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Further Guidance on When a Development Agreement is a Public Works Contract

on Friday, 04 January 2019.

The outcome of the appeal in Faraday Development Ltd v West Berkshire Council has important implications for public bodies and developers looking to structure land arrangements outside the scope of the public procurement rules.

As a result of the decision, the strategy for such arrangements is likely to become more difficult. The decision also contains guidance on the use of transparency notices to mitigate against the risk of contract ineffectiveness in the event of a successful procurement challenge.

We previously commented on the case back in June when the Court of Appeal ("CA") hearing took place.

The first instance decision was regarded by many as pushing the boundaries of when a development agreement is not a public works contract, and the appeal decision has resulted in those boundaries being pushed back.

The High Court found that the development agreement did not constitute a public works contract for the purposes of the procurement rules, in part, because:

  • it accepted the Council's view that the development agreement was a property transaction with the aim of income generation rather than having the realisation of works as its object
  • there was no legally binding obligation on the developer to drawdown plots of land for development even though in practice there was a significant commercial incentive

The CA however took a different view of these two elements.

Main Purpose of the Agreement

The definition of a public works contract was met. The development agreement amounted to a contract for pecuniary interest whose object, explicitly, is the execution of works, and made detailed provision for the carrying out of a development involving the execution of works by (the developer) in accordance with the Council's requirements (see para 38 of the judgment).

The CA emphasised the need to look at the real substance of the transaction and not merely its form. It seems relevant here that although the Council's intention in entering into the agreement was to regenerate a strategically important area of land in Newbury and to generate income, it had also reserved ample control over the content and execution of the works, and had agreed to underwrite the scheme.

Definition of a Legally Binding Obligation

While the CA agreed that there was no legally binding obligation when the development agreement was entered into, under the terms of the development agreement the obligation to carry out the works crystallised at the time when the developer decided to draw down parcels of land. The CA categorised the arrangement as giving rise to a contingent obligation. It reached this conclusion taking into account the works under the development agreements were very specific, were agreed in consultation with the Council and were binding without any further action from the Council. It distinguished and contrasted previous cases where it had been found there were no binding obligations to deliver works, most notably the leading case on development agreements in Helmut Muller, on the basis that the developer was free to choose what works, if any, to carry out.

The practical point from a drafting perspective is that the more control a contracting authority is seeking, the more likely it will be seen to be an indirect procurement of works.

Use of Transparency Notices

Where a contracting authority fails to carry out a regulated procurement process for a contract subject to the procurement rules, it risks the sanction of the contract being declared ineffective even after the contract has been entered into, for a period of up to six months.

The benefit of a transparency notice, if properly used, is that it can reduce the period in which a challenge can be brought post contract by making an interested party aware of the transaction and stating the time period for a procurement challenge.

The Council sought to take advantage of this mechanism. However the CA found that the Council had failed in its duty of transparency to set out the legal justification for its decision not to follow the procurement rules. By stating that the arrangement was a pure land transaction and therefore exempt from the procurement rules was an over simplification, and did not reflect the detailed and complex nature of the development agreement. As such a bidder could not be said to be have full knowledge of the relevant facts to enable it to decide whether or not to bring a challenge.

Governance Issues

Whilst the Council may have believed at the time it entered into the arrangement that it was validly structured to fall outside the scope of the procurement rules, it became unlawful at the time the developer decided to drawdown land under the development agreement.

The CA fell short of criticising the Council in relation to its conduct.

However it made clear that the standard expected in relation to the use of transparency notices was high. Contracting authorities wishing to rely on transparency notices in the future can expect more detailed scrutiny of legal advice and options analysis at governance meetings.

Clearly this decision has important consequences both for the parties involved and in the wider interest. It is not yet clear whether the Council will be seeking leave to appeal in the Supreme Court.

Full details of the judgment can be found here.

For more information or advice on this or any other procurement issue you may be facing, please contact Stephanie Rickard in our Procurement Law team on 0117 314 5675.