First declaration of ineffectiveness granted and some clarity on developments at last

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First declaration of ineffectiveness granted and some clarity on developments at last

Published 22 November 2018

Following recent EU and domestic case law, in particular, R (on the application of Midlands Co-operative Society Ltd) v Birmingham City Council (2012), it had been argued that the public procurement regime could be avoided by ensuring that a development agreement contained no immediately enforceable obligations to carry out works. Even if there were obligations placed on a developer, if these were contingent upon some future act being carried out at the discretion of the developer (eg applying for planning) this was not considered to amount to a public works contract to which the procurement regime would apply.

In this case, the development agreement contained obligations on St Modwen as developer to carry out works but these obligations only crystallised and became enforceable if St Modwen chose to draw down a parcel of land within the development area of the London Road Industrial Estate in Newbury. The development agreement therefore set up a structure within which discrete developments would be carried out, if St Modwen chose to do so at some point in the future, in relation to each parcel of land.

Faraday was a developer who had an interest in the development area. It had secured planning permission for a mixed use development in respect of long leases which it held on three plots of land on the London Road Industrial Estate and an option to acquire a long lease on a fourth. Faraday had participated in a non-OJEU tender process (as part of a JV) run by the Council for the regeneration of the London Road Industrial Estate. St Modwen was selected as the successful developer.

The Council chose to publish a voluntary ex-ante transparency (VEAT) notice prior to entering into the development agreement which purported to explain that no OJEU procurement process was carried out prior to appointing the successful developer because:

"The agreement is an exempt land transaction and not a "public works contract" because:

  1. the agreement places no binding obligation on St Modwen to undertake any works;

  2. the Council has not specified the requirements for any works; and

  3. the Council does not exercise a decisive influence (nor indeed any influence) on the type or design of any works

and any services to be provided were incidental to the main object of the agreement.

The purpose of the VEAT was to protect against any claims for ineffectiveness once the development agreement had been entered into.

In the High Court, Holgate J held that there was no public works contract because when the development agreement was entered into, St Modwen did not come under any obligation to carry out works and was free under the agreement to walk away if it so wished. Faraday appealed the High Court decision.

In the Court of Appeal the judgment centred around four main points:
  • Was the development agreement a public works contract at the point at which it was entered into?

The Court held that development agreement was a contract which included a mechanism for the carrying out of the works by St Modwen to give effect to the Council's intended regeneration of the industrial estate. It provided for the precise extent and effect of those obligations and the precise circumstances in which they were to become enforceable. The Court's view was that the Council had reserved ample control over the content and execution of the works. However, it left the fulfilment of the contingency upon which the crystallisation of those obligations depended, in the control of St Modwen as developer i.e. the drawing down of the land. Once that was done, mutually binding obligations on the Council and St Modwen would take effect, and the Council had already taken the decision to commit itself to that arrangement.

The Court said that looking at the contract in this way, it was possible to conclude that the development agreement was not yet, at the point at which it was signed, a public works contract.

  • Was it unlawful for the Council to enter into the development agreement, because by doing so it committed itself to entering into a public works contract without following an OJEU compliant procedure?

The Court said that on this point, it is clear that the EU authorities require the Court to look at the relevant contractual arrangements as a whole and consider the transaction in its totality to establish whether the authority has by its "decision or action" procured, or contractually committed itself to procuring, works or services from a particular economic operator. In the present case, the Council had committed itself in this way, without any further steps being required of it, to enter into a public works contract with St Modwen in the future. There was no opportunity for a public procurement process to be gone through before the public works contract materialises.

Therefore, by entering into the development agreement, the Council agreed to act unlawfully in the future.

  • If the development agreement was not a public works contract, was it a public services contract?

If the development agreement was not a public works contract then it was argued before the Court that it must be a public services contract because at the time it was entered into there were immediately enforceable obligations on St Modwen to provide services relating to planning and design.

Whilst the Court agreed that the agreement did contain such obligations on St Modwen, there was no justification to segregate these from the works obligations and the transfer of the land. The services were ancillary to and preliminary to the performance of the works obligations and could not sensibly be divorced from the works obligations, with no independent purpose. The "principal purpose" approach was adopted by the Court here and the principal purpose in this case of the development agreement was to bring about the execution of the works and to implement the regeneration and development.The main object of the agreement was not, therefore, the provision of the services and the contract could not fall within the definition of a public services contract.

Did the VEAT notice preclude a declaration of ineffectiveness being made by the Court?

  • Previous case law on the validity of VEAT notices in circumstances where the justification for the lack of OJEU procurement process was not genuine has held that such VEAT notices will not operate to preclude a declaration of ineffectiveness.

In the Faraday case, the Court found that the VEAT notice failed on the issue of transparency – it said that more than a mere formal justification is required and must be complete in stating "an unequivocal explanation of the reasons that led the contracting authority to the view that the contract could be awarded without following the procedure for public procurement". Third parties should be able to decide "with full knowledge of the relevant facts whether they consider it appropriate to bring an action".

The Court held that the VEAT notice in this instance was not transparent enough and did not meet the requirement in the Regulations for the notice to include a justification for the decision to award the contract without prior publication of an OJEU notice.

Ineffectiveness and Fine

The Court declared the development agreement entered into in 2015 to be ineffective.

The fine imposed by the Court alongside the declaration of ineffectiveness was a nominal amount of £1 which may be surprising to some given the stark warnings authorities have had about the unlimited nature of a fine to be imposed under the Public Contracts Regulations which must be "effective, proportionate and dissuasive". Whilst the imposition of a fine is mandatory where the Court makes a declaration of ineffectiveness, the Court has discretion as to the amount of the fine, and the nominal nature of this fine may well be because the Court acknowledged that there was no evidence that the Council at any time acted in bad faith. Whilst the development agreement may have been entered into in breach of the requirements of the public procurement legislation, the Court was of the view that it was not a "sham" to deliberately avoid the OJEU regime.

How does this change things?

Until now, ineffectiveness has been a "theoretical" risk which had not actually been tried and tested in the courts. It is now more than a theoretical risk and will be seen as a real and potentially very harsh remedy.

There are many development deals where this decision will impact significantly; particularly those entered into within the last 6 months (i.e within the time limit for bringing an ineffectiveness claim). Until now the “immediate enforceable obligation" was seen as key to bringing an agreement within or out with the scope of the procurement regime and contracting authorities will perhaps see this decision as unhelpful when trying to progress developments without a full OJEU process.

Authors

Alison Walton

Alison Walton

Newcastle

+44 (0)191 404 4129

Hannah Chapelhow

Hannah Chapelhow

Newcastle

+44 (0)191 404 4121

Mary Mundy

Mary Mundy

Leeds

+44 (0)113 251 4727

Victoria Fletcher

Victoria Fletcher

London - Walbrook

+44 (0)20 7894 6658

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