On 11 February 2015, the High Court issued a ruling that could have important consequences for local authority property development schemes.  The High Court ruled that Winchester City Council (‘Council’) acted unlawfully by varying a development agreement with Silver Hill Winchester No. 1 Limited (the ‘Developer’) in the absence of a procurement process.  The Court concluded that the variations to the agreement, taken as a whole, resulted in a contract which was materially different in character to the original agreement and should have been subject to a new procurement process.  The case is significant since it considers the circumstances in which changes to a development agreement may trigger the need for a new competitive tender process.  In considering this issue, the High Court has strictly applied the test of when a ‘material variation’ occurs.

Background

In December 2004, the Council entered into a development agreement with the Developer for the comprehensive redevelopment of the Silver Hill area in Winchester city centre.  The agreement was a public works concession agreement which should have been put out to tender.  However, the Council did not carry out any form of tendering process at the time in breach of the procurement rules (although the Court acknowledged that it was now too late for that breach to be remedied).

In June 2014, the Developer sought consent from the Council to make variations to the agreement.  In August 2014, the Council agreed to the variations on the grounds that the project was not viable on the original contractual terms and therefore it would not proceed.  The claimant, Councillor Gottlieb, applied for judicial review of the Council’s decision to authorise the variations.

Variations to the agreement – the legal position

Mrs Justice Lang began by noting that neither Directive 2004/18/EC nor the Public Contracts Regulations 2006 as amended (the applicable procurement rules in this case) contained explicit provisions dealing with contractual variations.  Therefore, the Court applied the Pressetext test of whether the variations were “materially different in character from the original contract and, therefore, such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract”.

Notably, the High Court considered that an increase in potential profitability for the economic operator can be a material variation for the purposes of the Pressetext test and that in a development or concession contract, the commercial value of a contract will be judged by the potential profits to be obtained from third parties and not just the awarding authority: the financial terms between the parties were not the only consideration.

Distinguishing this case from the facts in the recent Edenred (UK Group) Limited v HM Treasuryjudgment, where there had been a full tendering process and so the unsuccessful bidders and those who had expressed an initial interest could be identified, the High Court held that evidence of actual or potential bidders may assist but was not a prerequisite to satisfy the Pressetext test.  To do so would have the undesirable consequence of placing a defendant who fails to comply with any procurement requirements in a better position than one who does not.  Rather it was sufficient that the claimant could convince the High Court, on the balance of probabilities, that a realistic hypothetical bidder would have applied for the contract, had it been advertised, but he is not required to identify actual potential bidders.  In this case, the High Court was satisfied that, on a balance of probabilities, a realistic hypothetical bidder would have applied for the varied agreement, if the agreement had been advertised.

The variations to this agreement

A number of variations were made to the 2004 agreement based on representations made by the Developer that the project was not viable on the original terms and therefore it would not proceed.  They included the removal of the following requirements from the 2004 agreement: to provide 35% ‘affordable housing’ and civic amenities; to sub-contract to listed building contractors using competitive tendering; and to provide a replacement bus station.  The variations also included: the extension of a site by the addition of another property; a substantial increase in the volume of potential retail space; and increased payments by the Developer to the Council.

The Council argued that the above variations were covered by a variation clause contained in the 2004 development agreement.  The High Court rejected that argument and held that the variation clause was so broad and unspecific that it did not meet the requirement of transparency as set out in case law.  In addition, the variation clause failed to provide the information which an economic operator would need in order to assess the potential scope for variations when tendering. 

In the end, the High Court concluded that the variations to the agreement, taken as a whole, resulted in an agreement which was materially different in character, such as to demonstrate the intention of the parties to re-negotiate the essential terms of the agreement.  The Council’s decision to authorise the variations, without carrying out a procurement process, was unlawful. 

Conclusion

This case serves as a useful reminder to all those engaged in an existing or future procurement process to think carefully about potential changes to a contract post-award and to document those changes in clear, precise and unequivocal variation clauses. In particular, local authorities and developers who are party to development agreements should take note that variations brought about by changed economic circumstances may trigger the need to re-procure the contract.  Contracting authorities and bidders are also reminded to consider carefully the new Public Contracts Regulations 2015, due to come into force on 26 February 2015, which helpfully codify the case law in this area and specify the circumstances where a contract variation is not considered to be material.

For a link to the judgment, click here.