Procurement in a Nutshell: Court provides development agreement guidance

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The Court of Appeal has now handed down its own judgment on the case following appeal; in doing so helping to provide further clarity as to when a development agreement will or will not be outside the scope of the Public Contracts Regulations (the Regulations).

The facts

The Appellant, Faraday, appealed against the High Court’s finding that West Berkshire Council had not acted in contravention of procurement law by entering into a development agreement with another company without having first followed a procurement process as set out under the Public Contract Regulations.

The Agreement concerned the proposed development of land which was owned by the Council.  At first instance, the High Court held that because the agreement did not constitute a “public services contract” or a “public works contract” within the meaning of the Regulations it was exempt from having to follow a procurement procedure.

A key factor influencing the Court in reaching its decision was the fact that, as well as imposing a number of definitive obligations on the developer, the agreement also contained a contingent obligation, meaning that if the developer chose not to exercise a certain option it would be under no duty to execute any works.

Allowing the appeal, the Court held that the Council had acted unlawfully by not procuring the contract  despite holding that the agreement was neither a “public services contract” nor a “public works contract”.

Was the agreement a public services contract?

With regard to the question of whether the agreement could be classified as a public services contract, the Court noted that although the object of the contract was largely works based, it did also contain a services aspect.

However, in reaching its decision the Court highlighted previous case law which stated:

“In the case of a mixed contract, the different aspects of which are… inseparably linked and thus form an indivisible whole, the transaction at issue must be assessed as the basis of the rules which govern the aspect which constitutes the main or predominant feature of the contract”

As such, when considering the development agreement as a whole, the Court of Appeal found that it was not a public services contract covered by the Regulations given that it was “predominantly” a works contract.

Was the agreement a public works contract?

In relation to whether the development agreement constituted a public works contract, the Court reiterated the definition provided by the Regulations i.e. works contracts are public contracts which have as their object the execution of works.

However, in addition to this, the Court recognised that:

“It is clear from the jurisprudence that a transaction will not fall within the definition of a “public works contract” unless it involves the contractor assuming an obligation.  But a question left unresolved by specific authority is the defining quality of a relevant obligation, and, in particular, whether or not it must be immediately enforceable”.

It was due to this principle that the uncertainty arose over the classification of the development agreement because in addition to the various definitive obligations there was also uncertainty created by the contingent obligation.

As regards this contingency, the Court stated that as long as this remained a mere possibility i.e. before the developer exercised its option:

“it is possible to conclude, consistently with the case law, that it is not, at this stage, to be regarded as a “public works contract”.  This, [we] acknowledge, involves reading into the authorities the notion that a contingent obligation, or an obligation that is not immediately enforceable at law, is generally not a relevant obligation for the purposes of a “public works contract””.

In other words, at the point that the procurement took place there were no obligations that would form the basis of a public works contract.

Had the Council breached procurement law by failing to procure the contract?

However, irrespective of the findings that the development agreement was not a public services contract, nor a public works contract (as long as the contingent obligation remained), the Court held that the Council had breached procurement law by not conducting a proper procurement.

This was the case because at the later point of the option being exercised and the development agreement being entered into, i.e. the same point that the developer committed to fulfilling its contingent liability, a public works contract would enter into effect and it would be too late for the required procurement to take place.

“By entering into the development agreement, therefore, the council effectively agreed to act unlawfully in the future.  In effect, it committed itself to acting in breach of the legislative regime for procurement… that is in itself unlawful, whether as an actual or anticipatory breach of the requirements for lawful procurement.”

Why is this important?

The Court of Appeal’s judgment has helped clarify a previously uncertain area of the law affecting development agreements.  In this regard, the ruling reminds Contracting Authorities that, in situations where they are perhaps uncertain as to the nature of the contract that they are entering into, they should be certain to ensure all regulatory and procedural procurement requirements are complied with.

How can I find out more?

If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.