Court of Appeal allows appeal over development agreement and procurement

The Court of Appeal has handed down a key ruling on public procurement law and development agreements, also making the first declaration of ineffectiveness in England.

Lord Justice Lindblom, who gave the main judgment, said the appeal in Faraday Development Ltd v West Berkshire Council & Anor [2018] EWCA Civ 2532 raised the following question:

“Did a local authority [West Berkshire] act in breach of the requirements of Directive 2004/18/EC ‘on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts’ and the Public Contracts Regulations 2006, when, without having followed a procurement process under the 2006 regulations, it entered into a development agreement containing contingent obligations on the part of the developer to carry out development on its own industrial land?”

The appellant, Faraday Development, appealed against Mr Justice Holgate’s dismissal in August 2016 of its claim for judicial review of the decision of West Berkshire to enter into the development agreement, on 4 September 2015, for the disposal of land on the London Road Industrial Estate, in Newbury, to the interested party, St Modwen Developments Ltd.

The High Court judge also dismissed Faraday's claim under Part 6 of the Public Contracts Regulations 2015. He held that the development agreement did not constitute either a "public works contract" or a "public services contract" under the 2004 Directive and the 2006 regulations. He also concluded that the council had not failed to comply with the requirement in section 123(2) of the Local Government Act 1972 to obtain "best consideration".

The Court of Appeal allowed Faraday’s appeal.

Lord Justice Lindblom found that the development agreement clearly did provide, at the date it was entered into, for a procurement by the council of the development it was intended to deliver. “At that date, no further act of procurement by the council remained to be done, for which a lawful public procurement procedure could later be conducted. The time for that had passed.”

The Court of Appeal judge said that when the council entered into the development agreement, it had nothing more to do to ensure that a "public works contract" would come into being. “It had, in fact, done all that it needed to do to procure. It had committed itself contractually, without any further steps being required of it, to a transaction that will fully satisfy the requirements of a 'public works contract'. It had committed itself to procuring the development from St Modwen.”

Lord Justice Lindblom said the development agreement constituted a procurement in its result, and a procurement without a lawful procurement procedure under the 2004 Directive and the 2006 regulations.

“The procurement crystallizes when St Modwen draws down the land,” he pointed out. “The ground lease entered into by St Modwen will contain an unqualified obligation to carry out works, and a corresponding obligation will also be brought into effect in the development agreement itself. The development agreement made that commitment on the part of the council final and provided also for a reciprocal commitment on the part of St Modwen. It did so without a public procurement process, and without affording any opportunity for such a process to be gone through before the 'public works contract' materializes. At that stage it would be too late.

“Thus a 'public works contract' will have come into being without a lawful procurement process. The regulation of the council's actions in procuring the development will have been frustrated."

By entering into the development agreement, Lord Justice Lindblom said, 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.

He added: “Doubtless there were good commercial reasons for the parties constructing the development agreement as they did, not least the flexibility it provided against the risk borne by St Modwen. But this cannot undo the conclusion that there was here a procurement of development that did not undergo the requisite procurement procedure.”

Lord Justice Lindblom stressed, however, that “there was no evidence in this case, and indeed no suggestion, of the council having acted at any stage in bad faith, or with any motive to create a mistaken understanding of its objectives in entering into the development agreement or of the "economic and commercial reality" of the transaction.

He went on to conclude that there was a failure to give an adequate justification for the council's decision to proceed as it did. The voluntary ex ante transparency notice issued by West Berkshire failed the requirement in regulation 47K(4)(a)(iii). “It was not a valid notice, and was not effective to prevent the court making a "declaration of ineffectiveness" if that remedy was justified.

The Court made a declaration of ineffectiveness and ordered the council to pay a penalty of £1.

In a statement West Berkshire said it was disappointed by the Court of Appeal’s ruling.

“The decision raises questions of such profound public importance that the council is considering appealing the Court of Appeal decision to the Supreme Court,” it added.

West Berkshire had previously agreed with St Modwen to put the development agreement on hold pending the outcome of the appeal. This position will continue while the local authority considers the details of the Court of Appeal’s judgment and decides whether to appeal to the Supreme Court.

Cllr Graham Jones, Leader of West Berkshire Council, said: “The regeneration of the London Road Industrial Estate remains a core part of our vision for Newbury. It is frustrating that this decision pauses our plans to bring new homes, affordable accommodation and high-quality office to the area. It will delay our plans but not deter us from the ambitious, exciting redevelopment which we remain committed to delivering for people in Newbury and beyond.”

See: Cat amongst the pigeons: a new approach for the procurement of development agreements? Richard Collins and Kathrine Eddon’s analysis of the Court of Appeal ruling