The Silver Hill judgment is a timely reminder that the Courts can and will intervene where a contracting authority seeks to materially change a public contract.  This decision also reaffirms that the risk of challenge is not limited to potential bidders; in certain circumstances interested third parties can also bring a procurement challenge.

The High Court has quashed Winchester City Council's decision to proceed with the proposed Silver Hill development in Winchester.  City councillor Kim Gottlieb (a vocal opponent of the scheme) applied for judicial review on the basis of alleged procurement law breaches.  The Court found in favour of Mr Gottlieb and held:

  1. the Council's failure to carry out a procurement exercise prior to entering into the original Development Agreement (DA) in 2004 was in breach of  the procurement rules (but that breach was now out of time); and
  2. the variations made to the DA in 2014 amounted to unlawful material changes in breach of procurement law. 

Public works concession contract

The Court determined that the original DA amounted to a public works concession contract, which should have been tendered in accordance with the public procurement rules.  The judgment does not contain any analysis as to whether the arrangement could be considered a pure land transaction, which would not be caught by the procurement rules.

What were the variations?

Having already pushed through a number of variations, in June 2014 the developer, Henderson Global Investors, sought consent to a further raft of amendments which included: a reduction in the number of residential units from 287 to 184; increasing the retail space; replacing the bus station with an on street bus interchange; the removal of a shop mobility centre and dial-a-ride premises; a reduction in the public parking spaces from 330 to 279; and substituting the affordable housing requirement with a financial contribution of £1m with scope for claw back.

In Summer 2014, the Council resolved to allow these variations, and also to remove the requirement on Henderson to put the construction works out to competitive tender and to reduce the number of residential units and car parking spaces. 

Unlawful material change

The leading case of Pressetext laid down the test to be applied when considering whether a contract has been changed to such an extent that it effectively amounts to a new contract, which requires a new procurement process.  That test, along with a number of 'safe harbours', has since been enshrined in Regulation 72 of the Public Contracts Regulations 2015 which is to come into force on 26 February 2015.

In applying Pressetext, the Court considered whether the changes introduced conditions which, had they been part of the initial award procedure, would have allowed for the:

  • admission of tenderers other than those initially admitted; or
  • acceptance of a tender other than the one initially accepted

The Court found that although the subject matter of the contract had not changed, the variations taken as a whole resulted in a contract materially different in character from the original version and which demonstrated an intention to renegotiate the essential terms. 

The Court considered that amongst other changes, the removal of the bus station requirement, the changes in the affordable housing, the reduction in the provision of civic uses and the addition of a further site for retail were material.   The Court noted that the changes had been agreed with a view to making an unviable development more commercially attractive, and therefore viable, from the developer's perspective.  The economic benefit of the contract had therefore been changed in favour of the developer.      

The Court was satisfied on the balance of probabilities that other potential bidders, with a realistic chance of success, would have bid for this opportunity if given the opportunity to do so.  In particular the Court found it was probable that there were other companies with the capacity for funding and the expertise to bid.  Indeed some well know names in the industry had already expressed positive interest in working with the Council on the scheme. 

Standing

The Court noted that whilst the procurement regulations provide specific remedies for economic operators, claims for judicial review by other interested parties are not precluded.

The Court held that as a local resident, council tax payer and City Councillor, Mr Gottlieb "has a legitimate interest in seeking to ensure that the [Council] complies with the law, spends public funds wisely, and secures through open competition the most appropriate development scheme for the City of Winchester".  Accordingly it was satisfied that Mr Gottlieb had sufficient standing to pursue judicial review, a point that was not contested by the Council at the permission stage.

The Court distinguished this case from the facts in R (Chandler) v Secretary of State for Children, Schools and Families [2010] LGR 1.  In that instance the claimant lacked standing to bring a judicial review claim because she did not have any interest in the public procurement regime, but was instead motivated by her political opposition to academy schools. Whereas Mr Gottlieb was seeking an open competition, in compliance with the procurement rules to allow Winchester to select the best development.

What implications does this case have?

Whilst this case has not made new law it is a useful reminder of the risks which can arise when agreeing variations to an existing contract:

  • A variation of a DA (even if triggered by an economic downturn) which renders a previously unviable scheme viable is likely to be considered material
  • The DA did allow for variations but the Court held they were so unspecific and broad that they did not meet the transparency or equal treatment requirements; the new 2015 Regulations permits review clauses subject to them being set out in "clear, precise and unequivocal" terms  
  • The absence of a competitive process cast doubt on whether the scheme was on the best terms available in respect of both value for money and the best proposal from a design, use and layout perspective.  Whilst this claim was focussed on procurement law, local authorities should also bear in mind their duty to secure best consideration when disposing of land in accordance with s.123 of the Local Government Act 1972
  • A further procurement round mid-scheme may lead to significant financial loss for the original developer who has invested time, money and expertise into a scheme. Where the original developer is responsible for the land assembly, it may even find itself the subject of a compulsory purchase order on behalf of the new developer; and
  • A council as planning authority could also be subject to separate challenges for any variation to planning obligations. It has also since been reported that the Secretary of State is considering whether to "call in" the planning application to give effect to the variations proposed.

Case reference: Gottlieb v Winchester City Council [2015] EWHC