The Court of Appeal recently issued its judgment in Faraday Development Ltd v West Berkshire Council, making the first Declaration of Ineffectiveness in an English public procurement case.
The judgment provides guidance about the extent to which public procurement rules apply to development agreements, and highlights the importance of careful drafting of VEAT notices.
West Berkshire Council sought a developer in relation to the regeneration of an industrial estate comprising plots of land held on long leases. The council entered into a development agreement with a developer, St Modwen.
The development agreement was complex, but broadly the developer had an option to draw down land for development. If the developer drew down the land, it had an obligation to perform works in accordance with plans approved by a steering group. If the developer did not draw down the land, there would be no obligation to perform works. Once the development agreement was finalised, the decision whether to trigger the works obligations lay solely with the developer.
The council did not undertake a public procurement process before entering into the agreement. It issued a VEAT notice, stating that it believed the agreement fell outside the scope of Directive 2004/18 and Directive 2014/24 because it was an exempt land transaction and not a "public works contract", as it placed no binding obligation on the developer to undertake works. It also stated that it was not a "public services contract".
Faraday challenged that decision. The High Court decided that the development agreement was not subject to the public procurement regime, as the developer was not under an enforceable obligation to develop the land. However, it gave permission for Faraday to appeal, observing that there was "a strong public interest" in examining when a development agreement will be covered by the procurement rules.
The Court of Appeal’s decision
The appeal was allowed. The court held that the VEAT notice was invalid, made a Declaration of Ineffectiveness and imposed a token civil penalty of £1.
Was the development agreement a public works or public services contract?
At the time it was concluded, the development agreement was “not yet” a public works contract, because the developer’s obligations to carry out works were – for the moment – contingent obligations.
The court also found that it was not a public services contract, because the main object of the agreement was the carrying out of works.
Was the agreement nevertheless unlawful?
There was no suggestion that the council had acted at any stage in bad faith, or with any motive to create a mistaken understanding of its objectives in entering into the development agreement or of the "economic and commercial reality" of the transaction. The economic and commercial reality was fully apparent from the development agreement. The transaction had not been structured with the aim of avoiding the procurement regime, and was not therefore a "sham" in the true sense of that concept.
However, the court had to consider the whole content of the agreement at the date it was entered into to establish whether, at that date, it embodied defined obligations that would, once they took effect, compose a "public works contract". Judged by that test, the development agreement clearly did provide, at the date it was entered into, for a procurement by the council of the development it was intended to deliver, as the council had reserved ample control over the content and execution of the works, even though the precise parameters remained to be set. When it entered into the development agreement, the council had nothing more to do to ensure that a "public works contract" would come into being. It had committed itself contractually, without any further steps being required of it, to a transaction that would fully satisfy the requirements of a "public works contract" as defined in the 2004 Directive.
The council effectively committed itself to acting in breach of the legislative regime for procurement. The only other possibility was that a contracting authority was at liberty to construct a sequence of arrangements whose combined effect was to constitute a "public works contract", without ever having to follow a public procurement procedure. That, the court said, would defeat the operation of the legislative regime.
Was the claim for a declaration of ineffectiveness precluded by the council's VEAT notice?
The critical question was whether the notice met all the requirements set out in the Public Contracts Regulations, particularly the requirements to provide:
a description of the "object" of the development agreement; and
a "justification" for the decision to enter into it without publishing a contract notice.
The VEAT notice did not meet the requirements set out by the court in Fastweb. The notice described the main object of the agreement as “an exempt land transaction”. The court said that this was “incorrect, or at best misleading”. The development extended “considerably further” than a transaction for the disposal or transfer of land, and contained intricate provisions for the design and execution of a large development.
In relation to the “justification”, the court said that the contracting authority had to provide a clear and unequivocal explanation of the reasons that led it to decide that the contract could be awarded without following the procedure for public procurement. It was essential that interested third parties, such as Faraday, could make an informed decision about whether it was appropriate to launch a challenge in the short period allowed by the legislation.
The court concluded that the VEAT notice was “not transparent enough.” It was therefore not a valid notice, and did not prevent the court making a declaration of ineffectiveness.
As well as providing important guidance on drafting effective VEAT notices, the case suggests that contracting authorities cannot assume that the procurement rules will not apply simply because there is no immediately enforceable obligation to carry out works. The court will consider a transaction in its totality to establish whether the contracting authority has procured, or contractually committed itself to procuring, works or services from a particular economic operator.
We can expect to see a greater degree of caution being adopted by contracting authorities in relation to the application of exemptions under the Public Contract Regulations for major regeneration schemes together with greater scrutiny from developers, particularly where VEAT notices have been issued in relation to development agreements.
The civil penalty in this case was a token amount, no doubt reflecting the particular facts of this case, including the fact that the council was not in bad faith. However, it should be borne in mind that the Regulations give the court the power to impose “dissuasive” penalties in an appropriate case.