Failure to follow procurement rules rendered development agreement ineffective

The Court of Appeal has given its long awaited judgment in the case of Faraday Development Ltd v West Berkshire Council

Following the High Court’s ruling in October 2016, Faraday Development Ltd successfully argued at the Court of Appeal that the development agreement between West Berkshire Council and St Modwen Developments Ltd was ineffective; a first in English procurement law.

What does this mean?

Following this decision, developers and local authorities need to be aware that in the context of development agreements procurement rules can still apply; even where there is no immediate obligation on the developer to carry out any works, or the transaction is structured around an option to acquire land.

The judgment also serves as a reminder of the stringent requirements of the content of voluntary ex parte transparency notices.

The remainder of this article goes into further detail about the judgment but it is important to note that each transaction must be viewed as a whole and so there is no one-size-fits-all approach that can be adopted towards development agreements.

Background

The council and St Modwen entered into a development agreement which, crucially, did not oblige St Modwen to immediately develop the land. The development agreement instead contained an option which if exercised meant that St Modwen would be granted a long lease under which there were certain obligations to carry out works.

Faraday challenged the arrangement entered into by St Modwen and the council, on the basis that a public works contract existed and public procurement rules should have been followed.

Summary of the appeal

The Court of Appeal concluded that when looking at the nature of the transaction as a whole, the development agreement was a public works contract that should have been subject to a public procurement.

Although the court considered that a public works contract did not exist at the time the development agreement was signed it was found that once the developer exercised the option to develop the land the contract would be considered a public works contract and therefore subject to procurement rules. The Court of Appeal noted that at this stage it would be too late for the council to follow a lawful procurement process as the council had already committed itself to procuring the works from St Modwen.

In its defence, the council argued that they had published a voluntary transparency notice in good faith and had therefore achieved the necessary transparency required to avoid having to procure the development agreement. However, the Court of Appeal concluded that the voluntary transparency notice was not sufficiently detailed as it had failed to follow the guidance given in the Fastweb case (Ministero dell'Interno v Fastweb SpA) and suggested that the arrangement was a simple land transaction.

It is worth noting that although the content of the voluntary transparency notice was deemed to be insufficient the court agreed that the council was acting in good faith and it was not an abuse of process.

Interestingly, although the court declared the development agreement ineffective, the council is only required to pay a nominal fine of £1. Whilst the judgment has implications for the structure of development agreements, the indication from the court is that substantial damages would not automatically follow a declaration of ineffectiveness.

Implications

This case highlights the importance for local authorities, landowners and developers of considering in every transaction whether it could constitute a public works contract bringing the public procurement requirements into play. There is otherwise a risk that a court could declare the development agreement “ineffective”, which for practical purposes means that it would be void.

Every transaction needs to be looked at on its facts and it is unwise to generalise too widely at this stage. But the difficulty with the agreement in this case is that it contained an option which, if triggered, resulted in obligations on the developer to carry out works. By the point at which the option was triggered and the works carried out, it was considered too late for the council to remedy the situation by carrying out a public procurement procedure, as the development agreement had already been entered into.