Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
An application was made by the London Borough of Hackney (the "Council") in relation to a proposed contract between the Council and its ALMO Hackney Homes Limited ("HHL"). The proposed contract was for up to 5 years, and required HHL decorate the external and communal parts of the Council’s housing stock.
Despite there being no need to tender the work (since it was being awarded to an ALMO) the Council chose to tender the work via OJEU. HHL won the tender for the contract.
The Council applied to the Tribunal for either:
- a determination that the proposed contract would be a qualifying long term agreement (a "QLTA") and therefore that the correct consultation process under the Service Charges (Consultation Requirements) Regulations 2003 (the "Regulations") had been followed; or
- (if the contract was not a QLTA) dispensation from some of the consultation requirements under the Regulations for "qualifying works" that would be carried out under the contract.
Various leaseholders opposed the application.
A copy of the Tribunal’s decision is full is available here. In summary the decision of the Tribunal was:
- That the agreement was not a QLTA because HHL was a wholly owned subsidiary of the Council and it is clearly set out in Regulation 3 that a contract with a subsidiary cannot be a QLTA ; and
- Not to grant dispensation because the Tribunal was concerned about the integrity of the tender process (an employee of HHL had been part of the tender evaluation panel) and was not happy about the proposed post-contract management arrangements.
The Tribunal’s decision on the first point was not surprising and clearly correct. The Regulations are very clear that agreements between a parent organisation and subsidiary cannot meet the definition of a QLTA.
In relation to the second point, the Tribunal was concerned that there were flaws in the tender evaluation process and contract management arrangements that would have meant residents were prejudiced if dispensation was granted (even in the post Daejan era).
The decision highlights the difficulties for local authorities and private registered providers over which consultation route to follow where they want a subsidiary company (either an ALMO or a DLO respectively) to deliver works for them. The difficulty comes because the "OJEU notice" consultation route is available only where an OJEU notice "is required to be given" (ie is "compulsory"). The problem is that if the contract for those works is tendered via OJEU and the ALMO or DLO wins the tender, the Teckal case means that it is not possible to say that the OJEU notice was "required". Under the EU procurement rules, this contract could have been awarded to the ALMO or DLO without any tender process. Whilst the expectation is that dispensation from consultation will be given in these circumstances, given the decision in the Hackney case, this cannot be guaranteed.
Conversely, if the local authority or private registered provider wants to award the work to the ALMO or DLO without following an OJEU notice procedure, they will have to follow the "qualifying works" consultation route, which would include obtaining at least two quotes. The difficulty here is that the local authority or private registered provider may not be able to award the contract for those works to the contractor providing one of the estimates without breaching the EU procurement rules. Depending on the value of the works, in order to award the contract for those works to an external contractor, they would have to follow an OJEU process!
This is another example of how the Regulations do not fit modern procurement practices or the EU rules.
There is no ‘easy’ solution to the dilemma of what to do where works have a value above the EU tendering threshold and trigger the leaseholder consultation requirements for qualifying works. The only realistic options we can see are either:
- Initially to consult with residents as if public notice is not necessary and as if letting a contract for qualifying works outside of an OJEU process. Residents then have the opportunity to nominate contractors and the landlord would have to source at least two estimates (one from the ALMO or DLO and one from an external contractor). If at the end of that process a decision is made to award the contract to the subsidiary, this will be fine from both a resident consultation and EU procurement perspective. If a decision is made that the subsidiary should not be awarded the contract, then a full EU procurement process will need to be followed. A new leaseholder consultation process would be needed using the "public notice" consultation route. In theory the subsidiary could bid again for that contract (although we suspect that may be unlikely, since the reason for running the tender process is because the comparison of the estimates has led to the decision not to award the contract to the subsidiary). If the subsidiary does tender and is awarded the contract, it may be necessary to consider an application to the Tribunal for dispensation (given that public notice did not technically need to have been given and so the exact requirements of the Regulations would not have been met). We expect dispensation would be granted in those circumstances.
- To skip straight to tendering the contract for the works via OJEU. Again the subsidiary could submit a tender, but if it was then awarded the contract it may be necessary to consider an application to the Tribunal for dispensation (given that public notice did not technically need to have been given and so the exact requirements of the Regulations would not have been met). Again we expect dispensation would be granted if that became necessary.
The advantage of following option 1 first is that the time and costs of an EU procurement process would be saved if in fact the contract is awarded to the ALMO or DLO subsidiary following consideration of the estimates.
We would also recommend that landlords faced with this position take full advice, so as to be fully aware of the options, the pros and cons of each option, and the potential risks, set in the particular context of the landlords, its residents and the specific works that are to be undertaken.
For more information
If you have any queries about this briefing or would like to discuss the issues in more detail, please contact either Emma Duke, Senior Associate on 0121 214 3617 or at firstname.lastname@example.org or Andrew Millross, Partner, on 0121 214 3637 or at email@example.com.
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