The Court of Appeal has just handed down its judgment in the case of Faraday Development Ltd v West Berkshire Council. This judgment is one of the most important developments in procurement law this year. As it concerned a development agreement, it is especially interesting to those working in the Projects and Construction sectors. However, it also involved a Declaration of Ineffectiveness and the drafting of a VEAT notice, meaning that its relevance extends to all sectors.
The case concerned a development agreement to develop land in Newbury, Berkshire. The contracting authority, West Berkshire Council, entered into a contract with developer St Modwen. The land was parcelled into leases, with the agreement giving St Modwen the option to activate or “draw down” a lease at a future point. Crucially, there was no obligation on St Modwen to take a lease or to start the development works. However, should St Modwen decide to take a lease, an obligation to develop would crystallise at that point and become binding. The arrangement was structured in this way to allow St Modwen the flexibility to decide whether to develop the land in the context of the well-known financial and commercial challenges within the sector.
The Council believed, given that (at the point the agreement was signed) there was no obligation on St Modwen to develop the land or even to take the lease, this contract could not amount to a public works contract as defined in the procurement regulations. Believing itself to be justified in this assessment it published a voluntary ex ante transparency (better known as VEAT) notice in August 2015, explaining that it was entering into the contract, that no OJEU process was required as this was a wholly exempt land transaction with no obligation to develop. The contract was entered into in September 2015, and the claimant Faraday brought a claim, arguing that this was an illegal direct award that ought to have been the subject of a full procurement process under the regulations.
The High Court heard the case at first instance, and, applying the decisions in Helmut Muellerand Midlands Cooperative, decided in the Council’s favour. As there was no obligation on St Modwen to develop, said the High Court, this could not be a contract for public works and therefore there could be no obligation to run a formal procurement process. However, the High Court did give permission for Faraday to appeal, noting that this area of procurement law was one where there was an interest in testing the principles established so far in case law around when a development agreement will (and will not) be caught by the procurement rules.
The Court of Appeal last week overturned that High Court judgment and found in favour of Faraday. It decided that, while it was true that, at the point the development agreement was entered into, there was no obligation on St Modwen to start work, nonetheless, should St Modwen take the option of a lease, the obligation to develop would be triggered. This option was entirely out of the Council’s control, meaning that at some point “down the line” there could potentially be a situation where a developer was developing land for the Council. In other words, the development agreement as signed could lead to a scenario where a public works contract came into being which had not been formally procured in accordance with the regulations.
The Council argued that even if this were the case, it had published a VEAT notice in good faith. This meant, said the Council, that the necessary transparency concerning the arrangement had been achieved as the market had been put on notice of it. The Court however (having looked at the transparency standards set out in the Fastweb case) decided that the VEAT notice was drafted in a way which did not give sufficient detail about the arrangement as a whole in order that other developers could, on reading it, understand the full scope of the transaction. The VEAT notice described the deal as an exempt land transaction without obligations and did not go into detail about the obligation to develop should the lease be drawn down. In reality, the deal was more complex than merely a simple land transaction; the Court held that the VEAT notice fell short of the necessary “clear and unequivocal disclosure”.
Having concluded that the development agreement was, when looked at in the round, a public works contract and that it had been awarded illegally without the necessary procurement process, the court was obliged to grant a Declaration of Ineffectiveness, overturning the contract from the date of the declaration. It was also required to impose a fine on the Council and the penalty was fixed at a nominal amount of £1. This has caused raised eyebrows amongst procurement lawyers, given the requirement in the regulations that these fines be proportionate and “dissuasive”!
However, as leading counsel for the Council explained at the White Paper Procurement Conference in London on Friday, this decision is not in any way a carte blanche to assume that all such civil penalties will be nominal. The circumstances in this case were unusual. The contracting authority had a genuine good faith belief that the procurement regime did not apply to this contract and there was no evidence that the transaction had been structured in this way to deliberately avoid running a procurement. The design of the option structure reflected not a hope to circumvent the rules but rather the commercial reality that developers face in the current climate.
Lessons to take away
Specifically in relation to development agreements, it is no longer safe to assume that where there is no obligation on the developer to develop, the procurement rules will not apply. Post-Faraday (assuming this judgment survives as good law; it is not yet clear whether the Council can or will pursue an appeal to the Supreme Court) it will be necessary to look at the deal in the round, particularly where obligations to develop may crystallise at a later stage in a contingent way.
There are salutary lessons too for those drafting VEAT notices – if you need to do so, you must have regard to the standards laid down in the Fastweb case and ensure that the notice truly reflects the nature of the contract being proposed.
The judgment means that we now have not one but two Declarations of Ineffectiveness in the UK. While on first reading it looks like the civil penalty imposed was anything but “dissuasive” authorities must remember that this case turned on very particular facts and should continue to assume that ineffectiveness fines could well be hefty.