Public Procurement Matters June 2010

New case law on land development agreements, time limits for bringing proceedings, and disclosure obligations for sub-criteria (transparency)

The application of public procurement law to property development agreements has been considered again by the European Court of Justice (ECJ) in the case (Helmut Muller). This judgment clarifies that the mere exercise of planning powers by a local authority (such as for example Section 106 of the Town and Country Planning Act 1990) is not sufficient to trigger the application of the procurement rules. For a public works contract to arise, the resulting work would have to be of direct and economic benefit to the contracting authority, such as where it acquires ownership or use of the works or contributes to at least some of the cost.

In other cases, greater clarity has emerged on the time limits within which claimants must bring proceedings.  Firstly, the Uniplex case before the ECJ has emphasised that the rule of having to act “promptly” should not compromise the availability of a full three months within which to bring proceedings.  Secondly, the important UK judgment in Sita UK v GMWDA has shown that the moment the clock starts ticking is not necessarily when the claimant knows absolutely every fact it considers pertinent (for example following lengthy correspondence), but when it has a basic knowledge of the fact of a breach having taken place.

The relevant law on public works contracts
Article 2(1) of the Public Contracts Regulations 2006 (PCR) defines a public works contract as “a contract in writing for consideration (in cash or in kind): (a) for the carrying out of a work or works on behalf of a contracting authority; or (b) under which a contracting authority engages a person to procure by any means the carrying out for the contracting authority of a work corresponding to particular specified requirements”.  If the above elements are all met then it is likely that a development agreement involves a public works contract subject to the procurement rules.

Previous thinking – Roanne and Flensburg
The notorious ECJ judgment in 2007 - Jean Auroux vs Roanne – attracted a lot of attention because it held that a development contract for the regeneration of a site entered into between two contracting authorities fell within the scope of the procurement rules and required OJEU advertisement regardless of the fact that the acquiring contracting authority would itself be subject to the procurement rules. This was seen as a warning to local authorities everywhere that if a contract results in the provision of works to (public) order (in excess of the works value threshold of approximately £3.9m), then even if other aims are pursued through the project as well, there is a public works contract subject to the procurement rules which must be advertised accordingly.  It is worth noting that such a principle could have been deduced from the earlier ECJ judgment in La Scala but it was the Roanne case that attracted a lot more attention.  Public authorities no longer felt they could “hide” public works obligations within wider land sales and thereby avoid procurement on the grounds of the rules not extending to plain land transfers.

In a separate 2009 European Commission investigation regarding the German public authority of Flensburg, however, it was observed that since in that case the agreement did not contain any legally binding obligation for the developer to construct the building envisaged, it fell outside the procurement rules. Rather, the contract only stipulated a right of (public) buy back of the land in case the building was not constructed. The Commission has publicly stated in its press release noting the termination of the investigation that this was not a public works contract (nor a concession) because the contract in question did not contain a legally binding obligation to execute works on behalf of a contracting authority.  The Commission further specifically confirmed that the buy-back right was not a sufficient sanction to create a positive and legally binding obligation to undertake the works.

Helmut Muller - need for economic benefit to the authority
The case involved the sale by a German public authority (the Bundesanstalt) of a property known as the Wittekind barracks. Helmut Muller was a property developer that lost a bidding competition to buy the property to another bidder, GSSI. The Bundesanstalt expressed a preference for GSSI’s offer on the basis of urban development grounds (GSSI also offered significantly more cash for the land) but did not complete the sale, rather opting to wait until GSSI had obtained formal planning permission for its intended development.  Helmut Muller challenged the decision to sell to GSSI, arguing that the process should have been subject to public procurement rules as a public works concession contract (ie. a works contract for which remuneration lies wholly or mainly in ability to exploit the works) and had not been. The German lower Court dismissed the application on the grounds that the contract to sell to GSSI was not a public works contract as per procurement law. Helmut Muller appealed the matter and the German Courts referred the matter to the ECJ for guidance.

The ECJ reinforced that the concept of a public works contract requires that works which are the subject of the contract are carried out for the economic benefit of the authority concerned, but that does not mean they must be materially or physically carried out for that authority.  The ECJ then made plain that in understanding what qualifies as economic benefit, this does not include an authority merely exercising its urban planning powers.  The ECJ confirmed that the necessary economic benefit will exist if the public authority will own the works, have the right to use them, derive advantage from their future use, or contributed financially to them or in the assumption of risk. The planning element had been in doubt since Roanne, which led some commentators to suggest that since some planning or highway–related obligations did require works contracts to be carried out in accordance with legally enforceable (public authority) demands, these contracts were within the scope of the procurement rules.  The Helmut Muller case has made plain that this is not the case. A planning obligation in itself is now clearly not a procurement, so that debate at least has been laid to rest.