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development agreements - are we any clearer on when they are subject to the EU procurement rules?

4 July 2011

Are we any clearer on when they are subject to the EU procurement rules?

In 2007, a state of uncertainty was created over the precise circumstances in which development agreements are to be classified as public works contracts for the purposes of European Union (EU) public procurement law, and consequently subject to a competitive tendering requirement.

The general picture

The uncertainty arose after the case of Auroux v Comune de Roanne, heard in the Court of Justice of the European Union in early 2007. A name now on the lips of many a developer and local authority, Auroux disturbed a previously popular belief that contracts involving the development of land (for example in the context of urban regeneration) fell outside the scope of the EU procurement rules. A number of public development projects were placed on hold because of the ruling, so the effect was significant.

However, in the case of Helmut Muller in 2010, the court signalled something of a relaxation of the approach taken in Auroux, and clarified the position in a way which many welcomed. The case made it clear that the EU rules are likely to require the development agreement to be advertised where an authority:

  • specifies the development work to a significant degree
  • imposes enforceable obligations on developer to do the work
  • provides pecuniary interest for the developer in doing the work

However, in the Muller case, the court also made it clear that:

  • the mere sale by the authority of land (whether developed or not), and
  • the mere exercise by the authority of its urban planning powers, in the absence of the above ingredients, will not trigger the EU rules.

Pecuniary interest

Very importantly, the court in Muller considered the concept and meaning of pecuniary interest, identified in the third limb of the test above. What this amounts to is the authority receiving some kind of service (or development) in return for a consideration passing from the authority to the developer/contractor. This, in turn, means that by definition the authority has to receive a direct economic benefit from the project, and that this can only arise where the authority:

  • will own the development
  • will have some kind of legal right in how the development will be used
  • will gain, economically, from the use of the development or will (conversely) bear the loss deriving from failure of the development, should it prove a failure.

Commission v Spain - the latest case

Commission v Spain was heard by the Court of Justice on 26 May 2011. In it, the European Commission took issue with the procedure adopted by the Spanish Government in relation to the award of what are called Integrated Action Programmes (or IAPs) in the Valencia region of the country.

IAPs are programmes of work which cover the development of single or multiple parcels of urban land and which cover infrastructure and public realm works. They can be carried out in one of two ways - either by direct management by the local authority when the land in question is identified, or by the appointment by the local authority of a developer to manage the development following public consultation and a competitive process. The developer is paid either in cash or in kind (in the form of developed land from the relevant landowner). At the end of the programme the land may vest in the local authority, which is then responsible for the future management of the development.

The European Commission initially challenged Spain on the basis that a number of aspects of the procedures for the award of IAP programmes did not comply with procurement law. The courts decision on 26 May was preceded by an opinion from the Advocate General.

The decision and the Advocate Generals opinion

Somewhat unusually, the Advocate Generals opinion in this particular case is more informative in explaining the link between development agreements and procurement law than the decision of the court.

The court reached the same decision as the Advocate General - the Commissions complaint should not be upheld. However, the court came to that conclusion for evidential reasons (i.e. the Commission had failed to prove that the IAPs were contracts regulated by procurement law), rather than considering whether the IAPs amounted to public works contracts to which procurement law should apply.

We look to the Advocate General on the latter point, who made the following comments:

First (and tellingly) the Advocate General suggested that the commission should "not overstretch the meaning of certain criteria within the public procurement directives for the sake of fitting the present arrangement within the scope of the public procurement rules". But the thrust of the opinion was whether, under the arrangements, the local authority conferred a pecuniary interest on the developer.

The Advocate General was clear that pecuniary interest is not confined to cash - it could take some other form, for example land. However, it had to come from the authority itself; the concept pre-supposes a reciprocal arrangement whereby the authority pays a price to a developer, who is required to carry out the works.

In other words, there will be no pecuniary interest (of the type that has to exist if a development agreement is to be subject to the EU rules) unless the authority is put to some economic detriment; this, in turn, ordinarily can only happen in the context of a mutually binding agreement between authority and developer/contractor.

In the case of IAPs, it is the developer who is responsible for funding the development costs, with reimbursement by the landowner (even though the authority lays down the requirement for that to happen). As such, the development is not paid for by the authority even though the works in question are public ones and ordinarily this may be permissible.

Conclusion

The Advocate General took the view that the fulfilment of public works such as these via a private initiative - which might not otherwise have come about - should not be frustrated. Unfortunately, the courts judgment of 26 May did not specifically address all of the issues raised by the Advocate General, and so there are still issues around development agreements which will remain unresolved until cleared up judicially.

The Muller case by no means answers all of the questions around the application or otherwise of direct economic benefit, and when such benefit can be said to accrue, or not to accrue. It is fair to say that there is still considerable scope for uncertainty as to what that expression could capture, and whether the ingredients of an agreement for a pecuniary interest are in turn met in a given case.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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