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Land development agreements and public procurement regulation: Faraday Development Ltd v West Berkshire Council [2018] EWCA Civ 2532

  • United Kingdom
  • Competition, EU and Trade
  • Public procurement
  • Real estate litigation

10-12-2018

In its Faraday decision the Court of Appeal has set aside a concluded land development agreement between a local authority and a developer for having been concluded in breach of procurement legislation. This is the first time that an English court has made a so-called “declaration of ineffectiveness” since the remedy was introduced in 2009. The case is also important in clarifying further the extent to which certain types of land development arrangements may be governed by procurement legislation.

Separately, the decision provides further clarification on the obligations that arise when publishing, and seeking to rely on, the so-called “voluntary transparency notice” which, when published correctly, renders an order for ineffectiveness unavailable to claimants.

These issues are discussed below.

Facts

Faraday Development Limited (Faraday) was the unsuccessful tenderer in a procurement run by West Berkshire Council (the Council) to appoint a development partner to regenerate an industrial estate in Newbury. The Council ran a competitive process which complied with its obligations under s. 123 of the Local Government Act 1972. However, in line with the Council’s belief that the transaction was an exempt land transaction, the competition was not conducted in accordance with the Public Contracts Regulations (the Regulations)1.

The outcome of the procurement was that the Council decided to award the development agreement (the Agreement) to St Modwen Developments Ltd (St Modwen). In broad terms, the Agreement required St Modwen to draw up detailed plans for redevelopment of a site owned mainly by the Council and, subject to the satisfaction of certain conditions, then gave St Modwen the option to draw down on long leases of land on the site. St Modwen was under no obligation to draw down on the leases but, if it did, it was then obliged to carry out works and services to develop the land in accordance with the plans which had been approved by the Council. Notwithstanding that it considered the transaction to fall outside of the scope of the Regulations, the Council issued a voluntary ex-ante transparency notice (VEAT notice) prior to entry into the Agreement with St Modwen.

Faraday challenged the decision to award the Agreement to St Modwen on a number of grounds, including that the Agreement constituted a “public works contract” or a “public services contract” for which a competition under the Regulations should have been conducted. Awarding the Agreement to St Modwen was, therefore, a breach of the Regulations. The High Court dismissed Faraday’s claim. This decision was then appealed. A copy of the High Court judgment can be found here. A copy of the Court of Appeal judgment can be found here.

Decision of the Court of Appeal

The Court of Appeal allowed the appeal, finding that the Agreement was not a public works or public services contract at the time it was entered into but, due to the obligations that would crystallize at the moment St Modwen chose to draw down on the long leases, the Council had in fact committed itself to entering into public works contracts in the future which should have been subject to competition in accordance with the Regulations. The Court found that the Council’s VEAT notice was deficient, and did not serve to preclude the Court from making a declaration of ineffectiveness in respect of the Agreement.

The decision raises a number of interesting points:

When will conditional obligations fall within the scope of the Regulations?

As set out above, St Modwen had an option to draw down on long leases of land owned by the Council, but was not obliged to do so. If St Modwen exercised this option, it became obliged to carry out works and services to develop the land in accordance with the plans which had been approved by the Council.

The Council argued that, in line with the decision of the High Court in R (on the application of Midlands Co-operative Society Limited) v Birmingham City Council, the Agreement should fall outside of the scope of the Regulations on the basis that it did not place St Modwen under any directly enforceable obligation to exercise its option to draw down the leases and develop the relevant land. The Court of Appeal did not accept this argument and concluded that, although the Agreement did not include any directly enforceable legal obligations to draw down on the leases and develop the land to begin with, as soon as St Modwen exercised its option (an event over which the Council had no control) a public works contract which should, but no longer could, be subject to a procurement process under the Regulations would come into being. The following passage of the judgment highlights the Court of Appeal’s view of the lawfulness of such an arrangement:

“By entering into the development agreement, therefore, the council effectively agreed to act unlawfully in the future. In effect, it committed itself to acting in breach of the legislative regime for procurement. As Mr Giffin submitted, that is in itself unlawful, whether as an actual or anticipatory breach of the requirements for lawful procurement under the 2004 Directive and the 2006 regulations, or simply as public law illegality, or both. The only other possibility would be that a contracting authority is at liberty to construct a sequence of arrangements in a transaction such as this, whose combined effect is to constitute a "public works contract", without ever having to follow a public procurement procedure. That would defeat the operation of the legislative regime2

The key distinguishing feature between the Faraday and Midlands Co-op cases appears to be the existence of enforceable obligations on the developer to develop the land. In Midlands Co-op, the developer, Tesco, remained free to decide whether or not to develop the land, even after acquiring the relevant land from the Council. As such, this was viewed by the Court as an exempt land transaction, even though it is likely that all parties to the agreement entered into it in the full expectation that Tesco would develop the land in accordance with the plans agreed by the Council. In Faraday, there was no such freedom on the part of the developer once the option to acquire the relevant leases had been exercised. As soon as St Modwen acquired its leasehold interest in the land, it came under an obligation to develop it. As such, the Court of Appeal did not agree that this was an exempt land transaction. Instead, the Court concluded that this was an agreement for the provision of works and services which was conditional on the developer acquiring the relevant land interest.

Based on the above, the guidance from the Court of Appeal appears to be that:

• In order to benefit from the land exemption, agreements for the transfer of interests of land should not provide (including as a result of the possible exercise of an option) for directly enforceable obligations to develop the land in accordance with plans approved by the relevant authority.3

• If such possibility forms part of the arrangements agreed, the arrangements would constitute a mixed contract, consisting partly of obligations for the carrying out of works/services which are, in principle, subject to procurement regulation, and the grant of rights relating to land, which are not.

• In line with the legal principles that regulate mixed contracts, whether the whole arrangement would then be subject to procurement regulation would depend on whether the two elements of the transaction are objectively separable.

• If they are objectively separable but the authority, nevertheless, wishes to combine the two elements, the entire transaction would, in principle, be governed by the relevant procurement regulations.

• If the obligations to develop the land are not objectively separable from the grant of the interest in land, whether or not procurement regulations would apply would be determined by reference to the “main subject matter of the contract”.4

In the Faraday case, the two elements of the transaction were deemed to be inseparable but the main object of the arrangement was held to be the development works (notwithstanding the conditional nature of this element of the Agreement).

The Council’s VEAT notice

A VEAT notice is a notice which may be published by a contracting authority in the Official Journal of the European Union (OJEU) so as to give voluntary notice to the market of its intention to award a contract without inviting expressions of interest from the market. Crucially, such notice must incorporate, among other things, a description of the object of the contract and a justification of the contracting authority’s decision to proceed on this basis.

If the VEAT notice is published in compliance with the requirements of the Regulations, and the contract is concluded after a minimum period of 10 days has expired (beginning with the day after the day on which the VEAT notice was published in the OJEU), then the remedy of ineffectiveness is no longer available.

In Fastweb,6 the CJEU already confirmed that for a VEAT notice to be valid and to offer protection against a claim for ineffectiveness, its contents “must disclose clearly and unequivocally the reasons that moved the contracting authority to consider it legitimate to award the contract without prior publication of a contract notice, so that interested persons are able to decide in full knowledge of the relevant facts whether they consider it appropriate to bring an action7. Fastweb also lays down the principle that the relevant review body, in this case the Court of Appeal, must decide whether the contracting authority acted diligently and could legitimately hold the view that it could award the contract without prior publication of a contract notice.8

In Faraday, the Council issued a VEAT notice which referred to the object of the Agreement as being an “exempt land transaction”. The notice also stated that “the agreement places no binding obligation on St Modwen to undertake any works”.

The Court of Appeal held that the Council’s VEAT notice was invalid and, therefore, could not have the effect of preventing the Court from making a declaration of ineffectiveness. In reaching this conclusion, the Court of Appeal noted that, although it was not in a position to conclude that the Council had not acted diligently, the reference to an exempt land transaction as the object of the Agreement was “more than a mere over-simplification. It was incorrect, or at best misleading” and that the VEAT notice was, “in short […] not transparent enough”.9 In addition, the Court of Appeal held that the VEAT notice would not have been capable of alerting a third party to the real nature of the transaction and failed to give an adequate justification for the Council’s decision.

Comments

This case is significant simply by virtue of it being the first case in which an English court has made an order declaring a concluded contract ineffective, nine years after the remedy was first made available. However, it also raises some other important issues.

The classification of the arrangement

The Court of Appeal decision is based on an interpretation of the Regulations which is seemingly more consistent with EU procurement law principles and requirements than the interpretation that had previously been offered by the High Court. For example, the Court of Appeal concluded that, if an arrangement includes an option which, if exercised, would give rise to a public contract, the whole arrangement should be assessed for compliance with the relevant regulations on the basis that the authority has effectively committed itself to entering into a public contract in the event that the option is exercised in the future.

This is consistent with the approach adopted in the Regulations on how to determine whether the value of a public contract meets or exceeds the relevant thresholds which would render it subject to procurement regulation. According to this, in estimating the value of a contract the calculation must also take into account “any form of options”. Whether these options would ultimately be exercised or whether the options are exercisable at the behest of the contracting authority or the contractor are issues which are irrelevant in this context.

Equally, in Commission v France10 the CJEU made it clear that the exercise of an option (for the provision of certain works) which forms part of a public contract which was awarded following an advertised contract award process would only be valid if the original contract award process had been designed in a way which took into account the possibility of that option being exercised, including, for example, by formulating appropriate award criteria to evaluate bidders’ offers as regards the (possible) exercise of that option. In other words, absent evidence that the option has been “tested” fully as part of a compliant contract award process, the subsequent exercise of that option would breach procurement legislation. Again, the Court of Appeal’s decision is consistent with the CJEU’s approach in that case also.

VEAT notice

The Court of Appeal’s decision is also instructive in making clear that simply asserting that the contract being awarded is of a type which is not subject to procurement regulation is not sufficient for the purposes of complying with the obligations in the Regulations to describe the object of the contract (accurately) and to provide a valid justification for it being exempt from advertising obligations.

In this context, the Court placed particular emphasis on the fact that there was clear evidence that, ultimately, the principle aim of the arrangement was the carrying out of the works. As such, asserting that this was an “exempt land transaction” rendered the notice invalid.

Anti-avoidance principles

Regulation 18 of the Public Contracts Regulations 2015 (PCR 2015) provides that the design of procurements should not be made with the intention of excluding them from the scope of the Regulations. Although the Agreement was entered into prior to the coming into effect of the PCR 2015, and the Public Contracts Regulations 2006 contained no equivalent provision to Regulation 18, at paragraph 166 of the High Court judgment the Court recognised that on this point: “the parties are agreed that for the purposes of these proceedings there is no material difference between the earlier legislation and the current legislation which replaces it”.

Given the scope of Regulation 18, and the fact that the parties agreed that the same principles applied under the previous regulations, it was surprising that the High Court concluded that “the legislation does not contain any general anti-avoidance principle”.11 Although this issue was raised in argument before the Court of Appeal, it was not addressed in detail on the basis that the Court of Appeal was satisfied that the Council did not intentionally exclude the procurement of the Agreement from the scope of the Regulations.

At the same time, the Court of Appeal did indicate that it would be unlawful to attempt to avoid the effects of the Regulations by breaking down a transaction which fell within the scope of the Regulations into a series of separate transactions which did not: “The only other possibility would be that a contracting authority is at liberty to construct a sequence of arrangements in a transaction such as this, whose combined effect is to constitute a “public works contract”, without ever having to follow a public procurement procedure. That would defeat the operation of the legislative regime.”

While it will be interesting to see how broadly this anti-avoidance obligation is interpreted in future cases, contracting authorities should continue to be mindful of this regulation when considering their public procurement law obligations.

Level of the civil financial penalty

Finally, of much interest is the fact that in declaring the contract ineffective the court also imposed a penalty of just £1. Regulation 102 of the PCR 15 provides that, where a declaration of ineffectiveness is made, the Court must also order that the authority pay a civil financial penalty. Regulation 102(4) provides that the penalties ordered in circumstances where the grounds for ineffectiveness have been met “must be effective, proportionate and dissuasive”. In deciding upon the appropriate penalties, Regulation 102(5) stipulates that the Court must also take account of, among other considerations, the seriousness of the breach and the behaviour of the contracting authority.

There are two potential interpretations of these provisions: (i) that all of the penalties imposed, when viewed in the round, must be effective, proportionate and dissuasive, or (ii) that each penalty must be effective, proportionate and dissuasive in its own right. Although the basis upon which the Court of Appeal decided on the appropriate level of penalty is not clear from the judgment, its nominal value strongly suggests that the Court preferred the first interpretation, that is, that all of the penalties imposed, when viewed in the round, must be effective, proportionate and dissuasive. In light of the Court’s finding that the Council had not deliberately circumvented the Regulations or acted in bad faith12, but where the Regulations obliged it to impose a financial penalty, the nominal penalty indicates that the Court considered that a declaration of ineffectiveness was a sufficiently effective, proportionate and dissuasive penalty.13


1. The legislation in force at the time the Agreement was entered into was the Public Contracts Regulations 2006. The current regime is the Public Contracts Regulations 2015, under which very similar issues would arise. References to the Regulations are to the Public Contracts Regulations 2006, although corresponding provisions are also included in the Public Contracts Regulations 2015.

2. See paragraph 62 of the Court of Appeal judgment.

3. To be clear, absent such directly enforceable obligations, the existence of planning permission relating to a site will not of itself bring the transfer within the scope of the procurement regulations.

4. Regulation 4(2)(b) Public Contracts Regulations 2015

5. See Regulation 99(4) PCR 2015 / Regulation 47K(4) PCR 2006

6. Judgment of 11 September 2014, Fastweb, C-19/13, EU:C:2014:2194

7. Paragraph 48 of Fastweb

8. See Paragraph 50 of Fastweb

9. Paragraph 88 of the Court of Appeal judgment

10. Judgment of 14 October 2004, Commission v France, C-340/02, EU:C:2004:623

11. Paragraph 188 of the High Court judgment

12. See paragraph 70 of the Court of Appeal judgment, in which it is said: “There is no evidence in this case, and indeed no suggestion, of the council having acted at any stage in bad faith, or which any motive to create a mistaken understanding of its objectives in entering into the development agreement or of the “economic reality” of the transaction”.

13. A declaration of ineffectiveness was made in the Scottish case of Lightways (Contractors) Ltd v Inverclyde Council [2015] CSOH 169, but the detail as to the value of the civil financial penalty imposed is not publically available.

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