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R (Faraday Development Ltd) v West Berkshire Council & Anor [2016] EWHC 2166 (Admin)

DATE: 26 Aug 2016

Holgate J dismissed the judicial review application of West Berkshire Council’s decision to let a development agreement to St Modwen Developments for the regeneration and redevelopment of the London Road Industrial Estate in Newbury owned by the Council.  Faraday was the joint venture partner of an unsuccessful bidder and sought to challenge the decision and the agreement on the basis that the Council had not complied with its duty to secure best consideration under s. 123 of the Local Government Act 1972 and that the agreement should be been procured according to the procedure set out in what is now Directive 2014/24/EU which is transposed into English law by the Public Contracts Regulations 2015. These arguments were rejected and permission to appeal refused.

On the best consideration issue, the Council had followed a lengthy process with regard to formulating its proposals and seeking bids, and the Judge considered that it was clear that the Council had had fully in mind its duty in a context where the project was a complex and long-term one and a number of possible approaches were open to the bidders. The Judge summarised the principles applicable to s. 123 at [130]-[134]:

“130. In R v Commissions for New Towns ex parte Tomkins [1988] 87 LGR 207, Bingham LJ held (page 218) that the policy of legislation such as section 123 is to ensure, so far as reasonably possible, that public assets are not sold at an undervalue, save with the authority of the Secretary of State.

131. The following principles may be distilled from the case law as to the circumstances in which the Court may or may not intervene in relation to the application of section 123:-

(i)            The Court is not entitled to substitute its own view on the facts and merits for that of the local authority. The Court may only interfere if there was no material upon which the authority’s decision could have been reached, or if in reaching that decision, the authority disregarded matters it ought to have taken into consideration, or if it took into account matters which were irrelevant, or if its decision was irrational (R v Essex County Council ex parte Clearbrook Contracts Limited Mc Neill J, 3 April 1981):

(ii)           The Court is only likely to find a breach of section 123(2) if the local authority:

(a) has failed to take proper advice, or (b) failed to follow proper advice for reasons which cannot be justified, or (c) although following advice, it followed advice which was so plainly erroneous that in accepting it the authority must have known, or at least ought to have known, that it was acting unreasonably (R v Darlington B.C ex parte Indescon Ltd [1990] 1 EGLR 278, 282);

(iii)          Section 123(2) does not mandate the authority to have regard to any particular factors (R (on the application of Salford Estates (No.2) Ltd) v Salford City Council [2011] LGR 982 at paragraph 95);

(iv) There is no need for the authority’s decision-making process to refer to section 123(2) explicitly, provided that the Court is able to see that the duty has in substance been performed (Salford at paragraph 103);

(v) The obligation under section 123 is not to conduct a particular process, but to achieve a particular outcome (Salford at paragraph 95). But process may have an important, or even determinative, evidential role in deciding whether the authority has complied with section 123(2)) (R (Midlands Co-operative Society Ltd) v Birmingham City Council [2012] LGR 393 at paragraphs 122-3).

(vi) “Consideration” in section 123(2) is confined to those elements of a transaction which are of commercial or monetary value. Therefore the Court will quash a decision to sell property where the authority has taken into account an irrelevant factor, eg. job creation, when assessing whether it is obtaining the best “consideration” reasonably obtainable (R v Pembrokeshire County Council  ex parte Coker [1999] 4 All ER 1007; R v Hackney L.B.C. ex parte Lemon Land Ltd [2001] LGR 555);

(vii) The deliverability or credibility of a bid, or the care with which it has been prepared, are commercial factors which are relevant to an assessment of whether the “consideration” offered is the best reasonably obtainable. Likewise, the highest offer on the table need not represent the best “consideration”, because an authority may conclude that “a bird in the hand is worth two in the bush” (R (Lidl (UK) GmbH) v Swale BC [2001] EWHC Admin 405 at paragraph 18);

(viii) In order to discharge the duty under section 123(2) there is no absolute requirement to market the land being disposed of, or to obtain an independent valuation (Lidl at paragraph 18).

132. I return to principles (i) to (iii). A case in which an authority takes into account a consideration which is legally irrelevant is a straightforward example of a public law error normally justifying intervention by the Court. But a failure to have regard to a material consideration needs further examination, given that the legislation does not mandate any specific matters which must be taken into account by the authority. Although, it is for the Court to determine whether a consideration is legally capable of being relevant, the general principle is that it is for the decision-maker, the authority, to decide (a) whether to take a relevant consideration into account and, if it does so decide, (b) how far to go in obtaining information relating to that matter. Such decisions may only be challenged on the grounds that it was irrational for the authority not to take a legally relevant consideration into account or, having done so, not to obtain particular information …”

Holgate J also rejected the main procurement ground on the basis that the Directive and Regulations required for a public works contract not only that there was an obligation to design but also to execute the works and there was no obligation to execute in this case. This also did not amount to an “indirect obligation” to execute works within Helmut Müller GmbH v Bundesanstalt für Immobilienaufgaben [2010] ECR I-2673. Further, rejecting a third ground, a public authority was not prevented from entering into a non-procurable contract and was not obliged by the Directive or the Regulations to so construct its contracts so as to bring them within the procurement regime (following R (Midlands Co-operative Society Ltd) v Birmingham City Council [2012] BLGR 393). Whilst the Court would consider transactions which as a whole might provide a procurable agreement, there was no general anti-avoidance principle:

“184. Although the Austria case decided that artificial transactions or devices designed to avoid the procurement regime are to be disregarded or treated as ineffective, neither the 2014 Directive nor the 2015 Regulations contain any general anti-avoidance principle. Indeed, recital (5) of the Directive states:-

“It should be recalled that nothing in the Directive obliges Member of States to contract out or externalise services that they wish to provide themselves or to organise by means other than public contracts within the meaning of this Directive” (emphasis added)

185.        I am unable to accept the Claimant’s argument that an anti-avoidance role or interpretation should be given to the term “indirect obligation”. The phrase does not appear in the substantive provisions of the Directive. However, it is referred to in recital (9) as follows:-

“Whether the contractor realises all or part of the work by his own means or ensures their realisation by other means should not change the classification of the contract as a works contract, as long as the contractor assumes a direct or indirect obligation that is legally enforceable to ensure that the works will be realised” (emphasis added)

Thus the language of the 2014 Directive reiterates the principle laid down in the decisions of the CJEU referred to in paragraphs 175 to 177 above. When the most recent Directive came to be drafted and adopted there was an opportunity to widen the concept of an “indirect obligation” if it had been thought appropriate to do so as an anti-avoidance measure. That step was not taken. The Claimant’s argument flies in the face of the express language used in the 2014 Directive.

186.        I am reinforced in these conclusions by observations in recent CJEU decisions on the approach which should be taken to the reach of procurement legislation, at a time when the 2004 Directive was in force. Once again the 2014 Directive has subsequently been adopted without changing the approach laid down by the Court. In paragraph 34 of his opinion in the Helmut Müller case Advocate General Mengozzi referred to the principal objectives of the Directives on public contracts as being to abolish restrictions on fundamental freedoms (eg. movement of goods, establishment and to provide services) and to encourage competition. However, he stated that it should not be assumed that the scope of the legislation can be “extended indefinitely” in reliance upon those objectives. Thus, a purely “functional” interpretation based exclusively on the fundamental objectives of the Directive is impermissible, thereby disagreeing with the contentions which the Commission had advanced (paragraphs AG 35 and 50). The mere fact that a party obtains an economic benefit from a public authority (eg. an increase in the value of land) without any prior competition with others interested in acquiring that benefit is insufficient to engage procurement legislation (paragraph AG 36). The scope of the Directive should be identified first by reference to the objective requirements specified in the Directive itself. The objectives of the legislation are among the principal points of reference for the interpretation of that legislation, “but they cannot constitute the only reference parameter” (paragraph AG 39). The Court did not disagree with any of that reasoning. It certainly did not adopt the purely “functional” approach to the interpretation of the legislation which the Commission had advanced.

187.        The same theme was taken up by the Advocate General in Commission v Spain [2011] 3 CMLR 43. That case was concerned with a certain type of land use agreement under which a local authority would give assurances regarding the exercise of planning powers (by adopting a detailed plan) in return for a commitment by a developer to finance and execute infrastructure contained in the plan and possibly buildings needed for public purposes, including social housing (paragraph AG 69). Owners of land affected by such a plan might choose to participate in the development or be expropriated, the developer being responsible for paying any compensation due (paragraphs AG 31 and 40). The Advocate General referred to the rejection of the “functional” interpretation of the Directive in the Helmut Müller case (paragraph AG 74) and added that the Court should exercise some restraint if a broad interpretation of an EU legal concept would lead to detailed EU legislation applying to situations not considered in the legislative process (paragraph AG 75). Likewise, in paragraph AG 77 the Advocate General advised against “over-stretching” the meaning of certain criteria in the procurement legislation. He had in mind the possibility that a broad approach might discourage private initiatives in the field of planning and land development and therefore could result in public authorities having to take on direct responsibility for financing and executing development more often, rather than relying on the “land use agreement” model (paragraph AG 76). A particular problem in the Spain case was whether the attribution of new building rights by the public authority could be considered to represent financial consideration in exchange for the infrastructure which the developer was obliged to build for the authority (paragraph AG 73). The Court decided that the developer’s obligation to provide infrastructure was not the main object of the contract (paragraph 96 of the judgment).

188.        In the Midlands Cooperative case Hickinbottom J accepted (paragraph 116) that a public authority could choose to enter into a contract which avoids the onerous requirements of the procurement legislation. That is consistent with the conclusion I have reached that the legislation does not contain any general anti-avoidance principle. Instead, leaving to one side cases where the agreement contains an artificial device for the avoidance of the procurement regime, the question is an objective one: irrespective of whether the parties intended their agreement to fall inside or outside the public procurement regime, does the contract fall within the legal definitions of a “public contract”?” 

Charles Banner and Heather Sargent represented the Claimant.

David Elvin QC and Luke Wilcox represented the Council.

A copy of the judgment can be downloaded here.