PLANNING AGREEMENTS AND EC PUBLIC PROCUREMENT LAW

By Jean-Jacques Paradissis^*

The recent decision of the European Court of Justice in the case of Ordine degli Architetti delle Province di Milano et Lodi v Comune di Milano,¹ even though it concerns EC public procurement law and Italian planning law, seems to have implications for British planning law. In an article in 1993 by Chris Bovis, it had been stated that ‘Compliance with the Public Procurement Directives by Member States and the relevant contracting authorities and judicial control by the European Court of Justice and national courts will in time elucidate the whole regime of planning and construction throughout Europe’.² It can be contended that this time might now have come for a narrow but important issue of English planning law: planning agreements. These are planning obligations concluded by agreement between local planning authorities and developers under s. 106 of the Town and Country Planning Act 1990.

I. FACTS

For present purposes, the material facts in the case of Ordine degli Architetti delle Province di Milano et Lodi v Comune di Milano concern the grant of planning permission for a huge redevelopment of land to various private entities by a local authority in Italy (the City of Milan). According to Italian planning law, the grant of any planning permission is conditional on the payment of a fee which is proportional to the planning impact that each development has on land.³ This infrastructure contribution can either take the form of a direct disbursement by the developer, or the developer can enter into an agreement with the planning authority to undertake some or all of the necessary infrastructure works, in which case the costs of the works are subtracted from the contribution. In the present case, the developers agreed with the City of Milan that they would undertake the design and building of the outer shell of a theatre (which would host the activities of the world-wide famous Scala di Milano opera house while it was being restored) in return for a reduction in their infrastructure contribution. The remainders of the works for the completion of the theatre were to be undertaken by the City of Milan, which would organise a tendering procedure for that purpose.

The local professional body of architects (Ordine degli Architetti delle province di Milano e Lodi), the national professional body of architects (Consiglio Nazionale degli Archittetti) and two individual architects, challenged the legality of the City of Milan’s decision to allow the developers to undertake these infrastructure works directly in return for a discount in their contribution. The appeal was filed in the competent national court, the Regional Administrative Court of Lombardy, and the claimants raised issues concerning both Italian planning law and EC law. The EC law argument was that the contract for the building of the theatre was in fact a public works contract within the meaning of the EC rules on public procurement, and as such it should have been awarded only after the relevant EC tendering rules had been followed. In other words, the claimants were contesting that they had been unlawfully precluded by Italian planning law from tendering for the building contract.

The national Court decided to apply article 289 of the EU Treaty and to refer the matter for a preliminary ruling to the European Court of Justice (ECJ).⁴ The question referred by the Italian administrative court that is relevant here, was whether legislation under which the holder of planning permission may execute infrastructure works directly instead of the payment of a fee, is contrary to the strict tendering procedures imposed on member states by Directive 93/37/EEC⁵ in relation to public works over a value of 5 million euros. This Directive is part of a trilogy of directives regulating procedures for the procurement of contracts let by public contracting authorities: the other two sets of directives concern public service contracts and public supply contracts.

II. JUDGEMENT

The major issue that was to be decided by the ECJ, was whether the contract concluded between the City of Milan and the developers was a public works contract within the meaning of the Public Works Directive. The meaning of a ‘public works contract’ is defined in article 1(a) of the Directive as contracts for pecuniary interest concluded in writing between a contractor and a contracting authority, which have as their object either the execution, or both the execution and design of a public work, as defined in the Directive. The ECJ examined whether the six features of a public works contract as set out in the Directive could be applied to the issue in question. These six elements that are necessary for a contract to be qualified as a ‘public works contract’ are:

1. The existence of a contract within the meaning of the Directive. The ECJ ruled that although the local authority had no choice between potential contractors, since only the owner of the land could enter into an infrastructure agreement, and that it was entered into under specific provisions of Italian Planning legislation, the development contract was such a contract. The court based its finding on various arguments the most important being the need to ensure an interpretation consistent with the purpose of the public works Directive, namely to guarantee Community-wide competition over public works contracts by providing strict tendering procedures aiming at preventing discrimination in favour of national tenderers.⁶

2. A contract concluded in writing. This element was not contested.

3. A contract for pecuniary interest. The pecuniary nature of the contract relates to the consideration due from the public authority concerned in return for the execution of the works which are the object of the public works contract and which will be at the disposal of the public authority.⁷ The Court of Luxembourg referred to the interpretation made by the referring Italian Court according to which, since the infrastructure works were to be redeemed for a reduction from the development contribution, the contract was not lacking pecuniary interest. The ECJ adopted this analysis on the grounds that it was consistent with the aim of the Directive (the elimination of discriminatory practices in public procurement) and it would best ensure the full effect of EC law.

The Advocate-General had a different opinion on this matter, and for him there was no pecuniary consideration. In his analysis, he makes clear that in this case there are two different legal relationships. First, the relationship by which the developer asks for planning permission under Italian planning regulations. These regulations subject him to a development tax, which he can compensate by undertaking to build himself some works. Second, the relationship by which the developer agrees with the City of Milan to build a public work and to bear all the costs. In this second relationship there is no financial consideration. Thus the question that has to be answered is whether pecuniary considerations that stem from other relationships than the one concerning the public work itself, can substitute the absence of a pecuniary interest in the contract by which the developer undertakes to realise some public works. For the Advocate-General, it seems that the existence of a pecuniary interest should be present in the relationship concerning the public work for the Directive to apply. Moreover he believes that a different interpretation does not serve the aim of the Directive, which is increased openness in public procurement, because the local authority is not paying anyone for the works and thus there is no risk of distortion of competition since the works are not being executed with public funds. ⁸

4. The execution of ‘public works’. This element did not pose any problems of interpretation since the scope of the public works Directive extends inter alia to the execution, or the design and execution, of any building installation, civil engineering and construction works as long as they are sufficient to fulfil in themselves an economical and technical function. So, the construction works at issue were found to be such works.

5. One of the parties must be a ‘contracting authority’. This element too did not pose any problem since article 1(b) of the Directive defines these authorities as being any bodies governed by public law, including the state and regional and local authorities.

6. The features of the contractor. The ECJ finally held that the Works Directive does not require the contractor to be able to execute directly the works using his own resources, as long as this person is able to arrange for the execution of the works and to provide a guarantee in that connection.⁹

As a consequence, contrary to the opinion of the Advocate-General, the Court found that the agreement by which a developer undertakes to build infrastructure works instead of paying a financial contribution for the grant of planning permission, was a ‘public works contract’ thus making the Public Works Contracts Directive applicable.

III. RELEVANCE TO BRITISH PLANNING LAW: PLANNING OBLIGATIONS BY AGREEMENT.

This case is important for EC procurement law since it is one of the first major cases in which the ECJ considered in a detailed manner the concept of a public works contract. This important aspect of the case will not be considered herein,¹⁰ but only its planning law aspect.

In Britain, as opposed to Italy, in order to obtain planning permission there is no statutory obligation to pay any sort of infrastructure contribution, even though the adoption of such fees has been proposed by Professor Grant.¹¹ It might seem a priori that this ECJ case has little impact in British planning law. However, it can be contended that this case has implications for English planning law, when planning obligations pursuant to section 106 of the Town and country Planning Act 1990 (hereinafter TCPA 1990) are concerned.¹²

1) Applicability to planning agreements.

Generally speaking, the main method provided in English planning law for planning implementation and development control is through the grant of planning permission to which conditions can also be attached. However, section 106 of the TCPA 1990,¹³ provides a mechanism under which, if planning permission would have had to be refused as contrary to the current planning policy, the developer can undertake to offer some facility which the local community would accept in exchange for the grant of permission. Under this mechanism, known as planning obligations, landowners can enter into legal obligations which bind their land (like covenants) either by an agreement with the local planning authority or unilaterally.¹⁴ Planning agreements, commonly referred to under the term planning gain,¹⁵ allows for otherwise unacceptable applications for planning permission to be granted by imposing negative or positive obligations on the present and subsequent landowners. The obligations according to s. 106(1)(a) to (d) of the TCPA 1990, can either restrict or impose conditions on the use or development of the land in question, require the payment of a sum of money, or require ‘specified operations or activities to be carried out in, on under or over the land’. These operations can be almost anything as long as they are connected in some way with the proposed development.¹⁶ In practice, this has led to provisions by which the developer will agree to fund or undertake the construction or improvement of facilities lacking in the local community such as road works, traffic improvements, erection or refurbishment of schools and social housing.¹⁷

Italian planning law being very different from English, it shall first be examined whether the findings of this case can be applied to planning agreements. Following the reasoning of the ECJ, it shall be analysed whether the six elements of a public works contract exist in planning agreements. In English law the definition of a ‘public works contract’ is given in regulation 2(1) of the Public Works Contracts Regulations 1991 ¹⁸ which transposed the Public Works Directive in national law, and is ‘a contract in writing for consideration (whatever the nature of the consideration) - (a) for the carrying out of a work or works for a contracting authority, or (b) under which a contracting authority engages a person to procure by any means the carrying out for the contracting authority of a work corresponding to specified requirements’.

1. The existence of a contract. This condition seems to be satisfied when planning agreements are concluded. Similarly to Italian law, in English Planning law only the landowner can enter into a planning agreement that binds his land. However, the effet utile reasoning of the ECJ can be applied for section 106 agreements too, according to which: ‘the fact that the public authorities are not free to choose the contractor cannot in itself justify non-application of the Directive, since that would ultimately preclude from Community competition the execution of works to which the Directive would otherwise apply’.¹⁹ Indeed, it seems that planning agreements are used by local authorities to execute infrastructure and other works that are in their responsibility to undertake, but the authorities lack the proper funding to execute them.²⁰

2. A written contract. This condition poses no difficulty, since according to s. 106(9) TCPA 1990, all planning agreements must be in the form of a deed, which is a written instrument.²¹

3. A contract for pecuniary interest (consideration). This point seems to be the most debatable concerning the application of this case to English planning agreements, since s. 106 agreements are very different from Italian infrastructure agreements. The ECJ in the present case considered, on the grounds that it was consistent with the aim of the Directive, that since the infrastructure works were to be redeemed for a reduction from the infrastructure contribution, the contract was not lacking pecuniary interest. Thus, it should be examined if a similar reasoning could be applied for English planning agreements, even if they are quite different as illustrated in the following table.

Literally, where an undertaking is given to carry out works under a planning agreement, this is not given in relation for a pecuniary interest. In English planning agreements there are two legally distinct but related actions. First, the planning agreement according to which the developer agrees to build at his own cost a public work. Second, the planning permission granted to the developer for the development of a site. These two legal acts, although not linked in strict law,²² are linked together in practice, in the sense that what the developer is getting in exchange of his planning agreement is a grant of planning permission which he would have not got had not it been for the planning agreement. Moreover, in practice, most planning agreements make the obligation conditional on planning permission being granted and implemented. In strictly legal terms,²³ it can be considered that the works undertaken by the developer through a planning agreement, are for free and that he is not getting any money in return. However, the situation is different if analysed from an economic perspective.

The government has been adamant that planning obligations are not a means for planning permissions to be ‘bought and sold’.²⁴ However, this is a policy statement that cannot stand to a scrutiny of the mechanism of planning obligations. The developer on the one hand agrees to provide some sort of facility that is lacking to the local community, and on the other hand the local authority agrees to give him planning permission that would otherwise be unacceptable. Thus, the actual consideration in planning agreements, if not the legal consideration, is the grant of planning permission for a development that would otherwise have been unacceptable. The law only requires that the planning agreement must be entered into for a planning purpose and not be manifestly unreasonable.²⁵ Such consideration though not directly ‘pecuniary’ should be considered to satisfy the pecuniary interest element for the Directive since ‘planning gain’ equals to financial gain for the developer. As the ECJ case demonstrates the pecuniary interest (relating to the consideration due from the public authority) can be present in a different legal relationship than the one concerning the public works. Consequently the developer is not agreeing for free to enter into a planning agreement but he expects to get more development rights than he would be entitled to normally, had he not agreed to a planning agreement. These increased building rights undoubtedly are of economic significance. A possible method of calculation of the actual consideration of planning agreements for the purpose of applying the Public Works contracts Directive and regulations to them is given further on.

Of course, such an approach is debatable in terms of strict legal logic, though it can be contended it is the only one that ensures that the Directive has full effect in English law. The approach adopted by the ECJ in the present case was debatable too on the grounds of legal logic, however the ECJ opted for a purposive approach.²⁶ So, such an interpretation, similar to the one adopted by the ECJ when Italian planning law was concerned, should prevail as it best conforms to the purposive approach of the ECJ which is to open public works contracts, to genuine competition and to avoid any sort of favouritism. In the present case, the proceedings were initiated by architects complaining of not being able to tender for the execution of the works. In England too there have been cases in which different developers have been competing to enter into a planning agreement.²⁷ Nevertheless if the Directive is not applied, genuine competition for public work contracts might be harmed through the adoption of planning agreements in which the developer agrees to directly undertake the works involved. In the case of planning agreements which involve the payment of a sum by the developer to the local planning authority for the financing of public works, once the local authority starts using the money for the execution of the works, the Directive becomes applicable and all of its procedural safeguards have to be followed.²⁸ It is thus compatible with the purposive interpretation to consider that the same works, that would be subject to the Directive if they were contracted out by a public authority using funds given by the developer in accordance with a planning agreement, have to be subject to the Directive if the developer undertakes to execute them directly before transferring them to the local planning authority. Otherwise, planning agreements could be a way to circumvent the Directive’s requirements and aims.

4. The execution of public ‘work’ or ‘works’. This shall depend on the nature of the works that the developer undertakes to execute, and reference should be made to the detailed definition of what can be considered as public works under the Directive and the transposing regulations. Regulation 2(1) defines ‘work’ as meaning the outcome of any work which is sufficient of itself to fulfil an economic and technical function. The same provision also states that ‘works’ are activities contained in the general industrial classification of economic activities within the Communities and are detailed in Schedule 1 to the Public Works Contracts Regulations 1991.²⁹ However, it is submitted that since most of the times these works concern the erection or improvement of public infrastructures and such works are covered by the Directive, this condition would be met. Moreover, it should be noted that when planning obligations are used for the provision of social housing,³⁰ special rules apply under the Directive.³¹

5. One of the parties must be a ‘contracting authority’. Following s. 106(9)(d) of the TCPA 1990, a planning agreement must be agreed³² with a local planning authority, which has the powers to enforce it. Local planning authorities are defined by Part I of the TCPA 1990 and are (depending on the particular geographic area concerned) either County Councils, District Councils, or London Boroughs. Regulation 3(1)(h) of the Public Works Contracts Regulations 1991 expressly provides that local authorities are contracting authorities for the purpose of the Regulations.

6. The contractor. Regulation 4(1) of the Public Works Contracts regulations defines the ‘contractor’ as being ‘a person - (a) who sought, or who seeks, or would have wished, to be the person to whom a public works contract is awarded, and (b) who is a national of and established in a relevant State’.³³ The ECJ makes it clear in its decision that it is irrelevant who the contractor is, as long as he undertakes the obligation to take steps for the execution of ‘public works’. Even if planning obligations are local land charges that bind the land concerned, and thus only the landowner may bind its land, it is possible (even if in practice local authorities will seek to make an agreement with the landowner) for other persons to enter into a planning obligation even if they do not own the land at the time of the agreement.³⁴ In any case, it is clear that any person entering into a planning agreement will be caught under the Regulation’s definition of the contractor as construed by the ECJ.

Having found that planning agreements appear to fulfil all of the conditions necessary to be considered as ‘public works contracts’, it is important to examine to what extent they would fall under EC procurement law.

First, the Directive only applies to major work contracts. There is a financial threshold of 5 million euros.³⁵ Any contract whose total value of the projects exceeds this threshold (excluding the VAT) is subject to the provisions of the Directive. It is prohibited to circumvent it by using special methods of calculations or by engaging into ‘salami-slicing’³⁶ of contracts.³⁷ It is also important to determine the method of calculation of the value of such contracts, especially when they are planning agreements that appear to be concluded either for free or for ‘peppercorn’ considerations. ³⁸ Indeed, regulation 7(2) of the Public Works Contracts Regulations 1991 provides that the estimated value for the purposes of a public works contract shall be the value of the consideration which the contracting authority expects to give under the contract. The matter with planning agreements is more complex, as analysed above. Also, reg. 7(6) provides that whenever contracting authorities provide any goods to the person awarded a public works contract for the purpose of carrying out that contract, the value of the consideration of the contract shall be taken to include the estimated value of those goods. Although planning permission is not strictly-speaking a ‘good’, as explained above that is the real consideration for planning agreements. However, calculating with certainty the pecuniary value of a planning permission might be a difficult task to perform. Concerning Italian planning agreements dealt with in the present ECJ case, this value was easy to calculate since the value of the works undertaken by the developer was to be deducted from his infrastructure contribution, which was a specific amount. In English planning agreements this amount appears to be the value of the works themselves, thus the amount the local authority would have to spend if it had itself to carry out the works.³⁹ This indicates that when planning obligations are agreed to, which genuinely have no pecuniary consideration (for instance when the undertaker is not getting planning permission or anything else in return), then these agreements do not fall under the terms of the public works rules.

Second, it is important to mention that planning agreements may either provide for the direct execution of prescribed works by the developer itself or for the payment of a sum of money to the local authority in order to cover for such works. Following the reasoning adopted by the ECJ in this case, it seems that only planning agreements that provide for the direct execution of works by the developer (or under his responsibility) fall under the Directive.

The value of these works will also have to be over the financial threshold of 5 million euros, which means that not all of them will be concerned. However, it seems that since planning agreements are used mainly for important developments, the most significant agreements will be caught under these rules. In any case, common sense indicates that when an agreement involves the construction by a developer of an infrastructure work, if this work is significant (thus presenting an interest for competing developers) then it will be over this threshold. As examined above, EC procurement rules do not apply to planning agreements providing either for the payment of a sum by the developer to meet the cost of works, or that are below the financial threshold of 5 million euros. However, if an attempt was made to take advantage of these two conditions by combining them in order to side-step from the Directive, such an agreement might still be subject to it.⁴⁰ Indeed, according to article 6(4) of the Directive, ‘no work or contract may be split up with the intention of avoiding the application of this Directive’.

2) Towards greater openness and accountability.

Having found that it is at least arguable that this case will apply to some of the most important planning agreements, it remains to be seen what are the consequences of applying the public works Directive to them. The Public Works Directive and in general EC public procurement law provides for a strict procedural framework for the award of procurement contracts to private entities aimed at ensuring the equal treatment of all competitors and avoiding favouritism.⁴¹ It can be argued that the Directive might help overcome some of the critics faced by planning obligations in general, namely, uncertainty and unfairness, lack of transparency and absence of third party rights of appeal. For present purposes, the description of the procedural requirements of the Public Works Directive shall be omitted and only the requirements that are of great significance to the problems arising in the process of negotiating planning agreements shall be described.

i) Greater publicity.

Negotiations over planning agreements invariably take place in private and in secret between the local planning authority and the developer.⁴² The terms of planning agreements have not to be disclosed at least till they have been ‘proposed’.⁴³ Such secrecy has even been used by a local authority in order to manipulate two competing developers to its advantage.⁴⁴ The application of the Directive may open up such contracts, since it would be mandatory for local authorities to advertise by a way of a tender notice in the Official Journal of the European Communities that they are calling for tenders for a specific public work by way of a planning agreement. Also, a contract award notice detailing the result of the call for tenders would have to be published.⁴⁵ Such publicity is beneficial not only for competing developers but also to objectors, who might be informed that a planning agreement is being considered and with which developer it was concluded.

ii) The limitation of discretion of local authorities.

As the relevant case law on planning agreements demonstrates, sometimes developers of adjacent land parcels compete to enter into an agreement in return of obtaining planning permission.⁴⁶ English law seems to grant wide discretion to local planning authorities when having to make a choice between competing schemes. The Directive might address this issue, since it sets down strict procedures and award criteria between competing tenderers and, in any case, the local planning authority will have to abide by the selection rules it advertised in the tender notice. Public works contracts can only be awarded on the basis of the offer which offers the lowest price, or which is the most economically advantageous to the contracting authority. ⁴⁷

iii) Third party rights of appeal to Courts.

When the Directive is applicable, then there are very powerful statutory remedies available to competing tenderers. Regulation 31 of the Public Works Contracts Regulations, provides that any contractor (or intending contractor) suffering loss or damage from the procedures not being correctly followed by the public authority, may apply in the High Court for an interim order suspending the procedures or a specific action. They can also ask, either or both, for an order to set aside illegal decisions, or an order to amend any document, or even the award of damages.⁴⁸ All these remedies seem very powerful and, especially the award of damages by the public authority, seems to be a strong incentive for the correct application of EC procurement rules.

However, these specific remedies are available only to litigants having suffered damage from the EC procurement Directives not being correctly followed, thus competing tenderers. When planning agreements are entered into, there is no specific statutory right of third parties (either for objectors, or competing developers) to appeal except for the limited remedy of judicial review available against any planning decision.⁴⁹ In judicial review proceedings, it was once thought that other third parties have no sufficient standing to rely on grounds based on the incorrect application of EC procurement law procedures. As ruled by Richards J. in R. (on the application of Kathro) v Rhondda Cynon Taff CBC,⁵⁰ ‘The correct procedure is a matter of obvious concern to tenderers or would-be tenderers, but those persons have their own remedies under the regulations themselves. The claimants have not been shown to be affected in any way by the choice of tendering procedure. They have seized on the point simply as a fall-back way of trying to stop the project. I see no wider public interest to be served by allowing a challenge …’. ⁵¹ In this case, even if the applicant had sufficient interest to start judicial review proceedings, she had not sufficient standing as to raise arguments based on the incorrect application of the EC public procurement Directives. However, in the recent case of R. (on the application of Kides) v South Cambridgeshire DC⁵² the Court of Appeal has held that when a litigant has sufficient interest so as to have standing to initiate judicial review proceedings, then he can rely on any grounds available for his claim to succeed. Parker L.J. stated ‘It seems to me that a litigant who has a real and genuine interest in challenging an administrative decision must be entitled to present his challenge on all available grounds’.⁵³ As a consequence, this would seem to indicate that if a third party has sufficient interest as to bring judicial a review claim he could rely on arguments based on the incorrect application of the public procurement directives, even if he was not a competing tenderer.

3)The question of the application of the tendering procedure by the developer itself.

This ECJ decision has been criticised because of the fact that since normally only developers with an interest in the land in question would enter into a development agreement with the local authority, applying EC public procurement rules to such contracts will not be able to induce any sort of competition and will only result in unnecessary costs for the award procedure.⁵⁴

However, the ECJ seems to be aware of this difficulty, and provides in its judgement a solution to it:

The Directive would still be given full effect if the national legislation allowed the municipal authorities to require the developer holding the building permit, under the agreements concluded with them, to carry out the work contracted for in accordance with the procedures laid down in the Directive so as to discharge their own obligations under the Directive. In such a case, the developer must be regarded, by virtue of the agreements concluded with the municipality exempting him from the infrastructure contribution in return for the execution of public infrastructure works, as the holder of an express mandate granted by the municipality for the construction of that work.⁵⁵

The ECJ clearly indicates that it could be possible for the local planning authority to contractually bind the developer so that he follows all the procedural requirements of EC law, acting on behalf of the public authority. This would however present a risk for local authorities since the idea of using a ‘mandate’ would mean that the local authority could still be held liable for an incorrect application of EC procurement rules by the developer. Indeed, if the Directive was not correctly applied by the developer contractually being bound to do so, then competing developers would still be able to directly sue the local authority for damages. To safeguard such situations, planning agreements could include financial or other guarantee clauses.

IV. CONCLUSION

This case concerns Italian planning Law, which is very different from British law when planning agreements and impact fees are concerned. Moreover, even if its findings can be applied to planning agreements, they are only relevant for agreements that provide not only for the direct execution of public works by the developer, but also that are over a value of 5 million euros. However, these should be the most important planning agreements and it is hoped that it has been shown that this case might have important implications as to how EC public works procurement law may provide some indirect but still concrete solutions to transparency problems arising in planning law. This is especially important since the ECJ has also ruled that the Public Works Directive has direct effect.⁵⁶

From a more theoretical point of view, this case is also important because it shows how domains of EC law a priori unrelated to environmental and planning law, may have important implications to areas in which Member States have decided that the EC could only intervene after decisions are unanimously taken. More precisely, paragraph 2 of article 175 of the EU treaty provides that measures concerning town and country planning and land use can only be adopted at Community level unanimously by the Council. Thus, this Case which is based on EC public procurement rules, demonstrates how the unanimous decision procedure might be bypassed when EC rules on public procurement are expanded by the ECJ as to cover planning law.⁵⁷