Public procurement: Court of Appeal makes first declaration of ineffectiveness in England and Wales

3 December 2018

On 14 November 2018, the Court of Appeal made the first ever declaration of ineffectiveness in England and Wales in respect of a public contract in Faraday Development Ltd v West Berkshire Council [2018] EWCA Civ 2532. This is only the second declaration of ineffectiveness to have been made in the UK as a whole, following the Scottish decision in Lightways (Contractors) Limited v Inverclyde Council [2015] CSOH 169.

Raj Shah and Aleksandra Wolek in Sharpe Pritchard’s public procurement team explain the key implications of this significant case for contracting authorities, especially those that are seeking to enter into development agreements or intending to rely on Voluntary Ex Ante Transparency (VEAT) notices.

What are declarations of ineffectiveness?

As a reminder, a declaration of ineffectiveness is one of the potential remedies available as a consequence of a procurement challenge. Introduced into English law by way of the Public Contracts (Amendment) Regulations 2009, which amended the Public Contracts Regulations 2006 (the “PCR 2006”), a declaration of ineffectiveness means that obligations under a relevant public contract that haven’t yet performed will not be performed, so the contract is prospectively (but not retrospectively) ineffective from the date of the declaration (see Regulation 101 of the Public Contracts Regulations 2015 (“PCR 2015”), which have superseded the PCR 2006). In addition, where a declaration is made, the court must order a civil financial penalty, the amount of which is at the court’s discretion but must be effective, proportionate, and dissuasive.

Regulation 99 of the PCR 2015 states that a declaration of ineffectiveness may be made where one of the following three grounds applies (subject to certain exceptions set out in that regulation):

  • where a contract has been awarded without prior publication of a contract notice where this was required (this is the most likely ground for a declaration of ineffectiveness);
  • where a contract has been awarded without compliance with the rules concerning standstill periods or suspension, thereby depriving an economic operator of the chance to begin proceedings before the contracting authority enters into that contract; and
  • a contract called off from a framework agreement or under a dynamic purchasing system has not been awarded in compliance with the rules governing the relevant framework agreement or dynamic purchasing system.

What is the purpose of a VEAT notice?

Voluntary Ex Ante Transparency (VEAT) notices are used, as in this case, by contracting authorities where a contract has been awarded without the prior publication of a contract notice in the Official Journal of the European Union (OJEU) in order to resist challenge on the basis of the first ground of ineffectiveness. Contracting authorities also sometimes use VEAT notices before entering into a variation of a relevant public contract. Regulation 99(3) of the PCR 2015 states that the first ground of ineffectiveness will not apply if the contracting authority considers the relevant contract award to be permitted by the PCR 2015, publishes a VEAT notice in the OJEU indicating its intention to enter into the contract, and observes a standstill period of at least ten calendar days beginning on the day after the date of the publication of the VEAT notice in the OJEU. Regulation 99(4) states that, in order to be valid, a VEAT notice must contain:

  • the contracting authority’s name and contact details;
  • a description of the object of the contract;
  • the contracting authority’s justification for its decision to award the contract without a contract notice in the OJEU;
  • the name and contact details of the economic operator who is being awarded the contract; and
  • any other useful relevant information.

VEAT notices ought only to be used after careful consideration and having taken appropriate legal advice. The Court of Justice of the European Union has previously held in Ministero dell’Interno v Fastweb SpA C-19/13 that, where a contracting authority cannot reasonably justify its decision to award a contract directly without publishing a contract notice (for example, where the contracting authority does not genuinely believe that the direct award is permitted under procurement legislation), then a VEAT notice will not in itself prevent a declaration of ineffectiveness.

What happened in this case?

The case considered whether West Berkshire Council (the “Council”) acted in breach of the PCR 2006 when it entered into a development agreement (the “Agreement”) with St Modwen Developments Limited (the “Developer”), which contained obligations on the Developer to undertake regeneration works on the Council-owned London Road Industrial Estate in Newbury. The structure of the Agreement allowed the Developer the choice whether or not to draw down land for redevelopment. If the Developer did draw down land, it would then be under an obligation to conduct the redevelopment works in accordance with the specification. If, on the other hand, it decided not to, there would be no obligation to acquire and redevelop the land. 

The award of the Agreement to the Developer was pursuant to a non-OJEU competitive tendering exercise but not a full OJEU procurement process under the full regime set out in the PCR 2006, since the Council had considered that the full procurement regime did not apply to the Agreement on the basis that it was neither a public works contract nor a public services contract. As such, the Council chose to publish a VEAT notice following the decision to award the Agreement to the Developer.

One of the members of an unsuccessful consortium bidder for the Agreement, Faraday Development Limited (“Faraday”), challenged the Council’s decision to award the Agreement to the Developer, but in the first instance judgment, the High Court held that the Agreement was not a public contract for the purposes of the PCR 2006. Faraday proceeded to appeal this first-instance judgment, and the Court of the Appeal was asked to consider:

  • whether the Agreement constituted a public works contract that ought to have been advertised in the OJEU and been subject to a fully regulated procurement process in accordance with the PCR 2006;
  • whether it was unlawful for the Council to enter into the Agreement on the basis that, in doing so, it committed itself to entering into a public works contract without following a public procurement procedure;
  • whether the deal had been deliberately structured to avoid the application of the PCR 2006; and
  • whether any declaration of ineffectiveness as a remedy was precluded by the Council’s VEAT notice.

The Court of Appeal’s findings were as follows:

  • Considering the transaction as a whole, the Agreement did constitute a public works contract that ought to have been subject to a compliant public procurement exercise. Even though a public works contract didn’t exist at the time the Agreement was signed, as soon as the Developer exercised its option to draw down the land for development, a public works contract would have then materialised, at which point it would have been too late to undertake a compliant public procurement process. Such conduct, in the Court’s view, constituted a breach of the PCR 2006.
  • The Court held that the Council had effectively acted in breach of the PCR 2006 insofar as the public works contract would materialise following the Developer’s decision to draw down the land. This constituted a breach of the PCR 2006, whether actual, anticipatory or a simple public law illegality. While the Court recognised that there may have been commercial reasons for why the Agreement had been structured in the way that it was, the commercial reality did not justify a procurement of development works without a compliant procurement.
  • The Court concluded that there was no evidence to suggest that the Council had acted in bad faith and had sought deliberately to avoid the application of the PCR 2006, which is likely why the civil penalty imposed on the Council was fixed at a nominal sum of £1.
  • The Court declared the Agreement ineffective, and confirmed that this declaration of ineffectiveness was not precluded by the VEAT notice issued by the Council. This is because the VEAT notice in question was not sufficiently detailed (having failed to follow the guidance given in the Fastweb case mentioned above) and described the transaction incorrectly, suggesting that the arrangement was a simple ‘exempt land transaction’ and omitting to mention the contingent obligations to design and execute a large development. This failed to alert third parties to the true nature of the transaction.

What are the practical implications of this case for contracting authorities?

  • Consider transactions as a whole – even if they comprise distinct elements – and consider whether at any point these would give rise to a public works, services, or supplies contract subject to the PCR 2015.

    Even if a transaction comprises distinct elements at different points in time, the Court in this case felt that the transaction in its totality should be considered at the date it is entered into to ‘establish whether, at that date, it embodied defined obligations that will, once they take effect, compose a “public works contract”. If contracting authorities were free to arrange a series of transactions which together constitute a public contract subject to procurement legislation without undertaking compliant procurement exercises, the purpose of that legislation could be defeated. Contracting authorities should therefore be mindful of their procurement obligations, particularly when arranging for land sales and subsequent development arrangements. Public works contracts entered into as a condition of a land contract with a contracting authority may still be subject to the full procurement regime under the PCR 2015 if their value exceeds the relevant threshold for works contracts (currently £4,551,413).

  • Consider procurement implications when entering into development or regeneration agreements.

    The Court found the Agreement neither to be a public works contract or a public services contract for the purposes of the PCR 2006 (now superseded by the PCR 2015). Looking at the transaction as a whole, however, the Agreement committed the Council at a later date to contracting with the Developer for the delivery of works which had not been procured. This decision is therefore highly relevant to local authorities and developers wishing to enter into agreements for development or regeneration of land without first running a compliant procurement process under the PCR 2015.

  • If relying on a VEAT notice, ensure that this is transparent and contains sufficient detail as to the true nature of the transaction.

    This case makes clear that nothing short of ‘full and unequivocal disclosure’ will suffice for a VEAT notice to preclude a declaration of ineffectiveness. Always take into account and ensure that the requirements of regulation 99(4) of the PCR 2015 have been followed when drafting a VEAT notice, as well as the guidance in Fastweb, i.e. that a contracting authority wishing to rely on a VEAT notice to justify a direct award must be able to show that it has a bona-fide belief that using a VEAT notice is justified. This might include, for example, taking and retaining appropriate legal advice, internal notes, and board minutes that record the contracting authority’s reasons for its belief that a VEAT notice is justified in the circumstances.

In conclusion, as well as serving as a reminder that VEAT notices should never be seen as a simple solution to addressing a defective, non-compliant, or even non-existent procurement procedure, this case highlights the importance of considering the nature of a deal as a whole in order to determine whether or not the requirements of public procurement legislation apply.

For further information, contact Raj Shah, Associate in the procurement team, or Jo Pickering, Partner in our real estate and development team, on 020 7405 4600. We have extensive experience advising on public procurement and development agreements and would be happy to advise further on the law and practice in these areas.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

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