Faraday Developments Ltd v West Berkshire Council and Another overturned on appeal

Faraday Developments Ltd v West Berkshire Council and St Modwen Developments Ltd (Notice Party) [2018] EWCA Civ 2532

The Court of Appeal of England and Wales overturned a High Court decision regarding the applicability of EU public procurement rules to the award of a development agreement containing contingent obligations on the part of the developer to carry out development on the Council’s land. The case will be of interest to local authorities who are seeking to develop lands that they own.

The High Court

In the High Court, Faraday challenged the tender process for the award of the development agreement which was not conducted in compliance with EU procurement rules because the Council did not consider that the agreement was a “public works contract” within the meaning of the public procurement directive. The Council issued a voluntary ex ante transparency (VEAT) notice stating that it believed that the agreement was outside the procurement regime. Faraday claimed that the EU rules should have applied to the agreement entered into between the Council and St Modwen Developments (“SMDL”), the successful tenderer. The High Court dismissed Faraday’s claim finding that the EU procurement rules only apply where the contract awarded provides for an enforceable obligation on the part of the economic operator to provide the works/service. The development agreement contained an option which if exercised meant that SMDL would be granted a long lease under which there were certain obligations to carry out works. However, the only obligation that arose when the agreement was signed was an obligation to provide design drawings which, the High Court found, was ancillary to the main object of the agreement which was to facilitate regeneration. According to the High Court, the arrangement fell outside the scope of the public procurement regime. (Please see the Philip Lee article from 23 November 2016 for further information in relation to the High Court case).

Court of Appeal

The Court of Appeal overturned the decision of the High Court on 14 November 2018. The Court said that it must look at the substance of the transaction and not merely its form and must establish the true nature of the development agreement. The Court of Appeal regarded the development agreement as “not yet” a public contract given the obligations contained within it were not immediately enforceable but rather were contingent on SMDL drawing down the option contained within it. However, the Court proceeded to find that once the developer exercised the option to develop the land, the development Agreement would be considered a public works contract without having conducted a lawful procurement process. The judge noted that at this stage it would be too late for the Council to follow a lawful procurement process as the Council had committed itself contractually to procuring the development from SMDL. The Court found that in effect, by entering into the development agreement, the Council had agreed to act unlawfully in the future.

As regards the VEAT notice published by the Council to protect itself against an order of ineffectiveness, the Court found that the notice was not valid. The notice described the main object of the development agreement as being an “exempt land transaction”. This was described by the Court as more than a “mere over-simplification. It was incorrect, or at best misleading. The judge was highly critical of the lack of detail within the VEAT notice noting the development agreement itself “extends considerably further than a transaction for the disposal or transfer of land. It contains intricate provisions for the design and execution of a large development, which it was envisaged and intended that St Modwen would carry out…..”. However, this detail was not reflected within the VEAT notice.

Having concluded that the development agreement amounted to a “public works contract”, the Court found that the VEAT notice was not effective to prevent the court making a Declaration of Ineffectiveness. Notably, this represents the first declaration of ineffectiveness granted by a Court in England & Wales.

Commentary

One of the solutions to the ongoing housing shortage in Ireland is the development by local authorities of lands which they own. The nature of the deal may involve the construction by a private developer of housing development with a certain portion of the units being remitted to the local authority for use as social and/or affordable housing. If the development itself is carried out by a private developer, the nature of the transaction will determine whether or not the local authority will need to conduct a public procurement process. Simply put, if the local authority is simply selling the land to a developer, EU procurement rules do not apply. However, if there is any agreement which places an obligation on the developer to carry out the development, either now or in the future, then it cannot be assumed that the procurement rules will not apply.

Abnormally Low Tenders – dealing with allegations that the successful tenderer’s bid is abnormally low?

Contracting authorities are often faced with allegations that the tender it has selected as the successful tender is an abnormally low bid. Such allegations are generally coupled with a demand from one or more of the unsuccessful tenderers for the contracting authority to investigate the alleged abnormally low bid. How should a contracting authority respond to such a demand?

This question was recently assessed by the High Court in England in the case of SRCL v NHSE [2018] EWHC 1985 (TCC) where Mr Justice Fraser outlined the obligations of contracting authorities in relation to abnormally low tenders under Article 69 of the 2014 EU Public Procurement Directive.

Whilst there is already a considerable body of jurisprudence addressing the question of abnormally low tenders, these previous decisions were made under the 2004 public procurement directive. Accordingly, Fraser J reviewed whether the change in wording between the 2004 and 2014 versions of the Directive meant that a contracting authority is now under a duty to investigate tenders that appear abnormally low, or whether this obligation arises only when the contracting authority wishes to reject such a tender?

To assist with this exercise, Mr. Justice Fraser turned to the views of Professor Arrowsmith who advances three potential interpretations of Article 69 as follows:-

  1. A duty to investigate in all cases, and a duty to reject when a tender presents an unacceptable risk of default.
  2. A general duty to investigate but no general duty to reject tenders based on risk of non-performance. That duty only exists as expressly stated in Article 69, namely non-compliance with certain legislation in the specified fields of environmental and social legislation.
  3. A duty to investigate that is implicitly limited (in light of the purpose for which the provision was originally introduced) to those circumstances where the authority wishes to reject a tender but there is no duty to reject any tender, except under the explicit duty to reject tenders that are abnormally low because of failure to comply with the specified social and environmental legislation.

Mr. Justice Fraser ultimately agreed with Professor Arrowsmith’s third interpretation and found that the change of wording between the two iterations of the Directive has no practical effect for the purpose of determining the obligations of a contracting authority.

When Must an Authority Investigate?

Mr Justice Fraser found that there is no general obligation on contracting authorities to investigate a tender. The duty to investigate only arises when the authority suspects that a tender is abnormally low and should be rejected for that reason. That suspicion should then trigger a process whereby the authority requests the relevant tenderer to explain its prices, with Fraser J noting that there could be a “perfectly reasonable and feasible explanation” for the lower prices.

Following the investigation (and without a satisfactory explanation), the authority is then entitled to reject the tender, but is not required to. The obligation to reject a tender following the investigation arises only where the tenderer has failed to comply with certain environmental and social legislation.

The standard by which a Court will review the decision is the same as that applied to procurement proceedings generally – it is for the authority to decide what it suspects to be abnormally low, not the Court. Emphasising the significant challenge facing a claimant that alleges error on the part of a contracting authority in failing to appreciate that there was or might have been an abnormally low tender, Justice Fraser noted that “in the majority of cases, the conclusion of the contracting authority will be given substantial weight by the court. Going further as SRCL seek to do in this case, risks placing an impossible burden on contracting authorities, and stifling true commercial competition”.

Is There a Definition of ‘Abnormally Low?’

Noting that there is no definition of what an abnormally low tender is, the Judge attempted to provide guidance as follows:

There is no definition of what the words “abnormally low” mean. However, the expression must encompass a bid which is low (almost invariably lower than the other tenders) and the bid must be beyond and below the range of anything which might legitimately be considered to be normal in the context of the particular procurement.”

Genuine Competitiveness is OK

The Judge also emphasised a previous observation of Judge Akenhead in NATS (Services) Ltd v Gatwick Airport Ltd [2014] EWHC 3728 (TCC), that there may very well be a competitive edge to the tender process, and that a tenderer may wish to tender at a low price in order to gain a foothold in a market or to increase its market share.

Commentary

This decision will provide clarity to contracting authorities on how they should approach suspected abnormally low tenders. However, more significantly the decision signals a warning shot to any unsuccessful tenderer considering a challenge based on an abnormally low tender claim that contracting authorities do have a certain amount of discretion in this matter and flexibility as to how they assess tenders that may appear to others to be abnormally low.