EU procurement rules and s. 106 agreements - the uncertainty continues

November 23, 2009

Despite guidance from the Office of Government Commerce, it is still unclear whether EU procurement rules apply to s. 106 agreements where there are major public infrastucture obligations, argue Ian Gilbey and Peter Andrews.

The Office of Government Commerce (OGC) recently published guidance on how EU procurement rules should be applied to development agreements. It followed pressure from the market, reacting to the trend over recent years for local authorities and regional development agencies to advertise and tender more development agreements.

The trend began following two European Court cases – La Scala and Jean Auroux/Roanne, which applied a very wide definition to which schemes qualify as ‘public works contracts’. There have been further cases since, and more are pending. These should clear up most areas of uncertainty over the next few years.

Meanwhile, the OGC guidance gives some help on applying the law to development agreements, but the question of whether the rules also apply to s.106 agreements with significant public infrastructure obligations remains unclear.

The OGC guidance specifically does not cover planning obligations – promising further guidance on this in future – but does suggest that the European Commission is currently actively investigating whether the procurement rules apply to s.106 agreements.

The economic climate means public sector projects are commercially attractive, and developers are more likely to challenge if they lose out. From 20 December this year, the courts will have the right to tear up some arrangements agreed in breach of the rules, and even fine the authorities involved – so practical solutions are needed.

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This issue needs to be analysed from a technical and market practice perspective.

The 1990s UK case Brent v O’Malley indicated development projects were not ‘public works contracts’ and were therefore outside the Rules.
But the European Court’s recent interpretation means there may be a public works contract where: a scheme is specified by the authority; there is ‘consideration’ (through money or money’s worth – some cases suggest grant of planning consent is enough to be ‘consideration’); it serves a regeneration function, whether or not it will be owned or leased back to the authority, and whether or not it ‘feels’ public (school, social housing) or private (commercial premises).

With caveats, the OGC Guidance focuses on routes authorities can take to reduce the chances of their development agreements being caught. The main one is that, in some circumstances, there is no ‘public works’ contract where the authority merely sets outline specifications, and chooses between differing detailed specifications worked up by the developer. In such circumstances the argument is that the authority is not ‘specifying’ the works. This may be harder in the context of public infrastructure (such as a new primary school) secured through a planning obligation.

The court has not decided whether this principle applies to s.106 agreements as well as development agreements.
Obligating a developer to contribute sums towards mitigation works to be carried out by the authority itself – for example building a school – will not be a public works contract under the rules. It might, in future, be more attractive to structure more arrangements this way to avoid having to advertise for the developer (or ‘public works’ provider) under the rules.
But it is often more efficient for a developer to carry out the works itself. Where this is secured through a s.106 agreement, it is necessary to analyse whether this is a public works contract.
The European Court has to deal with European law across 27 member states, so pays little attention to how an agreement is categorised in national law. Previous cases show that the fact infrastructure works are dealt with through national planning legislation does not prevent EU procurement law applying.
So where s.106 agreements contain significant infrastructure provisions, the European Court would analyse them in the same way as a development agreement specifying the same works.
Planning obligations are much less likely to be caught if they merely regulate what a developer would build anyway – in terms of sequencing, materials etc – rather than specifying significant additional mitigation (amounting to ‘public’) works.
So within reason and where possible, expressing such provisions as planning conditions rather than s.106 obligations may help in presentation terms to reduce the risk of them being classed public works contracts.
Even though, technically, the public/private ‘flavour’ of the works to be carried out does not determine whether the rules are triggered, the more the works ‘feel’ like social infrastructure, the greater the practical risk that a rival developer will pick up the point and challenge if the rules are not followed.
In the short term, whatever the technical position, the risk of being challenged on failing to apply the rules to the selection of a developer where works are specified through a s.106 agreement may still be low. But we would expect that market practice will develop, just as it is doing with development agreements, particularly as more and more cases come through.
If so, as more authorities apply the rules in selecting developers on schemes regulated by s.106 agreements, the risks of being challenged for not doing so would increase.
In the current economic climate pursuing such a challenge may secure a commercial or competitive advantage, whatever its eventual outcome, which may increase the likelihood of future legal proceedings.