On 14 November 2018, the Court of Appeal gave judgment in the case of Faraday Development Ltd v West Berkshire Council [2018] EWCA Civ 2532, providing guidance on the application of procurement law to Development Agreements and making the first declaration of ineffectiveness by an English Court since the remedy was introduced in 2009. We previously commented on the first instance decision in this case.
What were the facts?
The claimant, Faraday, challenged the decision of West Berkshire Council to award a development agreement for the regeneration of an estate in Newbury. Faraday argued that the Council acted in breach of its public procurement obligations because the Development Agreement constituted a 'public works contract' or a 'public services contract' within the meaning of the Public Contracts Regulations 2006 and should therefore have been competed in accordance with the Regulations. The Council was instead of the view that the Development Agreement was not covered by the Regulations, and had in fact published a voluntary ex ante transparency ('VEAT') notice stating its justification for this position.
The structure of the Development Agreement was vital for the outcome of the case. The Development Agreement established a 'multi-stage' process leading up to the obligation to carry out works in the future. Initially, the Development Agreement only imposed an obligation on the developer to undertake certain preliminary planning services, and there was no obligation to carry out works until a procedure had been followed with regard to design and viability assessment. Crucially, even after the design and viability assessment was completed, the developer only had an option to carry out the works and was not obliged to. The option could be exercised by drawing down the requisite land under the Development Agreement.
First instance decision
The High Court rejected Faraday's challenge and held that the Development Agreement was neither a public works contract (because the developer was 'free to walk away') nor a public services contract (as the main object of the agreement was the carrying out of works to regenerate the site). Also, the Council had not deliberately and unlawfully avoided the procurement rules through its structuring of the Development Agreement.
Court of Appeal decision
The Court of Appeal agreed with the High Court that:
- the Development Agreement did not amount to a public works contract at the time it was concluded, as it did not impose any immediately enforceable obligations at that time
- the Development Agreement was not a public services contract, because the main object of the agreement was the carrying out of works
- the structure adopted by the Council was not a sham designed to artificially avoid public procurement legislation.
However, the Court of Appeal held that the entry into the Development Agreement was still unlawful on the basis that the arrangements when considered as a whole ultimately committed to a procurement, and such commitment would crystallise (i.e. the Development Agreement would become a public works contract) at a time when it was too late to carry out the required procurement process (i.e. at the point the developer drew down the land). This constituted both a breach of the Regulations and also public law (on the basis that the Council was effectively agreeing to act unlawfully in the future).
The Court of Appeal rejected the argument that the VEAT notice could act as a shield against a declaration of ineffectiveness on the basis that the VEAT fell short of the standards laid down by the CJEU in the case of Fastweb. Describing the Development Agreement as an 'exempt land transaction' was an over-simplification and it was misleading to suggest that there were no binding obligations on the developer. The notice therefore did not alert third parties to the real nature of the transaction.
Comment
The judgment provides helpful guidance on the approach to be taken when considering the application of public procurement law to Development Agreements. It is perhaps no surprise that it is necessary to consider the substance and not just the form of the contractual arrangements in question.
However, the judgment undoubtedly gives rise to increased uncertainty for local authorities exercising their development powers, and it is likely that a more cautious approach will need to be taken in the future with more transactions made subject to the procurement rules, particularly where it is highly likely that an option will be exercised.
It is interesting to note that the Court chose to fix the civil financial penalty at £1, indicating that the Court recognised it was obliged to order such a penalty alongside the declaration, but did not consider it necessary or appropriate for this penalty to have substance.
How can Burges Salmon help?
If you would like to discuss any of these issues further, please contact John Houlden, Laura Wisdom or your usual Burges Salmon contact.