News | January 9, 2019

Faraday’s law of public procurement

A recent Court of Appeal case has sounded a note of caution to those considering entering into conditional development agreements with public authorities where public procurement rules are not followed.

Until the judgment in the case of R (Faraday Development Ltd.) v West Berkshire Council [2018] EWCA Civ 2532 conditional development agreements were generally not considered to be within the scope of public works contracts to which the full tendering requirements of public procurement legislation applies, but that has now changed.

Under the spotlight was the decision of West Berkshire Council to enter into a development agreement with St. Modwen Developments Ltd without following the tendering requirements.  The case concerned a mainly Council-owned industrial estate in Newbury.  Faraday Development Limited (‘Faraday’) owned a leasehold interest in some of the buildings which it obtained planning permission to develop.  A joint venture company in which Faraday had an interest lost out to St. Modwen in a bidding process to develop the wider estate.

Faraday challenged the Council’s decision and asked the court to declare the development agreement ineffective.  The Planning Court refused that request but Faraday were successful on appeal.

The tendering requirements for public works contracts are often referred to as the “OJEU” procedure because before awarding contracts above a certain threshold (currently c. £4.5 million for works) public authorities must publish and apply contract award criteria and then advertise the contract award notice in the Official Journal of the European Union.  The driving force is the need for transparency and for all ‘economic operators’ to be treated equally and without discrimination when public works are being tendered.

The main public procurement legislation comprises EU Directive 2014/24/EU and the Public Contracts Regulations 2015, which transposed the Directive into domestic law.  Any public works contract (one entered into with a contracting authority for ‘pecuniary interest’ having as its object the execution of works) will be subject to the OJEU procedure.

The development agreement in this case was a contingent one because, whilst the Council was committed to sell land to St. Modwen and entrust them with developing the site, St. Modwen were free to walk away until exercising their option to draw-down and develop land.

The Court of Appeal first considered whether the development agreement was, on the day it was signed, a ‘public works contract’. Faraday’s argument being that the whole purpose of the development agreement was for St. Modwen to carry out works and, once St. Modwen exercised the option and drew-down land, they would be obliged, rather than just entitled, to undertake the development.  The court rejected that argument because the obligation to carry out works was, on the date the agreement was entered into, not immediately enforceable at law and it would be inconsistent with case law to regard it as a public works contract.

However, Faraday succeeded on the second argument, namely that by entering into the development agreement the Council had committed to entering into a public works contract in the future without following the OJEU procedure – at the point of exercising its option St. Modwen would then be committed to undertaking public works without an opportunity for the procedure to be followed at that stage.

It is now clear that, whilst development agreements of this type may not comprise public works contracts on day one, they will become public works contracts when the contingencies are triggered and face the prospect of being set aside if public procurement rules have not been followed.

The Council did guard against the possibility of the agreement being found to be a public works contract and declared ‘ineffective’ by following a frequently-used ‘voluntary transparency notice’ (‘VEAT notice’) procedure indicating its intention to sign the agreement and to observe a standstill period before doing so.  If undertaken correctly, the procedure can prevent a declaration of ineffectiveness being made.

Whilst the Council did, on the face of it, follow the VEAT Notice procedure correctly, the Court decided that the substance of the notice made it invalid because it did not contain a sufficient description of the object of the contract or an adequate justification of the decision by the Council to award the contract without following the OJEU procedure.

The decision demonstrates the shortcomings in relying on VEAT Notices to avoid the OJEU procedure.  When used correctly and in the right circumstances they provide local authorities, developers and their funders with essential comfort that a development agreement will remain valid, but they must contain a proper objective, relevant factual details and adequate justification as to why the public authority has not followed the OJEU procedure.  The Faraday case is a stark lesson in the consequences of getting it wrong and stresses the importance of developers and advisers checking that the public authority has done its work diligently, and the dangers of assuming that the authority has followed the procedure correctly.

Agreements that are now clearly caught by the public procurement rules include any that impose obligations to undertake works, whether those obligations are unconditional or dependent upon a further condition which, if triggered, would cause an enforceable obligation to undertake public works to arise.  It is crucial at the outset to consider the purpose of the contract and the potential end product because if it could potentially result in the public authority being obliged to grant a contract for works it will be caught by the rules.

Agreements that are below the relevant threshold and straightforward land sales with no obligations attached are not caught.  But what about section 106 agreements?  The Court reaffirmed existing case law which keeps them outside the rules because they have a “distinct status and role in the statutory planning scheme” and by their nature are not public works contracts.  The distinction that section 106 agreements do not oblige developers to proceed with the relevant development is an uneasy one because they often oblige developers to undertake significant public works, for example the construction of schools, once the contingency of implementing the associated planning permission has been triggered.  It’s hard to see the difference and it may be advisable for authorities to publish a VEAT Notice in those circumstances, as some already do.