Gottlieb, R (on the application of) v Winchester County Council

[2015] EWHC 231 (Admin)

Following the Pressetext case, in public procurement procedures, where there is a variation to the contract which is “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”, then a new procurement exercise must be undertaken. Such an order was sought here. Gottlieb argued that variations to a Development Agreement (“DA”) had changed the economic balance of the contract in favour of the developer in a manner which was not provided for in the terms of the initial contract. The Council disagreed and argued that the variations were not materially different in character. The Council had taken independent professional advice and noted that the DA, as varied, was a more favourable arrangement than the Council would be likely to obtain in the market.

The Council originally entered into the DA in December 2004. This did not carry out a procurement exercise when it entered into the DA. It provided for the comprehensive redevelopment by way of a mixed-use development comprising residential, retail, car parking, a replacement bus station, a civic square, a CCTV office, shop mobility and Dial-a-Ride service, and a market store. The DA further provided that the developer would pay a fixed sum to the Council during the construction period as well as a ground rent. The developer would itself receive a share of the profits.

In June 2014, the new developer sought the Council’s consent to vary the DA. The Council agreed in August 2014. The proposed variations included: a reduction in the number of residential and affordable housing units; the removal of a bus station and the provision instead of an on-street bus interchange and facilities; the deletion of a requirement for a Shop Mobility Centre, Dial-a-Ride premises and a market store, but the provision of a shop unit and increased retail space; a reduction in the number of public car parking spaces; and an increase in the rent payable to the Council

Where there is “a public works contract under which the consideration given by the contracting authority consists of or includes the grant of a right to exploit the work or works to be carried out under the contract”, then it might well be caught by the Public Procurement Regulations. This was the case here, because the agreement provided for the developer to be paid a majority share of the profits of the development, and to be granted a lease of the site under which tenants occupying the site would then pay rent to the developer.

Mrs Justice Lang DBE then considered whether the Pressetext principles applied here. The Judge considered that an increase in potential profitability for the economic operator can be a material variation for the purpose of the Pressetext test. The Judge then went on to say that Gottlieb had to satisfy the Court, on the balance of probabilities, that a realistic hypothetical bidder would have applied for the contract, had it been advertised, but he was not required to identify actual potential bidders.

Here, the evidence demonstrated that the variations to the DA were made because the Council accepted the developer’s representations that the project was not viable on the original contractual terms, and therefore it would not proceed. To save the project it was re-negotiated. However, in the view of the Judge the varied contract was materially different in character from the original contract. The most significant difference was that, overall, the varied contract was considered by the contracting parties to be viable for the developer, whereas they considered the original contract to be unviable.

Further, the bus station would have been non-profit-making for the developer. Now, that site was available for profit-making retail use instead. This would add commercial value and was a major change. So was the removal of affordable housing. Further, the removal was not a consequence of any planning requirement in 2014. The reason for varying (i.e. reducing) the level of affordable housing was the wish to make the project more profitable for the developer. Also, the varied terms allowed the developer to be authorised to procure the construction of the whole scheme (retail as well as residential) by a construction company with a house building subsidiary, without competitive tender. These more flexible terms allowed the developer to offset risk by bringing in a joint venture partner to deliver the residential development and take on the construction and sales risk of the scheme. This too was a material variation to the original contract which, if in place in 2004, would have provided an economic benefit to potential bidders, although I consider it is too speculative to quantify.

Finally, there was evidence that other potential bidders, with a realistic prospect of success, would have bid for this contract, if the opportunity had arisen. The purpose of the procurement regime is to ensure open competition, not to secure the most favourable terms for the public authority. The fundamental change which the parties intended to achieve was to increase the potential profit to the developer so as to make the scheme viable (i.e. achieve more than the 10% threshold return). Both parties believed that the original contract was no longer viable.

Therefore the Council’s decision to authorise variations to the DA without carrying out a public procurement process was unlawful.

Coincidentally, Regulation 72 of the Public Procurement Regulations 2015, which came into force on 26 February 2015, essentially codified the Pressetext principles which were applied in this case.