19 November, 2018
When is a public works contract a public works contract?
On 14 November 2018, the Court of Appeal handed down judgment on the question on whether a future commitment in a development agreement entered into by West Berkshire Council constituted a public works contract for the purposes of the Public Contracts Regulations.
The Council was found to have breached procurement regulations by effectively committing to award an above-threshold works contract as part of a land plus works package. Whilst those familiar with the case of Helmut Mueller GmbH v Bundesanstalt fuer Immobilienaufgaben  PTSR 200 (Case C-451/08) and other CJEU decisions will not be surprised by this, perhaps the finding of the Court of Appeal will remind contracting authorities and convince contractors in the UK that dodgy package deals are, in fact, dodgy. The judgment (and logic) requires this to be the case as, in its words: "the only other possibility would be that a contracting authority is at liberty to construct a sequence of arrangements in a transaction such as this, whose combined effect is to constitute a public works contract, without ever having to follow a public procurement procedure. That would defeat the operation of the legislative regime". The German case concerning the award of a public contract for the construction of a tax office building in Quedlinburg was settled out of court based on this logic.
As an aside, this is especially true when contractors purchase the land and then sell it back-to-back to contracting authorities, on the condition that they get the building contract - with the sole purpose of attempting to circumvent procurement rules. This has never been ok, and this case explains - in helpful detail - a few procurement fallacies. We are now likely to see increased craftiness in the drafting of options and conditions to carry out above-threshold works, with nebulous semi-commitments replacing bold obligations, with a view to keeping the works element in the realm of the R (Midlands Co-Operative Society Ltd) v Birmingham City Council decision, distinct from the fact of this decision in Faraday. That said, given that this is a Court of Appeal decision, whereas Midlands Co-Op was decided in the High Court, we may well see challenges even to situations more closely comparable to Midlands.
Per the judgment in Faraday: "Between May 2011 and November 2014 the council went about selecting a developer to undertake redevelopment. Faraday, a special purpose vehicle, held long leases of three of the plots, and an option to acquire a long lease of a fourth. Planning permission was granted for a mixed-use development on that land, the "Faraday Plaza Scheme" - most recently on appeal in February 2016. In October 2011 Faraday entered into a joint venture agreement with Wilson Bowden Developments Ltd., with a view to developing Faraday's land. In 2013 Wilson Bowden and David Wilson Homes made a bid in the council's tender process for the regeneration of the industrial estate. The bid included Faraday's land at a substantially reduced value in return for a share of the profits.
"It was envisaged that Faraday would undertake a development of flats on its land, as well as a proportion of the other housing proposed by the bid. On 27 March 2014 the council chose St Modwen's bid in preference to Wilson Bowden's. As the judge explained (in paragraph 109 of his judgment), there had been no substantial investment in the London Road Industrial Estate for about 40 years. The council's "twin objectives of encouraging regeneration/employment and enhancing its income were advanced in the context of [its] obligation to "maximise" its financial receipts, or achieve "best value"". The redevelopment "would be a long term project, involving a risky and complex land assembly exercise and relocation of existing businesses". The council was advised by Strutt & Parker that St Modwen "had significantly more expertise and experience to offer for this type of project" than Wilson Bowden and Faraday. The "redevelopment risks", including the costs of land assembly and relocation, and changes in market conditions, were to be borne by the development partner, not the council. The risks "could potentially affect the viability of the scheme as it unfolds"."
The Council did not undertake any due form of procurement process in relation to what was effectively a public works contract to which it would be committed upon St Modwen exercising the option on the land and, in fact, published a voluntary transparency notice (VEAT Notice), on the basis that (amongst other things) the contract was an exempt land contract, and that any works related to it were purely incidental. The Court of Appeal said "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."
Contractors have for years been persuading housing associations and other public contracting authorities that land plus building package deals are above board. Of course, it is in contractors' best interests for this to be deemed to be the case, given that the contractor who owns the land would thereby be able to hold contracting authorities over a barrel in terms of appointing them to develop said land as a condition to the land contract. This is a common tactic for contractors who would ordinarily be unable to win a proper procurement process (by reason of being disqualified for previous failings in public contracts, for example).
This decision confirms that build contracts that are to be entered into as a condition of a land contract with a contracting authority are still works contracts and that, therefore, if they are above the relevant threshold for public works contracts (currently £4,551,413), the contracting authority (be that a housing association, a local authority, or any other public or quasi-public body) has a duty to carry out a procurement process in line with the requirements of the Public Contracts Regulations 2015.
Contracting authorities should continue to be wary of contractors who approach them with land plus works packages that are above procurement thresholds. If a contractor is coming with a back-to-back land plus build contract deal, why not approach the current owner of the land directly and then put the works out to tender?
Forbes Solicitors' Commercial department regularly advises housing associations, schools, and other contracting authorities on the application of procurement law, including the Public Contracts Regulations 2015, in development and other contexts, including assisting in carrying out procurement processes and drafting contracts. Stephen McArdle, in our Dispute Resolution department, also specialises in litigating procurement disputes and challenges for both contracting authorities and economic operators. Get in touch with Daniel Milnes on 01254 222313 for details.