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Projects portrait1Procurement law continues to develop apace. David Hansom and Robert Prater highlight two significant cases over the past 12 months.

Illegal direct award on frameworks - a taste of things to come?

The case of Lightways (Contractors) Limited v Inverclyde Council [2015] CSOH 169 was heard by the Scottish Court of Session in December 2015. The court held that a contract awarded for street lighting services under a framework agreement breached the procurement rules, as it was awarded to a subsidiary company that was not independently named as a party to the framework agreement.

Background

In 2013, Inverclyde Council held a mini-competition under a framework agreement for the supply of street lighting services and awarded a contract to Amey Public Services LLP (Amey LLP). This contract was re-procured under the same framework agreement in 2015 and the Council again awarded the contract to Amey LLP.

The suppliers appointed to the street lighting service framework agreement included Amey OW Limited (Amey OW). Amey OW and Amey LLP are sister companies and both members of the same group of companies, but have different management committees and directors as well as different employees, assets and businesses.

Prior to 2013, Lightways (Contractors) Limited had supplied these services to Inverclyde Council. Lightways were not a party to the framework agreement. Lightways challenged the 2015 call off agreement on the basis that Amey LLP was not a party to the framework agreement and claimed the award of a contract amounted to an illegal direct award, made without prior advertisement.

The court’s decision

The court held that Lightways were permitted to bring a claim despite not being a party to the framework agreement. The court considered that Lightways had potentially lost an opportunity to tender for the 2015 contract. Lightways has standing to bring a claim as it was an “economic operator which claimed to have suffered loss and damage in consequence of a breach of the Council’s obligations under the procurement rules”.

The Council argued that it had made a clerical error and the contract was intended to have been awarded to Amey OW, not Amey LLP. The Council also argued that the contract would have been awarded by the Council on exactly the same terms, and it had clearly intended to offer the contract to a company which was a party to the framework agreement.

The court held that the Council had breached the procurement rules by awarding a call off contract to a company that was not a party to the framework agreement. The court also considered that the Council intended to award the contract to Amey LLP in the mistaken belief that it was a party to the framework, and therefore this was not a mere clerical error that could be rectified by novation or rectification of the contract. The court determined that the contract was ineffective and cancelled the call off contract.

Comment

This was the first occasion where a UK court applied ineffectiveness to a framework call off. It highlights the need for contracting authorities to take care to follow the correct procedures when calling off contracts under a framework agreement. Since this case, we have seen increased scrutiny and bidder complaints on framework agreements, which is perhaps due in part to this case.

When is a development deal not a public works contract - the latest instalment

In R (Faraday Development Ltd) v West Berkshire Council, the High Court dismissed a judicial review application in relation to the award of a development agreement between St Modwen Developments Limited (SMDL) and West Berkshire Council. This case highlights some of the many considerations local authorities face when entering into development agreements on a no procurement basis and is perhaps an encouraging affirmation of the precedents set in recent case law on this subject

Background

The Council entered into a development agreement with SMDL for the regeneration of an industrial site it owned. Under the deal, the Council would retain the ownership of the site and generate a revenue income through ground rents on the redeveloped site. The freehold interest in the site was held by the Council, but was subject to long leasehold interests. The claimant held various leasehold interests in parts of the site which it had acquired with a view to carrying out its own redevelopment project.

The Council considered proposals (received outside of a regulated procurement process) for the redevelopment of the site, which included proposals from the claimant and SMDL. The Council decided to proceed with SMDL’s proposal due to its greater experience in delivering schemes of that nature.

The Development Agreement required SMDL to draw up plans for the proposed development, the initial infrastructure works and valuation appraisals. A steering group made up of equal members from the Council and SMDL was responsible for the strategic objectives of the development and monitoring the progress of the development.

There was no obligation in the Development Agreement for SMDL to carry out any development on the site. SMDL had a considerable commercial incentive to proceed with the development as it had the potential to generate a significant profit for SMDL (aside from the resources it had committed in fulfilling its obligation to draw up plans (etc.) for approval by the steering group and to obtain planning permission).

Judicial review

Faraday Development Limited issued judicial review proceedings in respect of the Council’s decision to enter into the development agreement on the basis that:

  • the Council had failed to obtain best consideration for the disposal of the development site and, in addition, the transfer amounted to unlawful State aid (in breach of Article 107 of the Treaty of the Functioning of the European Union);
  • the Development Agreement amounted to a public works contract and/or a public services contract that should have been awarded in accordance with the Public Contracts Regulations;
  • that the Council’s decision not to impose an enforceable obligation on SMDL to carry out or procure works in the Development Agreement was irrational, on the basis that the procurement rules encourage competition.

The court’s decision

In considering each of the grounds, the court came to the following conclusions:

  • The fact that the Council’s rationale was to seek revenue income, and was not solely driven by receiving the highest capital receipt, was relevant in determining whether best consideration had been obtained. The Council had taken expert advice on the best way to protect and maximise the value achievable for the site and had been advised of the financial aspects of the offers it received. In seeking appropriate advice the Council could not be considered to have acted irrationally when accepting the offer from SMDL, and therefore could not have failed to obtain best consideration for the transfer of the site. As the duty to obtain best consideration was considered to be met, the court considered there could be no unlawful state aid present in the transfer of the site to SMDL.
  • When considering whether the Development Agreement should have been procured under the Public Contracts Regulations 2015, the court must consider the nature of the scheme as a whole, not just the terms and conditions of the agreement. The court did not consider that the Council did exert a ‘decisive influence’ over the development works. Additionally, due the absence of an enforceable obligation in the development agreement, any works would be undertaken at SMDL’s autonomous initiative. These factors contributed to the court determining that the development agreement should not be considered to be a public works contract under the Public Contracts Regulations and so a fully regulated procurement process was not necessary.
  • Further, the services provided under the agreement were incidental to the main purpose of the agreement, and their purpose was to facilitate the Council’s regeneration and financial objectives. The court concluded that the agreement did not amount to a public services contract that is subject to the procurement rules.
  • Given the court’s decision that the Development Agreement was not subject to the Public Contracts Regulations 2015, the court dismissed the claim that the Council acted irrationally when making its decision not to follow a regulated procurement process before entering into the agreement.

Comment

This case perhaps highlights the court’s willingness to apply the precedent established in previous case law including, most recently, R (on the application of Midlands Co-operative Society Ltd) v Birmingham City Council. This approach will not be appropriate in all cases and careful consideration should be given on a case-by-case basis for the appropriate structure for the development agreement.

Whether the authority wishes to have a decisive influence over the development and impose an enforceable obligation on the developer to proceed with the development, those agreements do generally amount to public works contracts rules and a fully regulated procurement process would be required.

David Hansom is a partner and head of public sector team and Robert Prater is a solicitor at Veale Wasbrough Vizards. David can be contacted on 020 7665 0808 or This email address is being protected from spambots. You need JavaScript enabled to view it., while Robert can be reached on 020 7665 0927 or This email address is being protected from spambots. You need JavaScript enabled to view it..