Development agreements and the EU procurement rules - again

Project iStock 000000224397XSmall 146x219A new line of attack was attempted in a recent High Court case on the issue of development agreements and the EU procurement rules. Nathan Holden and Stephen Pearson examine the judgment.

Until the European Court’s (ECJ) decision in Auroux [2007] ECR 1-385, the general view was that development agreements were not caught by the European Procurement Rules (the Rules) because of the general exception for land transactions.

Auroux exploded that assumption in suggesting that the majority of development agreements that public bodies enter into would be caught on the basis that they are works contracts, even if the public body did not benefit from the development that the agreement facilitated. This was bad news indeed, as it meant that every time a public body sold a piece of land and wanted to require the buyer to do anything with it, e.g. any form of built development, they would have to go through the full EU procurement process in selecting a buyer.

However, in the case of Helmut Muller [2010] 3 CMLR 18 commonsense prevailed and the law was restated so that development agreements would only be caught if development obligations in the development agreement were legally enforceable and were of direct economic benefit to the public body. This approach was put into practice in the decision in R (on the application of Midlands Cooperative Society Limited) v Birmingham City Council and Another [2012] EWHC 620 (Admin) where it was held that because a development agreement did not contain any legally enforceable obligations to perform construction works, then the Rules did not apply.

Recently, however, a new line of attack has emerged. In the case of AG Quidnet Hounslow LLP v London Borough of Hounslow [2012] EWHC 2639 (TCC), the London Borough of Hounslow owned a prime site adjacent to a shopping centre owned by Legal and General Assurance (L&G). Hounslow were in the final stages of negotiating a ‘lock-out’ agreement with L&G that they hoped would secure the development of land in Council’s ownership comprising an extension to L&G’s existing shopping centre.

Quidnet, owner of a rival shopping centre, sought a High Court declaration to the effect that entering into the ‘lock-out’ agreement would be unlawful because it would, in effect, be a public works contract and further, failing that, it would also amount to a breach of Article 56 of the Treaty on the Functioning of the European Union (the Treaty) which prohibits a Member State from imposing restrictions on nationals of other EU Member States providing services in their Member State. Services in these circumstances include activities of: an industrial character; a commercial character; craftsmen; or the professions (see Article 57).

The claimants argued that the development of the city centre site was a service provided by L&G to prospective tenants of the site and it did not matter whether those services were provided to the Council. It was enough that the Council had entered into a contract to facilitate the provision of those services. If this had been accepted by the Court, following the Telaustria [2000] ECR 1-10745 decision, then it would have required a degree of advertising sufficient to enable the “services market” to be opened up to competition. This could then have been achieved by advertising and inviting tenders to provide the services. This may, hypothetically, then have led to a service provider in another Member State bidding to provide the services that were intended to be provided by L&G.

The Court did not accept the claimant’s contention that the draft ‘lock-out’ agreement amounted to an agreement for services, but instead concluded that it was no more than an agreement to agree the terms of a long lease. However, even assuming this were not the case, in the Court’s view what mattered was whether, for the purposes of Article 56 of the Treaty, there was a restriction placed by the Council on the services to be provided. The Court found that no such restriction existed and therefore the provisions of Article 56, even at the most basic level, did not apply.

The judgment is also interesting in that it considers, although not part of the decision, the issue of how you determine whether activities are confined to an individual Member State. This is important for deciding whether Article 56 and other Treaty principles, e.g. those that relate to ‘Part B’ services or below threshold procurements, apply in a particular case.  

Finally, the Court also considered whether, on the assumption the claim had been successful, what factors to consider in deciding if a declaration, in this case not to enter into the contract, is the correct remedy having regard to:

  • the claimant’s delay in bringing the proceedings;
  • whether the Council had detrimentally relied on the absence of a challenge from the claimant;
  • the hypothetical nature of the claim – i.e. the protection of the rights of unknown undertakings in other Member States to compete for the services contract; and
  • whether damages are an appropriate alternative remedy in these circumstances.

In conclusion, the Courts have made it very clear (at least for now, as this is only a first instance decision) that claims made in reliance on Article 56 of the Treaty against public bodies entering into development agreements will struggle to succeed. However, for procurement practitioners, the case is probably more valuable for what it did not decide, in that it provides a useful steer on a number of tricky areas of procurement law and practice.

Nathan Holden is a partner and Head of Local Authorities and Stephen Pearson is a partner at Freeth Cartwright. Nathan can be contacted on 0845 077 9646 or by This email address is being protected from spambots. You need JavaScript enabled to view it., while Stephen can be reached on 0845 274 6900 or by This email address is being protected from spambots. You need JavaScript enabled to view it..