When is a work a public work?

The ECJ's ruling in the Helmut Muller case has provided some welcome clarification of the impact of EU procurement rules on development projects. Nathan Holden analyses the ruling and explains why local authorities will still have to tread carefully.

Up until a few years ago public bodies involved in development projects had little cause to worry about the European Procurement Rules (the Rules) because the general consensus, supported both by the English Courts and the European Court of Justice (ECJ), was that these agreements were not works contracts, but rather exempt land transactions on the basis that the main object of the transaction was the disposal of land.

Roanne

That all changed in 2007 following the ECJ’s decision in Roanne (C-220/05) (or Auroux as it is also known). There the Court held that a contract between the commune of Roanne and a publicly owned development body – whereby the latter would arrange for the construction of a new cinema, hotel and other commercial development – was a works contract and not a land transaction.

The contract between the commune and the development body provided that only a small part of development was for the commune, namely new roads, public open space and a car park. There was also a provision in the contract to the effect that if the development body were unable to sell the commercial space the commune would buy it from them.

The ECJ held that the arrangement was a works contract and reached the following general conclusions:

• it did not matter that the works were not carried out for the commune and were to be sold on;
• the main purpose of the contract was the creation of a work, namely a leisure-related development fulfilling an economic or technical function to the commune’s specification;
• it did not matter that the works were not carried out on land owned by the commune, it was enough that they met a wider regenerative objective that the commune sought to achieve, e.g. regeneration of their area; and
• the financial thresholds test for the applicability of the Rules were to be applied from a bidder’s perspective, that is, what is the total value they will derive from the project including exploiting the development constructed.

The consequences of the decision in Roanne were profound. The immediate impact was to slow the development process down because in the majority of cases it was not clear whether a development agreement was a works contract or not.

To make matters worse the decision also raised the spectre that section 106 planning obligations and other development-related agreements such as section 278 highways agreements would also be caught by the Rules.

The position was further exacerbated by the incorporation of the Remedies Directive into English law potentially giving rise to claims for “ineffectiveness” if the contract were incorrectly categorised, risking not only compensation payments but also a civil penalty (fine).

Helmut Müller

However, help was at hand. In March this year the ECJ, in the case of Müller (C-451/08), looked again at some of the issues raised in Roanne and in doing so provided useful clarification on key areas.

When is a work a public work?

In Roanne the French Government unsuccessfully argued that because the majority of the works were not to pass to the commune they could not be regarded as corresponding to the municipality’s requirements, and thus were not public works as defined by the Rules.

In Müller the ECJ reaffirmed the principle that it is not necessary that the works take place on land owned by the contracting authority, or are carried out for the contracting authority. However, it is a requirement that the works are for the contracting authority’s immediate economic benefit. The ECJ identified circumstances where an economic benefit would be present:

• the contracting authority will become the owner of the works (e.g. a new local authority-owned and run leisure centre);
• the contracting authority is to hold a legal right to use the works in order that they can be made available to the public (e.g. the right of the general public to use a private sports centre for no charge); or
• it may lie in the economic advantages that the contracting authority may derive from the future use or transfer of the work (e.g. a local authority provides financial resources to bring forward the redevelopment of its town centre as part of a regeneration initiative).

As to how the word “immediate” is to qualify “economic benefit” the ECJ did not provide any guidance. In the majority of cases this should be straightforward, although that will not always be the case when applying the third of the three example circumstances, because whether the benefit is immediate, or not, may be difficult to fathom.

Approving plans and planning obligations

The ECJ made it clear that a contracting authority will not obtain an immediate economic benefit by entering into contracts solely for the purpose of exercising urban-planning powers. This helps to clarify the position in respect of the majority of development linked agreements.

The same is true where a contracting authority simply approves plans etc, in its capacity, for example, as the local planning authority. These approvals will not amount to the specification of a work, thus avoiding the works falling within the definition of “public works” for the purposes of the Rules and the consequences that may have.

When is a concession agreement not a concession agreement?

The question here was whether it was possible to enter into a public concession agreement for a work, where the proposed concessionaire already owns the land on which the work is to be carried out or (and in effect amounting to the same thing) the concession is granted for an indeterminate (i.e. effectively indefinite) period.

The ECJ held that a contract entered into on that basis was not a concession agreement – the essence of a concession agreement for works is that it involves the transfer of the right to exploit an interest in land. If the concessionaire already owns the land then this essential feature is missing.

Conclusions

Müller provides useful and timely clarification in a number of areas and significantly assists in ameliorating the impact of the Roanne decision, but it doesn’t answer all of the questions and in the context of a typical local authority town centre regeneration scheme, the authority will still need to be careful to avoid deriving any immediate economic benefit from a development scheme if it is keen to avoid the effect of the Rules.

Nathan Holden is a partner at Mills & Reeve.