The case of R (Faraday Development Ltd) v West Berkshire Council and another
[2016] EWHC 2166 (Admin) will be of interest to local authorities and developers
alike as it provides detailed guidance on how a land development agreement can
be structured so that the resulting contract is outside the scope of public
procurement law.
Background
The case concerned a judicial review of West Berkshire Council's (WBC)
decision to enter into a development agreement with St Modwen Developments
Limited (SMDL) in relation to the redevelopment of a site in Newbury.
The development agreement was entered into following a non-regulated bidding
process. It required SMDL to produce project plans for the site and negotiate
outstanding land interests, but only included an option for SMDL to acquire an
interest in the land and undertake works.
Faraday Development Limited (FDL), a member of the joint venture company that
had been unsuccessful in the bidding process, challenged the decision on the
following grounds:
- WBC had breached its obligation under section 123(2) of the Local
Government Act 1972 not to dispose of land for consideration less than the
best that could reasonably be obtained.
- WBC’s decision not to follow a regulated procurement process was
unlawful because the development agreement was a public contract under the
Public Contracts Regulations 2006.
- WBC acted unlawfully by deliberately deciding not to impose an
enforceable obligation on SMDL to carry out works on the site in order to
avoid the application of procurement law.
The High Court dismissed all three grounds of claim.
Ground 1
In dismissing FDL’s argument that WBC had breached its duty under section
123(2), the Court found that WBC’s intention to maximise its returns from the
site was evidenced through the professional advice it sought as well as within
the tender documentation, which included references to its duty under section
123. This clearly showed that WBC had its duty under section 123 in mind.
FDL also argued that WBC acted irrationally in not probing SMDL’s and FDL’s
financial proposals further when it was advised there was insufficient financial
information to choose between the two bids. It was held that given the
complexity and future uncertainties of the project, it was entirely rational for
WBC not request further details. In the circumstances, WBC was entitled to focus
on the experience and expertise of SMDL and FDL in order to form a view as which
of the bidders would be likely to address those uncertainties best. Assessing
the experience and expertise of the bidders was directly relevant and critical
to WBC meeting its obligation under section 132(2).
Ground 2
Following the test in Helmut Muller, the Court provided that the development
agreement would only constitute a public contract and therefore fall within the
scope of public procurement legislation if:
- the “main object” of the development agreement corresponded to the
definition of a public works contract, a public goods contract or a public
services contract. This is to be determined by an objective examination, of
the entire transaction, having regard to the essential obligations which
predominate and characterise the transaction
- the development agreement included an enforceable obligation on the
developer to carry out that main object (eg works)
- the other requirements of the procurement legislation were met (eg
thresholds).
Main object
It was held that the main object of the development agreement was to
facilitate the regeneration of the site to maximise WBC’s financial receipts.
The Court rejected FDL’s claim that the agreement was a public works contract
as obligations and the option in the agreement amounted to an indirect
obligation on SMDL to undertake works.
Neither was the agreement a public services contract as the provision of the
project planning and negotiation services was not an end in itself. The services
were intended to facilitate the main object of the agreement (see above).
The development agreement did not therefore meet “main object” limb of the
test.
Enforceable obligation
In relation to the second limb, the Court held that there was no enforceable
obligation on SMDL to undertake works as SMDL could choose not to carry out
works on the site by not acquiring an interest in the land.
The Court appeared to take little notice of FDL’s claims that the commercial
realities of the arrangement meant that SMDL was highly likely to acquire an
interest and undertake the works. This is in line with the High Court judgment
in Midlands Co-operative case, which found no enforceable obligation to
undertake works, even though the developer would lose its right to acquire the
land and the price it had already paid for the acquisition (50% of the purchase
price), if it did not proceed with the works.
The Court therefore held that the development agreement was not a public
contract subject to public procurement law.
Ground 3
FDL claimed that WBC’s decision to deliberately avoid having to comply with
public procurement legislation was irrational as it was based on advice that it
would receive a more positive response from the market by running a
non-regulated tender process. This, in FDL's view, was a fundamental
misconception of the public procurement regime.
The Court rejected this argument. It acknowledged that public procurement
processes are onerous for participants and, given the uncertainty involved in
the arrangement, it was not irrational for WBC to deliberately structure the
agreement so that it fell outside of the scope of procurement law.
Conclusion
The case reinforces the view that the scope of the public procurement rules
will not extend to development agreements provided that they are structured so
that they are not classed as public contracts and/or do not include an
enforceable obligation on the developer to undertake works.
However it will be important to structure the agreement carefully because the
risks of getting it wrong and a contract being held to be a public works
contract are severe.
The case also highlights the importance being clear in agreements, tender
documents and internal communications on the key objectives of the local
authority in entering into development agreement and the value of experts in
helping the authority show it has met its duty under section 123.