As many contracting authorities and developers will be aware, the European Court decided in the 2007 case of Jean Auroux and Others v Commune de Roanne that traditional development agreements are public works contracts for the purposes of the Public Contracts Regulations. As a result, public bodies have had to consider whether a developer can only be appointed in accordance with the regulations.

Contracting authorities and developers had understandable concerns. There was also confusion about how the decision in Roanne sat with earlier decisions of the court. These decisions had held that land contracts were not subject to the regulations and, further, that mixed contracts (which contained both land and works elements) were not public works contracts unless the principle object of the contract was the works.

Over the last four years, the industry has built up its understanding of when arrangements can properly be classified as land contracts (which are outside the regulations) rather than public works contracts or public works concession contracts (which are subject to the regulations).

The Office of Government Commerce has helped by issuing guidance. The latest version was published in June 2010 after the case of Helmut Müller. It suggests that if the answer to all of the following questions is 'yes', the arrangement in question will be a public works contract for the purposes of the regulations.

The questions are:

  • Are the works required or specified by a contracting authority?
  • Is there an enforceable obligation in writing on the contractor to carry out the works?
  • Is there some pecuniary consideration, in cash or otherwise, for the carrying out of the works?

Most analysis concentrates on the first two limbs of the test rather than assessing whether there is any pecuniary consideration passing from the authority. After all, it is traditionally assumed that, where there is an agreement for lease or a contract for the sale of land, there is pecuniary consideration.

However, EU law is never quite that simple. There is scope for a case to be made that there is no public works contract on the basis that there is no pecuniary consideration. As interested parties will be aware, quite often not only is the contracting authority not paying the developer for the works, it is being paid in return.

In Helmut Müller, the court analysed the requirement for pecuniary consideration on the presumption that the contracting authority receives a service in return for the pecuniary consideration. The judgment indicates that the pecuniary consideration test is only satisfied where the authority receives a service of direct benefit to it. This occurs where the authority:

  • is to become the owner of the works; or
  • is to hold a legal right over the use of the works in order that they may be made available to the public; or
  • derives economic advantages from the future use or transfer of the works, in the fact that it contributed financially to the carrying out of the works or in the assumption of risk in the event that the works become an economic failure.

Following the Advocate General's opinion in the case of European Commission v Kingdom of Spain, there were high hopes that the decision of the court might provide further guidance on the question of pecuniary consideration.

In summary, the Advocate General concluded that in order for pecuniary consideration to exist, the contracting authority must bear some economic detriment. This could be in the form of a positive payment obligation or in suffering some loss of income or resource which would otherwise be due.

In the event, the decision of the court, handed down at the end of May, avoided this tricky question because the court found (in favour of Spain) that it had not been established that the contracts in question were properly public works contracts at all.

This is disappointing and contracting authorities and developers will, for the time being, have to rely on the first two limbs of the Office of Government Commerce guidance to ensure that the regulations do not apply. This would involve structuring arrangements which either contain no 'specified requirements' or no 'enforceable obligation' to undertake the works.

European Commission v Kingdom of Spain does tell us, however, that the principle object of the contract is not always clear cut. Contracting authorities must be prepared to substantiate their assessment that the principle object of the contract is either the transfer of land, the execution of works or the carrying out of services as the case may be.