Local authorities have a long history of providing charities and other not-for-profit entities with grant funding to achieve benefits for the communities they serve.

However, as time has gone on, the size of grants has increased and the nature of the activities that not-for-profit entities perform has broadened, while at the same time the basis on which the funds are provided has remained unchanged.

Grants are usually provided in two ways, either:

  •  by local authorities directly and regulated by grant aid agreements; or
  • from a central government source, and then passed through local authorities as accountable bodies (ie, as the grant recipient’s guardian, regulator, accountant and ultimately guarantor) under the terms of grant aid agreements or conditions of grant.

The use of the terms “grant” and “agreement” tends to give rise to the question of whether these arrangements are contracts and, if they are, whether they are caught by the Public Contracts Regulations 2006 (the regulations).

Defining our terms

If you look up the dictionary definition of the word “grant”, you will find that it has a multitude of possible meanings and is very difficult to tie down, but in this context I favour something along the lines of:

“the payment of money or some other thing, without the expectation of goods or services in return.”

For most public bodies, this probably accurately reflects their relationship with the grant recipient body, in that they require nothing directly in return but instead expect the grant to be directed to achieving a particular purpose, thus maximising the public benefit.

Even then, under the umbrella of the word “grant”, the approach varies considerably in that in some instances this may involve no more than providing a sum of money to subsidise a community group’s activities (effectively a gift) and, at the other, it could be used as a way of delivering services the local authority might otherwise have delivered itself (effectively procuring a service). Increasingly the latter has become more typical than the former.

The word “contract”, in general terms, is taken to mean a legally-binding agreement where one party promises to another to do (or refrain from doing) certain acts.

Procurement regulations

Article 1 (Directive 2004/18/EC), the parent directive to the procurement regulations, provides that the regulations apply to written contracts for a pecuniary interest.

The regulations define a public services contract as:

“A contract, in writing, for consideration (whatever the nature of the consideration) under which a contracting authority engages a person to provide services.”

There is no definition of pecuniary interest in the regulations and instead it uses the word “consideration”, which in practice means the contract must be for something of value, however small, or entered into as a deed.

Incidentally, in the past it has been argued that, as the grant-making body does not itself directly benefit from the award of the grant because (usually) the services are not provided directly to the grant-making or administering body, the regulations do not apply.

Following the European Court of Justice (ECJ) case of Roanne, it is difficult to see how that approach may be maintained. In the case, the ECJ held that a public body was procuring a work in acting as a promoter of a multi-screen cinema and leisure development, even though it was not the intended owner of the built development.

The implications that this case give rise to are that, where grant agreements impose legally enforceable obligations and specify how the grant is to be spent, it is likely to amount to a contract for services. Whether it is then caught by the regulations will depend on whether the estimated value of the contract exceeds the thresholds above which the regulations apply or, if the contract is for services, whether it falls into Part B of schedule 3 to the regulations and is, for all practical purposes, exempt from the regulations. Although, in either case, there is still a limited obligation to advertise where trade between member states is potentially affected.

In my view, the adoption of the tag “grant” does not obviate the need to analyse the precise nature of the arrangement. It is entirely understandable why a local authority might want to describe a contract as a grant aid agreement to avoid having to open up its award to competition, but this does not alter its essential character if it is in the nature of a contract for services.

Accordingly, there now exists a real risk that the giving of a grant may in actual fact amount to the award of a contract for services and be caught by the regulations. In light of the introduction of the new Remedies Directive by the end of this year, the consequences of getting this wrong in future may be more serious than they are at present.

  • The giving of a grant may, in some circumstances, amount to the award of a contract for services
  • The risk is particularly great where grant agreements impose legally enforceable obligations and specify how the grant is to be spent
  • The tag “grant” does not obviate the need to analyse the precise nature of the arrangement