Faraday generates uncertainty in the application of procurement law and land development.


Michael Faraday is credited with the invention of the generator. A recent Court of Appeal decision bearing his name is set to generate uncertainty and headaches for procurement lawyers and their clients. The decision is also historic as the first declaration of ineffectiveness in England.

Introduced as a new remedy in 2009, a declaration of ineffectiveness renders an unlawful contract void. Many a challenger has threatened to seek this remedy in recent years, but it had never been imposed by an English Court - until the Court of Appeal's judgment in Faraday Developments Ltd v West Berkshire Council. In the process, the Court also overturned a voluntary ex ante transparency (VEAT) notice.

Four key points from the judgment that will have an immediate impact on procurement practice:
  • A land development arrangement will be subject to the procurement rules if an obligation to do works arises at any time, even if there is no such obligation on signing, and even if it only arises subsequently, at the option of the developer
  • A VEAT notice will be invalid unless it describes in detail the contract that is entered into, as well as the justification for entering into it.
  • Without that contract description, publication of a VEAT notice will not start time running on a damages claim.
  • The 6-month time limit for an ineffectiveness claim does not preserve a claim for damages that has already expired.

Points 2 and 3 in particular will raise eyebrows for the demanding standards they impose on contracting authorities.   

The scene for the dispute was an industrial estate in Newbury. In September 2015, the Council entered into an arrangement with a developer (St Modwen) that it viewed as a land transaction, exempt from the public procurement rules. That view had been explained in a VEAT notice, published in the OJEU the month before. The core of the Council's analysis was that the arrangement did not contain an enforceable obligation on St Modwen to carry out any works. 

Faraday (a rival developer) challenged the St Modwen arrangement. While it was common ground that an enforceable obligation was needed to trigger the procurement rules, Faraday contended that just such an obligation was present. 

In the High Court Holgate J agreed with the Council's analysis that the arrangement was exempt. He held that, as the arrangement gave the developer the choice whether or not to carry out works, there was no enforceable obligation and the procurement rules did not apply. It did not matter that the developer might eventually come under an obligation to perform works, so long as the steps that would lead there occurred at the developer's option and the developer could "walk away" before the obligation crystallised.

The land development arrangement

Faraday appealed the High Court judgment, and the Court of Appeal allowed the appeal. 

In doing so, Lindblom LJ switched the focus to the development arrangement as a whole, and to timing issues. 

According to the Court of Appeal, the position when the contractual arrangements are entered into is only part of the picture. The Court should also look at whether or not the developer could (without any further steps from the Council) come under an obligation to do works at any time during the term of those arrangements. If it could, there is (or will be) a public works contract. 

The authority should not give rise to a state of affairs in which (even if there is no public works contract at the point of signing) such a contract arises in the future (in this case if and when St Modwen exercised an option).

On that basis, there was a works contract and the procurement rules would be triggered. The direct award to St Modwen breached those rules. 

The parties then agreed that a declaration of ineffectiveness was the inevitable consequence of that. A nominal £1 fine was also imposed on the Council.

The VEAT notice

Where a direct award is made, the remedy of ineffectiveness is precluded if a VEAT notice is published provided that: (i) a 10 day standstill period is adhered to; and (ii) the notice contains a sufficient justification. The EU Court has held (in the Fastweb case) that the justification must disclose clearly and unequivocally the reasons why the authority thought it was legitimate to make a direct award, so that potential challengers would have full knowledge of the facts when considering whether to take action. It was added that the authority had to have acted diligently in thinking that the relevant exemption applied. 

The Council had published a VEAT notice containing a justification and waited 10 days. 

However, the Court of Appeal found that ineffectiveness remained in play. This was because the justification in the VEAT did not explain sufficiently what the contract was, only what it was not (a works contract). That was insufficient to validate the VEAT and preclude ineffectiveness. 

Furthermore, the Court of Appeal found that the information contained in the VEAT was insufficient to start time running for a damages claim (the 30 day period starting from actual or constructive knowledge). 

At first glance, these conclusions on the VEAT appear harsh. There clearly was a sufficient justification for the direct award: after all the High Court agreed with the Council's analysis. However, the lack of a detailed explanation of the contract terms was its undoing. The notice was, according to Lindblom LJ "not transparent enough".

Limitation periods

The Court of Appeal did at least concede that where a damages claim is out of time, the challenger cannot resurrect that claim by also seeking ineffectiveness. However, given the other findings, this will be of little comfort to the Council and St Modwen. They are the first parties in England to have to pick up the pieces of an ineffective contract. If the challenger-friendly nature of this judgment is a sign of the future then (Brexit or not) they won’t be the last.

Commentary

This decision is at odds with previous High Court case law and with general practice among many procurement lawyers. There are also a number of elements of the decision which could be attacked, and the timing issue is (as far as the authors are aware) not one which has been raised in any of the domestic or European case law. There may be an appeal, but unless and until that happens and the decision is reversed, the reality is that Faraday represents the law. 

It will have serious consequences for transactions being planned and using the previous case law as justification for the view that the procurement rules can lawfully be avoided by stopping short of imposing an obligation on the developer at the outset to effect works.

Historic transactions should be saved from scrutiny by procurement law time limits, though it should be noted that the court in Faraday was receptive to the idea of extending time limits given the deficiencies in the VEAT notice.

All is not lost: the decision should not affect planning requirements and s 106 agreements. It should also not affect the approach considered by the European Commission in its Flensburg decision, where there was no obligation at all on the developer, merely a transfer of land with an obligation to transfer it back if development did not take place. However, adopting that approach will not suit every deal or every authority.

Finding new approaches through the obstacle created by the decision will require lawyers to be as inventive as Michael Faraday in finding new solutions to the problem of delivering land developments that do not trigger a requirement to conduct a procurement process in compliance with the procurement rules.

Key contacts

Jonathan Davey

Jonathan Davey

Partner, Commercial Services
United Kingdom

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Bill Gilliam

Bill Gilliam

Partner, Dispute Resolution
Leeds

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