Procurement: First Judicial look at the Concession Contracts Regulations 2016

Procurement: First Judicial look at the Concession Contracts Regulations 2016

Ocean Outdoor UK Limited v London Borough of Hammersmith and Fulham

Contracting authorities are increasingly exploring innovative ways of generating income. These may include involving the private sector in revenue sharing commercial schemes, some of which may involve the grant of concessions. In Ocean Outdoor UK Limited v London Borough of Hammersmith and Fulham Mrs Justice O'Farrell has provided the first judicial take on the Concession Contracts Regulations 2016. The first reported judgment on what constitutes a 'concession contract' for the purposes of the Concession Contracts Regulations 2016 (CCR) provides a useful breakdown of the test to be applied to determine whether or not a contract falls within the CCR. The case provides helpful analysis to guide contracting authorities in determining whether or not they need to comply with the procurement regime set out in the CCR.

Key points to note for contracting authorities

(i) Only concession contracts which require services to be provided for the benefit of the contracting authority in respect of its public obligations will fall within the statutory regime. In Ocean the Court rejected the argument that the receipt of income that the Council could use to provide services for its residents was, in itself, a benefit. However, this principle may be inconsistent with other ECJ cases.

(ii) For a concession contract to be caught by the CCR it must contain enforceable obligations placed on the contractor to carry out the services that are the subject of the contract. On the terms of the contract in question in Ocean that was not the case.

Background

Ocean Outdoor UK Limited (Ocean) and the London Borough of Hammersmith and Fulham (the Council) had entered into a lease in 2010 under which Ocean agreed to rent a plot of land alongside the Hammersmith flyover. The lease permitted Ocean to install, maintain and operate two towers for displaying advertising. Ocean accordingly built two large metal towers to which they attached screens for displaying adverts. The parties shared the gross profit generated from the sale of advertising space with the Council taking the lion's share (85%).

Subsequently, in 2014 the Council procured Wildstone Property Limited (Wildstone), a firm of property consultants with a remit to review the Council's portfolio of advertising sites and identify new opportunities for generating revenue. Wildstone identified that the Two Towers site could generate significantly more income for the Council than was currently being realised – indeed the income from the Two Towers had been declining. Following some limited negotiations with Ocean the Council decided to go to market to obtain a new lease arrangement for the site. The Council did not pursue a formal OJEU process. Instead it placed an advert in a trade journal and sent emails and brochures to several potentially interested parties, including Ocean.

Ocean submitted a number of bids but were blown out of the water on price by Outdoor Plus – whose proposal guaranteed the Council £1.7 million / year in rental payments. Ocean's proposal at its highest level amounted to a fixed rental payment of £825,000 / year inclusive of an upfront premium of the first 18 months rent. The Council determined to accept Outdoor Plus's bid and served notice on Ocean to quit the site.

Ocean issued proceedings challenging the decision to award the lease to Outdoor Plus. Ocean alleged that the lease was, in fact, a concession contract and ought to have been subject to a procurement process in compliance with the CCR. Ocean sought a declaration of ineffectiveness, penalty and damages flowing from the Council's failure to comply with the CCR, concessions directive and general principles of EU law (the Claim). Ocean also issued judicial review proceedings challenging the decision to award the leases to Outdoor Plus (the Judicial Review). Both proceedings were heard in a joint hearing at which the Court would consider the Claim and determine whether permission ought to be granted for the Judicial Review. If permission was granted the Court would also determine the Judicial Review at the same time.

Proceedings

The Court conducted a thorough review of the issues and set out the requirements for a concession contract to fall within the scope of the CCR. In summary these are as follows:

(i) The contracting authority must entrust the provision and management of the services to the economic operator and the services must be for the benefit of the contracting authority in respect of its public obligations;

(ii) There must be a mutually binding obligation for the provision of the services;

(iii) The consideration for the concession must be the right to exploit the services (with or without additional payment);

(iv) The economic operator must assume an operating risk in providing the services;

(v) The contract must not fall within one of the specified exclusions in the CCR.

Ocean fell foul of requirements (i), (ii) and (v).

The mutually binding obligation test

The leases required Outdoor Plus to use 'reasonable endeavours' to market and promote the site so as to maximise the revenue that might be derived under the contract. They did not require Outdoor Plus to provide advertising. The Court was clear: on those terms there was no obligation placed on Outdoor Plus to exploit the concession to provide advertising. There was no enforceable term which required Outdoor Plus to carry out advertising services. This point requires careful consideration as the judgment is somewhat ambiguous. The key point is that the obligation (to use reasonable endeavours to market the site) was not to carry out the services that were the subject of the contract: advertising services. It seems likely that had the clause required the contractor to use reasonable endeavours to provide advertising services it would have been sufficient to pass this limb of the test.

The public benefit test

The Court held that the contract could not be found to provide a benefit to the contracting authority in respect of its public obligations. The Council was under no statutory obligation to provide advertising for its residents. Further the Court determined that there was no intrinsic public benefit to the community from the commercial venture of advertising. Therefore the question was whether there was a specific public benefit that might be derived from the contract. Ocean advanced two arguments: firstly that there was a public benefit in that the Council had been able to avail itself of free advertising under the lease with Ocean. This enabled it to disseminate information to its residents for free. Ocean's second argument was that the income the Council would receive from the arrangement could be spent in furthering its public obligations. Both arguments were rejected. On the first the Court determined that there was no provision in the leases with Outdoor Plus that obliged them to provide free advertising to the Council. In respect of the second the Court held that the payment from Outdoor Plus to the Council was properly characterised as rent rather than a service. The public benefit test requires that a service be provided for the public benefit. This represents a narrow interpretation of the public benefit test. It could also be criticised as being inconsistent with ECJ case law in which no distinction is made between contracts which relate to public interest tasks and those which do not in evaluating whether a public contract arises.[1] The Court may have been influenced in its reasoning on this point by the land transaction exclusion in the CCR.

The exclusion for land transactions

The CCR exclude contracts the main purpose or object of which is the rental or acquisition of land. Ocean's case was that, looking at the transaction as a whole, it was clearly properly characterised as an advertising concession. The grant of the lease was simply to facilitate advertising. The Court firmly rejected that approach by reference to the parties' objectives. Although Outdoor Plus were only interested in the leases because of the advertising opportunities they would unlock the Council's main objective was to obtain a guaranteed source of income from the rental payments. The use that Outdoor Plus would put the land to did not change the nature of the transaction as being one for the rental of land. It may be that having come down firmly on the view that the main purpose of the transaction was to lease plots of land the Court's position on the payment of rent not forming a public benefit is easier to understand as where the land transaction exemption applies there is no concession contract.

Conclusion

In this case the Court found that, had the opportunity been a concession contract for the purposes of the CCR, a declaration of ineffectiveness and civil financial penalty would have been an appropriate remedy. In order to ensure that they avoid such draconian consequences contracting authorities should carefully consider the terms of any potential concession opportunity in deciding whether a CCR-compliant procurement procedure is required before taking any steps to procure.

[1]               Para 26 of Case C-26/03 Stadt Halle and RPL Lochau.