The tale of Two Towers - when should public contracts be advertised?

By Claire Gamage, Stuart Cairns, Chris Murray

10-2018

In the latest in a long line of case law examining when contracts concerning land are subject to the public procurement rules, the Courts have attempted to further clarify when a leasing arrangement may legitimately fall outside of the procurement regime.

This case is interesting from two perspectives:

  • firstly, the Court made clear that only concession contracts which concerned services for the 'public benefit' would fall within the ambit of the Concessions Contracts Regulations 2016; and
  • secondly, the Court found that an obligation to "use all reasonable endeavours to market and promote the sites" should not be interpreted as being the same as a positive legally binding obligation to provide services – a key ingredient when deciding whether a public contract (under any public procurement regime) should be subject to a regulated procurement process.

As local authorities continue to seek further ways of generating revenue, this case helpfully clarifies the type of transactions which are likely to fall outside the procurement regime. That said however, all such initiatives remain subject to ensuring that Best Value is secured and, as such, can still be susceptible to judicial review claims. Therefore any "off-market" transactions should be subject to thorough analysis with a robust justification, even if the procurement rules do not apply.

Background

In Ocean Outdoor UK Ltd v Hammersmith and Fulham [2018] EWHC 2508 (TCC), the tenant (Ocean) had leased two plots of land in West London from London Borough of Hammersmith and Fulham (the Council) since 2010. In 2009, Ocean had constructed two metal towers with media screens to sell outdoor advertising and as part of its leasing arrangement with the Council, the parties shared profits generated from selling advertising space (85% of such profits payable to the Council).

Over the years, the Council's revenue from the sites began to decline. In 2014, the Council appointed Wildstone Property Limited (Wildstone), who were tasked with identifying additional opportunities for the Council to generate revenue via advertising and media transactions. Wildstone identified that there was an opportunity to increase the revenue for the two sites.

In 2016, Ocean and the Council had some interaction in respect of the renewal of the two leases/renegotiation of the Council's revenue. During this interaction, Ocean questioned the independence of Wildstone in assisting the Council with the negotiations, albeit without providing any substantive detail as to why Ocean believed there could be an issue. Ultimately, the Council did not consider Ocean's offers sufficient to meet its revenue expectations. The Council therefore made the decision to invite market offers for redevelopment of the two sites via a competition which commenced in April 2017.

The Council did not advertise the opportunity in the Official Journal of the European Union (OJEU), but did advertise in a trade journal and sent direct invitations to tender to a number of companies. Following a tender report produced by Wildstone, the Council decided to award the opportunity to Outdoor Plus Limited, whose offer was £1 million per annum higher than the offer made by Ocean.

Ocean disputed the Council's decision, alleging various deficiencies in the procurement process and requesting further information. Despite the complaint from Ocean, the Council executed the new leases with Outdoor Plus on 30 June 2017. Shortly thereafter, Ocean issued proceedings on the basis that the leasing arrangement was in fact a 'concession' or in the alternative, that the Council's decision was subject to judicial review on the grounds of procedural unfairness and manifest error.

A 'concession' is a type of contract often used in the public sector to deliver services or construct infrastructure. A concession differs from a usual public contract because the 'concessionaire' (i.e. the operator appointed to deliver the services/infrastructure) takes on all or the majority of the risk in operating the concession. In a usual public contract, a company is paid a fixed amount for completing the required work or providing a service, e.g. the company builds and manages a motorway for a fixed price. However in concession arrangement, the company is remunerated mostly through being permitted to run and 'exploit' the work or service, taking on the risk that it may potentially lose its investment. Put simply, the company builds and manages the motorway at its own expense, but hopes to earn its revenue through charging tolls.

Concessions have only recently been fully subject to regulation since the enactment of the Concessions Contracts Regulations 2016 (the Regulations). Among other things, the Regulations require that concessions are advertised in the OJEU, and that a fair competition is undertaken in accordance with the EU principles of transparency, equal treatment and non-discrimination.

Ocean's claim ultimately failed. O'Farrell, J held that:

  • the arrangement was not a concession because:
    • there was no entrustment of a public service to Outdoor Plus (i.e. one of the essential elements of a concession) – there is no public benefit to the community from commercial advertising;
    • there was no (direct or indirect) legally enforceable obligation on Outdoor Plus to carry out the services. The Court held that a provision which required Outdoor Plus to use "all reasonable endeavours" to promote the sites was only for the purposes of producing revenue. It did not require Outdoor Plus to carry out any particular scope, volume or value of advertising; and
    • even if the arrangement did constitute a concession, it would have been excluded from the Regulations in any event as the contract concerned the acquisition or rental of land, i.e. one of the exemptions set out in the Regulations.
  • further, there were no grounds for judicial review:
    • the Council had not breached its confidentiality obligations by sharing Ocean's previous offers with Wildstone, neither was there any evidence Wildstone had shared that information with other bidders;
    • no conflict of interest arose in the Council instructing Wildstone to act as its agent. The fact that an employee of Wildstone was previously employed by Ocean some years previous and left in acrimonious circumstances, was not sufficient. Ocean had never explained to the Council why it believed a conflict may exist in appointing Wildstone. Even if it did, it would have been improper for the Council to act on unsubstantiated rumours; and
    • there was no evidence of bias. Ocean had won a previous competition run by Wildstone and had no financial or other interest in the outcome of this competition.
Comments

The judgment provides a clear structure in respect of analysing whether the components of a concessions contract are met. However, it will be interesting to see whether there will be any further cases which examine whether "reasonable endeavours", "all commercially reasonable endeavours" or similar, amount to a legally binding obligation to provide works or services.

In previous cases concerning land transactions, the Courts have analysed whether a company essentially has the commercial freedom to decide whether or not to undertake the works/provide services. On the face of it, an "all reasonable endeavours" clause would not appear to offer such a wide option for Outdoor Plus, albeit the Court took the view on this occasion that this drafting did not, in reality, require Outdoor Plus to do anything. It is perhaps questionable whether this interpretation reflects the Council's intentions in including this drafting in the contract. In that vein it is perhaps worth noting that the Court of Appeal decision in R (Faraday Development Limited) v West Berkshire Council is due to be published shortly, which may also touch on the issue of what amounts to a direct or indirect legally binding obligation to undertake works.

Finally, the Court's analysis of the subject-matter of the contract is noteworthy. Seemingly, a contract which would ordinarily meet all the criteria for a 'concession' (including a legally binding obligation to provide the services), will fall outside of the Regulations entirely, if its subject-matter does not concern activities for the 'public benefit' (e.g. parking facilities, leisure services or public toilets, which the Court said would ordinarily fall within the ambit of the Regulations). As local authorities are increasingly looking for ways to commercialise their activities, this case is a helpful reminder that certain activities will not be caught by the concessions rules, albeit running some form of competitive process in these circumstances can be helpful to achieve value for money and compare a number of solutions.

Please get in touch with any member of the team if any of the issues raised in this article are relevant to you.