Reversing Holgate J. in 2016, the Court of Appeal (Lewison, Lindblom and Flaux LJJ) held that the a development agreement, even though it does not commit the developer to undertake public works until it elects to serve an option notice to draw down land, is nonetheless a public works contract. Claims made with regard to anti-avoidance were rejected. Lindblom LJ giving the judgment held:

“61.      In this case, judged by that test, 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. When it entered into the development agreement, the council 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. The development agreement constitutes 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. 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.

  1. By entering into the development agreement, therefore, 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. As Mr Giffin submitted, that is in itself unlawful, whether as an actual or anticipatory breach of the requirements for lawful procurement under the 2004 Directive and the 2006 regulations, or simply as public law illegality, or both. The only other possibility would be that a contracting authority is at liberty to construct a sequence of arrangements in a transaction such as this, whose combined effect is to constitute a “public works contract”, without ever having to follow a public procurement procedure. That would defeat the operation of the legislative regime.”

The Court rejected the view that the Council had deliberately flouted the law or had not acted in good faith, nor was the services element sufficient to make the agreement a public services contract, though it held the VEAT notice not to be effective as a result of the strict approach required by Case C-19/13 Ministero dell’Interno v Fastweb SpA [2015] P.T.S.R. 111.

“68.      … It cannot be said that the underlying purpose of the option provisions in the development agreement, or of the development agreement as a whole, was an unlawful purpose, even if the development agreement itself ought to have been the subject of a procurement process in accordance with the legislative regime. It is perfectly possible in principle for the purpose of the development agreement, namely the development of the land by St Modwen in accordance with the objectives declared in its recitals, to be lawful, but the development agreement itself to be unlawful for the council’s failure to undertake a lawful procurement process. There is no logical difficulty in this. It also follows that Faraday does not have to succeed on this ground as well as on the argument as to the true effect and status of the development agreement if its appeal is to be upheld.

  1. It was not unlawful for the council to put in place a contractual relationship with a developer, or with St Modwen in particular, to secure the regeneration of the industrial estate. Nor was it inherently unlawful for the council to seek to achieve, if it could, a lawful contractual relationship with St Modwen, or any other developer, that fell outside the reach of the public procurement regime. It was lawfully entitled to attempt to find such an arrangement, without at any stage intending the arrangement to be unlawful. This was not, without more, an “abuse of rights”. It is not the same thing as an authority, or an authority and a developer, attempting to gain advantage for itself, or themselves, by deliberately entering into an artificial arrangement in an effort to disguise the “economic and commercial reality” of the transaction. That would likely be an “abuse of rights”.
  2. There is 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. That “economic and commercial reality” is fully apparent in the terms of the development agreement. It is not disguised. This was not, it seems to me, an arrangement of the kind that the court had to deal with in Mödling, which it could truly describe as a “sham” –because the transaction, in substance, was an arrangement within the ambit of the relevant legislative regime, and had been split into two parts with the simple aim of avoiding that regime. Evasion was the real and sole purpose of that structure. A similar analysis is to be seen in the Advocate General’s opinion in Helmut Müller (at paragraphs 103 to 107). That was not so here. The development agreement may have been entered into in breach of the requirements of the public procurement legislation. But it was not a “sham” in the true sense of that concept.”

The Court made a declaration of ineffectiveness and imposed a nominal financial sanction.

Click here for the judgment.

Charles Banner was junior counsel for the Appellant.

David Elvin QC was leading counsel for the Respondent.

(Both Heather Sargent and Luke Wilcox had also acted in the High Court).

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