Spanish inquisition

The Court of Justice has recently handed down its judgment in a land scheme case involving Spain. Deborah Ramshaw examines the ruling.

On 26 May 2011 the Court of Justice delivered its judgment in the Valencia land scheme case. In September 2010 we reported on the Advocate General’s opinion on this case which was a welcome “reining in” of the case law up to this point. The Court has not taken the opportunity to provide further clarity in this area but the judgment is nonetheless to be welcomed.

Background

The Commission commenced proceedings against Spain in respect of the application of the public procurement rules to certain Spanish land development projects. In Valencia, an “integrated action” is used where two or more separate pieces of land require comprehensive development. The detail of the Spanish legislation is fairly complex but, in essence, the local authority can decide to carry out the development itself using public funds (and a public works contract is therefore very likely to arise) or the authority can choose a developer (after a competitive process, albeit not a process under the Directive) to undertake the project and the relevant landowners must compensate the developer for the costs of the development, proportionally to the land they contribute to the project. This latter option is referred to as the “indirect action” process. One of the ways to carry out an “integrated action” project is to engage the statutory Integrated Action Programme (IAP). The aim of the IAP is to define the works to be carried out, the deadlines, and the economic and technical basis for management of the project.

As noted by the Advocate General the proceedings were initiated as a result of complaints to the Commission which were concerned with matters outside the public procurement arena, principally the obligation of landowners to pay for infrastructure works they did not want or need.

The Commission’s Case Against Spain

The Commission argued that the relationship between the local authority and the developer in the above context constituted a public works contract under Directive 2004/18/EC.  The Commission argued that the principal object of this relationship is the execution of public infrastructure and urban development works. The fact that the developer must tender the works contract(s) under the framework of the Spanish legislation did not, argued the Commission, alter the fact that the primary relationship should be classified as a works contact.

In respect of pecuniary interest for the contract the Commission argued that there was a bilateral contract between the authority and the developer under which the authority receives certain works and services and the developer receives from landowners a sum of money or its equivalent in plots. Consideration was also to be found in the authority’s decision to approve the IAP and to select the developer.

Spain’s Defence

Spain argued that the relationship between the authority and the developer, having regard to the way the developer was remunerated, was not a public works contract but a public services concession which falls outside the scope of the Directive. The award of an indirect action IAP is therefore not subject to the Directive.

Spain also argued that the execution of public works does not constitute the exclusive, or even fundamental, purpose of an IAP. Approval of an IAP also involves the financing and management of land consolidation as well as the assignment of development works. The developer is financially responsible for the execution of the works and is liable to carry out the necessary administrative procedures in order to guarantee that the project is free of charge for the authority and that the land-related costs and profits from them are fairly divided between the owners.

Spain contended that there was no pecuniary interest from the authority since the developer’s remuneration is provided exclusively by the owners. In summary, Spain argued that the developer should be viewed as a concessionaire since the developer’s remuneration depends on the developer being able to exploit the building plots and not on a fee from the authority.

Findings of the Court

The Court emphasised the definition of a public works contract as set out in the Directive and the fact that the Court has made it clear in previous judgments that where a contract contains elements relating to both a public works contract and another type of contract, it is the main object of the contract which determines which rules are to be applied to that contract. In particular, in assessing the main object of the contract, regard must be had to the “essential obligations which predominate and which, as such, characterise the transaction, as opposed to those which are only ancillary or supplementary in nature and are required by the very nature of the contract” (para 91).

The Court found that the Commission had not established that the works under the IAP indirect action constituted the main object of the arrangement between the authority and the developer. Indeed, as the Court noted, several of the activities which the developer is responsible for can properly be classified as services: preparation of the development plan; proposal and management of the land consolidation; acquiring plots; financing the project; and, procuring the works contractor.

The Court therefore dismissed the action.

Comment

The Advocate General had pointed out that if this particular arrangement were classified as a works contract it would have had the practical effect of discouraging private initiatives in the field of planning and development. To this extent the ruling is to be welcomed and the Court has recognised that the public procurement rules will not always apply in the context of development projects, particularly where the carrying out of works are not the main object of the arrangement. Disappointingly however the Court did not take the opportunity to provide clarification in this area, building on the opinion of the Advocate General.

The facts of this case are unusual given that they are based on Spanish domestic legislation which does not have an equivalent in the UK. To that extent the judgment does not take us a great deal further down the path to clarifying the development agreement/public procurement interface but it does, at least, confirm that simply because arrangements are related to regeneration / development projects it does not mean that they are necessarily covered by the Directive and that an analysis of the particular facts must be carried out in each case to determine whether or not the Directive applies. It no doubt assisted Spain’s arguments to show that the developer was at least selected via a competitive process and the works themselves were also subject to a full procurement process where relevant.

Deborah Ramshaw is Head of Procurement at Dickinson Dees LLP. She can be contacted by email at This email address is being protected from spambots. You need JavaScript enabled to view it. or on 0191 279 9836.