Court of Appeal dismisses procurement challenge over award of leases for land housing outdoor advertising structures

The Court of Appeal has rejected a legal challenge to a London borough’s award of leases for land on which structures that support large digital advertising screens are situated.

Lord Justice Coulson said the appeal in Ocean Outdoor UK Ltd v The London Borough of Hammersmith & Fulham [2019] EWCA Civ 1642 raised novel questions as to the scope of the Concessions Directive (Directive 2014/23/EU) and the Concessions Contract Regulations 2016 which implement that Directive.

The contracts in issue were two leases ("the New Leases") for land either side of the Hammersmith Flyover in West London, on which the structures known as "the Two Towers” are located.

Hammersmith & Fulham Council owns the land and the Two Towers.

The local authority originally leased the land to the appellants, Ocean Outdoor. When the leases came up for renewal, Ocean were comprehensively outbid by Outdoor Plus, and on 30 June 2017 the council entered into the New Leases with Outdoor Plus.

After failing to secure the New Leases, Ocean complained that the procurement exercise (in which they had freely participated) was unlawful, because it was one to which the Concessions Directive and the Regulations applied.

Hammersmith & Fulham denied that the Regulations applied.

Lord Justice Coulson said that if the Concessions Directive and the Regulations did apply, it was common ground that the procedural formalities they required for any procurement exercise did not occur. Ocean claimed damages as a result.

The council maintained that, even if the Regulations were applicable, the breach was procedural only and not 'sufficiently serious' to justify a claim for damages. Moreover, Hammersmith & Fulham submitted that the scale by which Ocean were outbid by Outdoor Plus means that there could have been no causal link between the council's breach and any loss suffered by Ocean.

For a 10-year lease, Ocean had offered £600,000 per annum with an upfront payment of the first 18 months' rent. By contrast, Outdoor Plus offered £1.7m per annum over the same 10-year term, with a staged annual increase and a market review in year 5. A similar scale of difference was apparent in the respective bids for a 5-year term.

In September 2018 Mrs Justice O’Farrell rejected Ocean’s claim. Ocean appealed.

Lord Justice Coulson said the appeal concerned three principal issues:

1. Whether the New Leases were service concession contracts within the meaning of the Regulations.
2. Whether the New Leases were contracts for pecuniary interest for the purposes of regulation 3;
3. Even if they were contracts for the provision or management of services, whether the land exemption applied to the New Leases.

Lord Justice Coulson, with whom Lord Justice Longmore and Mr Justice Snowden agreed, dismissed the appeal.

On the first principal issue, the Court of Appeal judge said Mrs Justice O’Farrell’s general conclusion, that the services had to be services which the council was otherwise obliged to perform (or were for the benefit of the council or its residents) then fed into her subsequent findings about the terms of the New Leases in this case.

“Having concluded generally that the services had to be services which the Council would otherwise be obliged to provide, the judge had no doubt that the New Leases were not service concessions contracts,” Lord Justice Coulson, adding that three of the four reasons given by the High Court judge for her conclusion on this point were “plainly right”.

The Court of Appeal judge continued: “The Council had no statutory or other obligation to provide advertising services for its residents (or anyone else) and Ocean do not suggest otherwise. Accordingly, any advertising services being provided pursuant to the New Leases were not and could not be provided on the Council's behalf.

“There was no express request for advertising by the Council within the New Leases, and its income was derived from Ocean Plus' possession and use of the land, not the nature or quantity of advertising they might sell. That advertising was in any event unrelated to the objectives of the Council or any of its public obligations.”

In addition, Lord Justice Coulson considered that there was no direct benefit to Hammersmith & Fulham or its residents as a result of the nature and quantity of the advertising featured on the Two Towers.

“Although the Council imposed negative covenants as to particular types of advertising (unlawful and moving advertisements were prohibited), it was irrelevant to the Council whether or not those who saw the advertisements (whether they were local residents or otherwise) benefited in some way from the advertisements that they saw,” he said.

The 2016 Regulations did not apply to the tender process for the New Leases, the Court of Appeal judge concluded.

On the second principal issue, Lord Justice Coulson said he considered that the New Leases were not contracts for pecuniary interest by means of which the council entrusted to Outdoor Plus the provision or the management of advertising services.

“Accordingly, even if I was wrong about principal issue 1, Ocean has not shown that the New Leases came within the definition in regulation 3(3), so their separate failure on principal issue 2 would be fatal to the appeal."

On the third principal issue, the Court of Appeal judge said he considered the New Leases to be genuine leases, and not contracts to provide advertising services. “If the New Leases were not caught by the land exemption, it is difficult to see what sort of lease or contract would fall within that exemption.”

He added: “The essential feature of the New Leases is that pursuant to their terms, Outdoor Plus obtain exclusive possession of these pieces of land and the Two Towers which exist there. They pay a fixed rent which is not conditional upon or affected by any particular type or level of advertising sold.

“Of course, Outdoor Plus have permission to use the Two Towers for the display of static advertising and to sell the advertising space to third parties, but that does not – in my view, cannot - change the nature of the underlying transaction: it remains an agreement for the rental of land.”

Lord Justice Coulson also gave his conclusions on a fourth principal issue, which related to damages, as, although strictly no longer arising, it raised a matter of general importance.

The judge said that, in his view, it would be wrong in principle to hold that (subject to a separate point about the causal link) a claimant in the position of Ocean was automatically entitled to claim damages as a result of a contracting authority's failure to follow the Regulations.

“That would mean that every breach of the procedural requirements would automatically trigger a claim for damages, regardless of any other factor. That is emphatically not the law. In order to attract damages, the breach has to be ‘sufficiently serious’, and that will always depend on the individual facts of the case,” he said.

The Court of Appeal judge also concluded that in public procurement cases, the loss of a chance principle was most likely to arise where there was a close comparison between the unsuccessful and the successful bids, and where it could be shown that the illegality in the tender process might have contributed to the rejection of the losing bid.

“The principle can be applicable because of the uncertainties caused by the number of hypothetical variables in play. But it will not apply where, even taking into account all those uncertainties, it is plain that the claimant's bid would have been rejected in any event.”

He added: “That is manifestly this case. Here, on the preferred basis of a 10-year lease, Ocean were outbid on a scale of 1 to 3. Even for a 5-year term, they were outbid on a scale of 1 to 2.5. As the judge put it at [160], ‘even if the opportunity to tender had been offered to other bidders, Ocean would not have been successful’ (paragraph 22 above). In other words, Ocean underbid so comprehensively that there can be no uncertainty as to the hypothetical outcome of a lawful competition: Ocean would still have lost. In those circumstances, the loss of a chance mechanism would never have been applicable and Francovich condition (iii) was not made out.”

The Court of Appeal judge said it should no longer be the practice in public procurement cases for the losing tenderer to claim damages by rote, regardless of the absence of any possible connection between the alleged illegality of the process and any loss it may have suffered, simply by relying on the loss of a chance principle. “In my view this case is a paradigm example of where damages – even calculated by reference to the loss of a chance principle – would never have been recoverable.”