The Court of Appeal has today handed down its long-awaited judgment in Faraday Development Ltd v West Berkshire District Council [Case No: C1/2016/3613].

It's a decision with important potential ramifications for public/private development projects. It's also the first declaration of contract ineffectiveness made under English law.

Overturning a fully-reasoned first instance judgment, the Court of Appeal decided that a development agreement containing contingent obligations on the developer to carry out development was a public works contract as defined in the public procurement rules (Directive 2004/18/EC and the Public Contract Regulations 2006). The Court decided that the Council had breached those rules by entering into the contract without having followed a regulated procurement process.

By way of relevant background:

(i) The Council undertook a tender process to select a development partner to redevelop an industrial estate. The redevelopment, in common with many such projects, was set to be a long-term, complex and risky process. The Council's objectives were to encourage regeneration and employment and enhance its income from its freehold interests in the estate.

(ii) Although the Council did not undertake a public procurement process within the scope of the regulations, it did issue a voluntary transparency (or 'VEAT') notice before entering into the development agreement with the eventual winner.

(iii) The development agreement permitted, but did not oblige, the developer to bring forward land on the estate for development.

At first instance, Holgate J concluded that the development agreement was not a public works contract or otherwise an arrangement that fell within the scope of the public procurement rules. The development agreement did not impose any binding obligation on the developer to acquire land or carry out works to redevelop the estate; as such the developer was free to walk away. The judge identified that the development agreement was an arrangement analogous to an option arrangement – a type of contract that the challenger, Faraday, accepted fell outside the scope of the regime. He considered that the effect of the existing leading European (Helmet Müller) and domestic (R (on the application of Midlands Co-operative Society Ltd) v Birmingham City Council [2012] EWHC 620 (Admin)) case law was that a contract of this type could not fall within the regime unless (i) its main purpose corresponds to one of the definitions of a "public contract" found in the Directive and (ii) the developer was under an enforceable obligation to carry out that main purpose,

The Court of Appeal disagreed, concluding that:

(i) Whilst the existing case-law made clear that a contract will not fall within the definition of a public works contract unless the developer had assumed an obligation, it did not resolve the question of whether that obligation had to be immediately enforceable.

(ii) It was necessary to look at the substance of the contract and not merely its form, distinguishing between contracts for the sale of land without any (immediate or contingent) obligations to carry out works, and contracts which give, with some precision, the mechanisms for carrying out works where a council retains some control over their content and execution.

(iii) The development agreement was not a public works contract at the point it was entered into. It was right to read into the case-law the notion that a contingent obligation was not a relevant obligation for the purposes of defining a public works contract.

(iv) However, the development agreement committed the Council to entering into binding arrangements if and when the developer exercised its option to bring forward land, which would in turn oblige the developer to carry out works. This would in substance comprise a transaction that on its own terms would fully satisfy the requirements of a public works contract. The Council had effectively agreed to act unlawfully in the future. That was because the development agreement would in those circumstances lead to a relevant procurement, ie a procurement that ought to have been conducted under the public procurement rules, of a public works contract without that public tender process having taken place.

(v) There was support for this approach in the existing authorities relating to multi-stage processes and the requirement in those cases to look at the real substance of the transaction.

The Court of Appeal dismissed the alternative grounds in the appeal, namely whether the public procurement rules had been deliberately and unlawfully avoided and whether the development agreement was a public services contract. The Court concluded that the Council had not acted in bad faith nor sought to mislead as to its intentions, and nor was it unlawful for the Council to seek to achieve a lawful contractual relationship with a developer outside of the scope of the public procurement regime. The Court also concluded that the fact that the development agreement contained immediately enforceable obligations to carry out ancillary services that were not the main object of the contract did not, consistently with the existing authorities (Hotel Loutraki and Commission v Spain), render it a public services contract.

Alongside shaking up the approach to the procurement of development agreements and making the first declaration of ineffectiveness under English Law, the decision is also of interest because of the Court's findings in respect of the level of detail required for a valid VEAT notice. The short point is that the Court found that the notice was invalid - it did not provide an adequate justification for the Council's decision and did not accurately describe the specific nature of the development agreement. As a result the Council was not able to rely on the notice to preclude the making of a declaration of ineffectiveness.

Finally, on remedies, the regulations required (i) that the Court made a declaration of ineffectiveness and (ii) that the Council was ordered to pay a civil financial penalty, which the Court fixed in the amount of £1. Permission to appeal to the Supreme Court was refused.