A recent Court of Appeal judgment in the case of Faraday Development Ltd v West Berkshire Council1 will require local authorities to consider carefully the scope of the public procurement regulations when they are considering whether what they are entering into is a development agreement or a sale of land. Arrangements which local authorities may have previously considered to be outside the scope of the regulations may now require closer scrutiny. The judgment also shows the amount of detail necessary if a voluntary transparency (“VEAT”) notice is to be effective in protecting an arrangement from a declaration of ineffectiveness.
The application of the public procurement regulations to development agreements has vexed contracting authorities and developers for a long time. In the case of Jean Auroux and Others v Commune de Roanne2 , the European Court of Justice took a very wide view of the type of land transactions that would be classed as public works contracts and so need to be procured through competitive procurements. Later cases in the European and UK courts have been more favourable to contracting authorities and the Administrative Court in the West Berkshire case followed that trend, dismissing the challenge against the local authority on all grounds. However, the Court of Appeal allowed the developer’s appeal and established some important points of principle.
Faraday Development Ltd v West Berkshire Council
West Berkshire Council wished to secure the regeneration of an area of land near Newbury, most of which it owned. It chose its developer and entered into a development agreement which gave the developer an option to drawdown parcels of land which it would then be required to develop in accordance with the terms of the development agreement, both for the Council’s benefit and the developer’s benefit. In advance of drawdown, the developer was required to provide various land assembly services, prepare development strategies and use reasonable endeavours to obtain planning permission. The Council had advertised for a developer but had not conducted a public procurement exercise. This was because it regarded the arrangement as a sale of land rather than a procurement of works since the choice of whether or not to drawdown and develop the land was entirely within the developer’s discretion, i.e. the obligation to deliver the works was a contingent obligation entirely within the developer’s control, and would only become an actual obligation if the developer chose to drawdown the land. However, the Council was sufficiently alert to the potential for different interpretations of the law to publish a voluntary transparency notice, explaining its reasons. With the Administrative Court having dismissed a challenge, the Court of Appeal found itself having to consider the lawfulness of the Council’s approach.
A key issue for the Court to decide was whether the development agreement was in fact a public works contract which should have been competitively procured under the public procurement regulations. If the development agreement was not itself a public works contract, the Court needed to consider whether the Council had unlawfully committed itself to entering into such a contract in the future without running a competitive procurement process.
Public works contracts
A public works contract is defined in the Public Contracts Regulations 2015 as a public contract which has as its object: the execution, or both the design and execution, of works related to one of the activities listed in Schedule 2 of the regulations; the execution, or both the design and execution, of a work; or the realisation, by whatever means, of a work corresponding to the requirements specified by the contracting authority exercising a decisive influence on the type or design of the work. The challenge in the West Berkshire case was based on earlier regulations but a similar definition applied.
Whilst a simple sale of land is not a public works contract, the position can be different if a sale of land is coupled with an arrangement for securing the development of the land. However, proceedings that were commenced but discontinued by the European Commission against Germany established the Flensburg principle that an agreement between a local authority and a developer that contains no legally binding obligation on the developer to carry out works does not amount to a public works contract. There is both European and UK case law which has recognised the validity of this approach.
West Berkshire Council purported to follow the Flensburg principle in entering into an agreement which it considered to be outside the scope of the public procurement regime but the Court of Appeal took a different view.
Commitment to act unlawfully
The Court of Appeal decided that the development agreement itself was not a public works contract, at least not at the time it was entered into, because it contained only a contingent obligation to carry out the works, and the contingency was within the control of the developer. However, the Court found that the agreement committed the Council to procuring works from the developer at the point when the developer exercised the option to drawdown land under the agreement. This meant that a public works contract would come into being at the point of drawdown without there having been a competitive procurement process and indeed without any opportunity for the Council to run one. The Council had therefore committed itself to acting unlawfully in the future.
Following European case law, the Court decided that it was necessary to consider the real substance of the overall transaction between the parties, and to view the several stages of a multi-stage transaction as a whole. The relevant question is whether the contracting authority has either procured, or contractually committed itself to procure, works from a particular economic operator.
The Court contrasted the West Berkshire case with other cases such as Helmut Müller GmbH v Bundesanstalt für Immobilienaufgaben3, where there was nothing binding either party to the carrying out of works.
Requirements for an effective VEAT notice
The Court of Appeal then had to decide whether the Council’s VEAT notice was sufficient to protect it against a declaration of ineffectiveness in respect of the development agreement. It considered the VEAT notice against the requirements of the regulations and the standards established in the case of Ministero dell’Interno v Fastweb SpA4. These required that a VEAT notice should be more than a mere formal justification. It should give a clear and unequivocal explanation of the reasons that led the authority to the view that the contract could be awarded without following the procedure for public procurement, so that any interested third party would be able to decide with full knowledge of the relevant facts whether it would be appropriate to bring a challenge.
The Council’s VEAT notice was found to be invalid because it was not transparent enough. It did not fully describe the development agreement. It said that the main object of the agreement was an exempt land transaction, that there was no binding obligation on the developer to carry out any works and that any services provided by the developer were merely incidental to the main object of the development agreement. The failure by the Council to mention the developer’s contingent obligation to deliver the works, and the statement that the Council had not specified the requirements for any works and did not exercise a decisive influence on the type or design of any works, meant that the VEAT notice did not alert third parties to the real nature of the transaction. Therefore, it could not prevent the making of a declaration of ineffectiveness.
Other claims, including that the Council had deliberately and unlawfully avoided the public procurement regulations, and that the development agreement was a public services contract, were dismissed.
The Court of Appeal’s judgment meant that the Council was subject to a declaration of ineffectiveness and the imposition of a financial penalty. However, the issue of wider concern will be the implications of the judgment for the management of this and other developments.
Implications of the judgment
The Court of Appeal’s judgment has demonstrated the importance of a local authority carefully considering the entirety of a transaction, and its true substance, when deciding whether the public procurement rules apply. Whilst pure land disposals fall outside the public procurement regime, arrangements which impose binding obligations to carry out works to a local authority’s specification and for the local authority’s benefit will usually be covered, subject to the application of thresholds and exemptions. Structuring the transaction using a multi-stage approach will not necessarily avoid triggering the public procurement rules, if the local authority will at any stage be committed to receiving works from a developer which have not been appropriately procured.
Local authorities should therefore be cautious about structuring arrangements as pure land disposals where they have wider objectives which they wish to “convert” into enforceable obligations once triggers are activated and/or conditions met. In that situation, the procurement of a works contract may be required.
It is also appropriate following this judgment for authorities to review when and how they use VEAT notices. If an authority is genuinely satisfied that it is making an arrangement outside the scope of the public procurement regime but is concerned how others might interpret it, a VEAT notice can help to protect the authority, or at the very least help to flush out any potential challenges so that they can be dealt with. However, a VEAT notice is unlikely to protect an authority which has decided to implement a transaction without complying with the public procurement regulations, even though it thinks there is a possibility the regulations could apply. The West Berkshire case has emphasised the importance of including detailed and accurate information in the VEAT notice so that the real nature of the transaction is apparent. If an authority publishes a VEAT notice which is light on detail, it risks the notice being found to be invalid in the event of a challenge. The downside of having to include detailed information in the VEAT notice is that it is easier for a potential challenger to pore over what the authority proposes to do, and so potentially easier for them to construct a case against the authority.
Are Flensburg and Helmut Müller still good law?
The Court of Appeal judgment in West Berkshire leaves the judgment in Helmut Müller and the decision in Flensburg unscathed but has highlighted the importance of considering whether a development truly falls within the principles established in those two cases. It is important to carefully review the “real substance” of the overall transaction, as opposed to merely looking at the legal form which the transaction takes.
A local authority should consider the following:
- Even if the terms of the transaction do not impose an immediate obligation on a developer to carry out works, is the local authority contractually committing itself to receive works from the developer at a later stage without first having the opportunity to run a procurement exercise?
- Is it a contract for pecuniary interest whose object is the carrying out of works in accordance with the contracting authority’s requirements, notwithstanding that there may initially be just contingent obligations which are triggered only at the discretion of the developer?
If so, the local authority should look to competitively procure the works.
If, however, the transaction is a land sale or the grant of a lease with merely an aspiration that works will be carried out, the principles established in Helmut Müller and Flensburg are likely to still apply.
1  EWCA Civ 2532
4  PTSR 111
If you’d like any further advice, please don’t hesitate to contact a member of Geldards’ Procurement Team.
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