Court grants first remedy of ineffectiveness over development contract

7 January 2019

A loophole that allows local authorities to enter into development agreements without carrying out OJEU processes has been successfully challenged for the first time.

In the past, local authorities have been able to agree the specifications of what should be built on areas of land without procuring under OJEU by entering agreements with developers without immediately enforceable obligations, effectively allowing developers to walk away without being in breach of contract.

While case law has traditionally not considered this kind of agreement to be a public works contract, the first successful claimant has been granted a remedy of ineffectiveness of contract for such a case.

West Berkshire Council had entered into a development agreement with developer St Modwens for the regeneration of the London Road Industrial Estate in Newbury, but only on the basis that the firm acquired land on the site.

Another developer, Faraday, had also expressed interest in the project and challenged the contract on the basis it was not in the spirit of the current procurement regulations, arguing the council had effectively bound itself into a public works contract as soon as St Modwens had acquired the land.

Speaking to SM Alison Walton, legal director at DAC Beachcroft, which represented Faraday, said: “The case law for this kind of development agreement for procurement said if there isn’t an enforceable obligation to build anything in the agreement, this is a loophole which means that it is not a public works contract and therefore it doesn’t have to be procured under OJEU.”

While the high court ruled that this was not a public works contract, it was overruled by the Court of Appeal on the grounds that it was unlawful for the council to enter into the development agreement, because by doing so it committed itself to entering into a public works contract, without undertaking a Europe-wide advertised tender process.

While the remedy of ineffectiveness has been available in English and Welsh courts for over nine years, this case marks the first occasion of a contract being cancelled as a result of a challenge by a supplier.

Walton believes that part of the reason the ineffectiveness remedy has taken so long to be used is because of the unlimited fine that can be imposed by courts that comes alongside the remedy.

“Procurements are usually challenged before the contracts are entered into, so the contract wouldn’t need to be cancelled, but there wasn’t a process in this case so it couldn’t be challenged then,” she said.

She continued: “It’s a really draconian remedy and everyone was a bit frightened of it because of this unlimited fine, so it could be a really expensive day in court.”

Despite the ominous unlimited fine, in this case the remedy resulted in West Berkshire Council being presented with a fine of just £1, which Walton believes is due to the fact the council hadn’t acted in bad faith.

Walton hopes that the use of the remedy in this case will allow case law to develop and she said it demonstrates how the remedy can be used in future as a tool for more open procurement.

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