at which point there would be a breach of the PCR 2015 (to the extent that this would constitute a "direct award" to the developer);
  3. Although a future breach could be triggered, the public procurement regime had not been "deliberately and unlawfully avoided"; there was no evidence that WBDC had acted in bad faith, or with a view to circumventing the rules;
  4. Furthermore, the DA was not a "public services contract". Although the agreement contained legally enforceable "Master Planning Services", there was no justification for segregating those services from the "main object" of the transaction which was to dispose of land and secure its future development.

Finally, the Court of Appeal held that, under the circumstances, a declaration of ineffectiveness was not precluded by WBDC issuing a VEAT notice. The PCR 2006 required a "description of the object of the contract" and a "justification" of WBDC's decision to award the DA without prior advertisement.

However, the VEAT notice fell short of these requirements by narrowly describing the DA as a "land transaction" without describing the, albeit contingent, obligations on SMDL to potentially acquire and develop the land in the future. To this extent it did not "alert a third party to the real nature of the transaction" and thus could not be relied upon for the purposes of circumventing any declaration of ineffectiveness. The court subsequently made such a declaration and ordered WBDC to pay a penalty of £1.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Date published

05 December 2018



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