Legal Uncertainty around Developer Led Public Sector Projects
Updated: Aug 6, 2019
The Court of Appeal has handed down judgment in the case of Faraday Development Ltd (Faraday) v West Berkshire Council (the Council) , holding that a development agreement was a ‘public works contract’ and as a result, was captured by the public procurement regime requirements.
In 2013, Wilson Bowden Developments Limited (which was in a joint venture with Faraday) submitted a bid for the regeneration of an area of council-owned industrial land. The Council chose to enter into the agreement with St Modwen Developments Limited instead, an agreement with an estimated value of £135 million.
Under the agreement, St Modwen Developments Limited was to use ‘all reasonable endeavours’ to obtain planning approval for the work covered by each development strategy, covering each development plot. Once a plot appraisal had been approved, St Modwen Developments Limited could choose to enter into obligations to acquire and redevelop the land, but it was under no legal obligation to do so.
On 4 September 2015, Faraday challenged the Council’s decision.
Court at first instance
Faraday challenged the Council’s decision to select St Modwen Developments Limited on three grounds:
The Council failed to comply with its duty not to dispose of land for consideration less than the best that could be reasonably obtained (Section 123 of the Local Government Act 1972)The development agreement was a public contract and the Council should have complied with the relevant public procurement legislationTo avoid following the relevant public procurement legislation, the Council did not look to impose enforceable obligations on St Modwen Developments Limited.
The High Court rejected Faraday’s challenge. It held that in entering into the development agreement with St Modwen Developments Limited, the Council had complied with its duty under Section 123 of the LGA. The development agreement was not a ‘public works contract’, nor was it a services contract, as the provision of services was not a key purpose of the development agreement. Finally, the court held that it was lawful for the Council to decide that the development agreement should not impose an enforceable obligation upon St Modwen Developments Limited to carry out the development.
Court of Appeal decision
Faraday successfully applied for a challenge of the High Court’s decision. The Court of Appeal agreed with the High Court on the following points:
the development agreement did not constitute a public works contract at the time it was entered into, because it did not impose any enforceable obligations at that time
the development agreement was not a public services contract because the main object of the agreement was the carrying out of works
the Council did not adopt the structure so as to avoid compliance with public procurement legislation.
However, whilst the development agreement did not constitute a public works contract at the time it was entered into, the Court of Appeal took the view that the transaction should be looked into in its totality at the date it was entered into and ‘establish whether, at that date, it embodied defined obligations that will, once they take effect, compose a ‘public works contract’’.
Upon entering into the agreement, the Council had made a legally enforceable decision to commit itself to the arrangement. St Modwen Developments Limited had committed itself to the immediately enforceable obligations, but not to the contingency obligations.
However, the Court of Appeal decided that once St Modwen Developments Limited had proceeded to draw down the land as per the terms of the agreement, there had been a procurement of development works that did not undergo the requisite procurement procedure. By entering into the agreement, the Council had effectively agreed to act unlawfully in the future.
What does this mean for contracting authorities?
The decision was the first declaration of contract ineffectiveness for a development agreement made under English law. It provides helpful guidance for contracting authorities considering entering into public/private development projects.
The key points for public bodies to take away from the judgment are:
public bodies should consider whether an agreement may trigger the public procurement regimes at the beginning, or indeed at any stage of the agreement. It is important to note that the Court of Appeal found that although there had been no deliberate wrongdoing by the Council, the effect of circumventing the procurement regime was the same
if publishing a voluntary ex-ante transparency notice (the Court of Appeal said in this case, the voluntary ex-ante transparency notice was ‘incorrect, or at best misleading’), it should be drafted in a way as to disclose the full extent of the proposed arrangements.
Procure Partnerships are happy to discuss further and support you with compliance should you have any projects that fall under this umbrella.