Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION
	[2013] CSOH 125
P636/13	OPINION OF LORD BRAILSFORD in the cause HFD CONSTRUCTION LIMITED Petitioners; against ABERDEEN CITY COUNCIL Respondents: ________________

Petitioners: Ross; Maclay Murray & Spens

Respondents: Lindsay QC; Morton Fraser

Interested Party: Mure QC; MacRoberts

23 July 2013

[1] The petitioners are a company who were one of four successful bidders selected at the first stage of a two stage bidding process by the respondents to submit offers for the development of heritable subjects at Broad Street, Aberdeen ("the subjects") formerly occupied by the respondents as a headquarters building. The respondents are Aberdeen City Council ("ACC"), a local authority constituted under the Local Government etc. (Scotland) Act 1994 and are the heritable proprietors of the subjects. Muse Development Limited ("Muse") upon whom the petition was served as an interested party and who were represented at the first hearing were another of the successful bidders at the first stage of the said process. The petitioners were unsuccessful in the second stage bidding process. Muse were the successful bidders in the second stage bids.

[2] In the present petition the petitioners seek judicial review of the decision by ACC to appoint Muse as preferred bidder in respect of the disposal and development of the subjects. The matter came before me at an expedited first hearing where the petitioner sought (i) declarator that the decision of the respondent to appoint Muse as preferred bidder was ultra vires; (ii) declarator that in deciding to appoint Muse as preferred bidder, the respondent failed to follow proper procedures and, separately, failed to have regard to relevant and material considerations; (iii) declarator that the decision of the respondent to appoint Muse as preferred bidder was unreasonable and in error of law; (iv) reduction of the decision of ACC to appoint Muse as preferred bidder.

[3] There was no material dispute as to the relevant factual background. Parties were agreed that the issues between them were capable of determination at the first hearing.

[4] ACC are the owners of subjects at Broad Street, Aberdeen which they formerly occupied as their headquarters. They have new headquarters and the subjects with which this petition is concerned are surplus to requirements. In March 2012, ACC through its agent Ryden advertised the former headquarters building and site for sale. In terms of the advertisement document, ACC invited development proposals for the site to be submitted on a two stage basis. Stage 1 required all bidders to submit indicative designs, proposed uses and outline financial proposals by a closing date of 3 July 2012. It was anticipated that a shortlist would be drawn up from the stage 1 bidders, the shortlisted bidders then moving to stage 2 which would require fully designed, costed and accredited proposals.

[5] The above process was followed. To assist stage 1 bidders, Ryden as agents for ACC issued "Guidance for the benefit of interested parties" in March 2012. Paragraph 1.1 of the guidance stipulated that:

"On behalf of ACC we are instructed to offer the property assets outlined within this and accompanying documents for sale."

Paragraph 1.8 of the guidance stipulated that:

"The Council are not averse to the consideration of Joint Venture Agreements or partnership arrangements for the development of this area."

Section 3 of the guidance was entitled "Core Information". Paragraph 3.1.2, which related to stage 2 of the bidding process, stipulated that:

"We will require a clear indication of the proposed purchase price and the terms and conditions upon which it is offered. This can be provided in the form of Heads of Terms. But will require a clear indication of the proposed timings for the purification of conditions and the programme for payment of the price if this is to be made in more than one instalment. They should also include provision for any "overage" payment and the conditions governing this if a "profit sharing" arrangement is offered."

Section 6 of the guidance provided for confidentiality in respect of bids on the part of both ACC and bidders.

[6] ACC selected four bidders to proceed to stage 2. The petitioners and Muse were among this group. In January 2013, Ryden issued further "Guidance for the benefit of Preferred Bidders." This document included advice about information required for second stage proposals and the assessment criteria to be used by ACC in the second stage decision process. Paragraph 5 of the document set forth ACC's development aspirations for the site. Paragraph 5.2 provided:

"The Council wish to ensure that it can demonstrate best value in the sale/redevelopment of the site encompassing not only the best financial option from the development but also the best development solution."

Paragraph 5.7 provided:

"The Council wish to ensure delivery of the project within an agreed timescale and will wish to introduce an initial period of conditional tenure to facilitate this."

Paragraph 5.8 provided:

"As previously noted, the Council is not averse to the consideration of Joint Venture Agreements or partnership arrangements in whatever form, particularly when this will facilitate create a better solution for development."

Paragraph 6 of the document was entitled "Detailed Information Required For Stage 2" and included the stipulation that:

"The Council require to be provided with details of how the purchase price and development will be funded to include:-..........Any assumptions made with reference to either capital or ongoing revenue requirement on the Council."

By letter dated 12th March 2013, Ryden advised the petitioner and other bidders of a closing date for offers on 9 April 2013 and advised that bids received after the closing date would not be accepted by the respondent.

[7] As already noted, both the petitioners and Muse submitted proposals at stage 1. The petitioners' proposal was for the sale of the subjects to them with various associated development proposals. Muses' proposal involved a sale and leaseback arrangement with a proposed structure involving a partnership between Muse and ACC. During the stage 1 process, Muse had discussions with ACC about the structure of their bid. The factual situation in relation to this was explained in an affidavit by Sarah Anne Shankland, a director of Muse, in the following way:

"Muse prepared a bid at stage 1. The basis upon which the bid was prepared is set out at paragraph 7 below. It involved a sale and leaseback arrangement and the structure proposed was a partnership with ACC. I can confirm that a representative of Muse (who no longer works for the company) had an informal discussion with a representative of Ryden (ACC's representative) during the stage 1 bidding process about the broad structure of Muse's proposed bid. The discussion was in very general terms (no financial figures were discussed). Muse sought confirmation of whether the proposed structure would be acceptable to ACC. The answer from Ryden was that ACC had asked for innovative solutions and that what Muse proposed sounded like one, but ACC did not comment further. The stage 1 bid proceeded on the basis of a sale and leaseback adopting the same structure as the stage 2 bid. No question was asked at stage 2 about the proposed structure because Muse assumed that, in being invited at stage 2, their structure was of interest to ACC."

[8] Both the petitioners and Muse submitted offers at the end of the stage 2 process. The petitioners bid was submitted on 8 April 2013 in the form of an offer for the purchase of the subjects. Muses' bid involved a sale and leaseback of the subjects with a partnership involving ACC.

[9] Assessment of the stage 2 bids was on the basis of a scoring matrix. On 1 May 2013, ACC intimated to the petitioners by telephone its decision to appoint Muse as the preferred bidder. On 10 May 2013, the petitioners submitted late proposals to the respondents: see 6/6 and 6/20-23. The petitioners found upon these documents at St. 13 for the proposition that these late bids show that the respondents have not obtained best consideration. This was followed by a letter to the same effect on 23 May 2013. The petitioners drew to ACC's attention certain perceived errors in the scoring. A further revised scoring matrix was issued on 10 July 2013. The outcome remained the same, with Muse as the preferred bidder.

[10] There was no dispute amongst parties as to the statutory and Treaty provisions which could be relevant in relation to this matter. The respondents are a local authority and are subject to certain statutory restrictions in terms of the disposal of land. Specifically, section 74 of the Local Government etc. (Scotland) Act 1973 ("the 1973 Act") applies. It is in the following terms:

"(1) Subject to Part II of the Town and Country Planning (Scotland) Act 1959 and to subsection (2) below, a local authority may dispose of land held by them in any manner they wish.

(2) Except in accordance with regulations under subsection (2C) below, a local authority shall not dispose of land under subsection (1) above for a consideration less than the best that can reasonably be obtained.

(2A) Subsection (2) does not extend to a disposal where-

(a)  the best consideration that can reasonably be obtained is less than the threshold amount; or

(b)  the difference between that consideration and the proposed consideration is less than the marginal amount.

(2B) The Scottish Ministers shall, by regulations, fix the threshold amount and the marginal amount for the purposes of subsection (2A) above.

(2C) The Scottish Ministers may, by regulations, provide as to the circumstances in which and procedure by which local authorities may, under this section, dispose of land for a consideration less than the best that can reasonably be obtained.

(2D) Those regulations may include provision-

(c)  requiring a local authority proposing to dispose of land at less than the best consideration that can reasonably be obtained to appraise and compare the costs and other disbenefits and the benefits of the proposal;

(d)  requiring the local authority, before deciding in favour of the proposal, to be satisfied that so deciding would be reasonable; and

(e)  setting out factors to which the local authority must have regard when considering whether its decision would be reasonable.

(2E) References in this section to the best consideration that can reasonably be obtained by a local authority are references to that consideration as assessed by a suitably qualified valuer.

(2F) In appointing and instructing a suitably qualified valuer for the purposes of subsection (2E) above, the local authority shall have regard to any guidance provided by the Scottish Ministers on-

(f)   what are suitable qualifications;

(g)  what factors are to be or not to be taken into account by the valuer in assessing the consideration referred to in that subsection.

(2G) Regulations under this section shall be made by statutory instrument which shall be subject to annulment in pursuance of a resolution of the Scottish Parliament.

(2H) Before making such regulations, the Scottish Ministers shall consult such associations of local authorities and such other persons as they think fit."

[11] The Scottish Ministers have made Regulations in exercise of the powers conferred by section 74(2B), (2C) and (2D) of the 1973 Act. Those are the Disposal of Land by Local Authorities (Scotland) Regulations 2010 (SSI 2010/160). Paragraph 2(1) of the 2010 Regulations provides that the threshold amount for the purposes of section 74(2A)(a) of the 1973 Act is £10,000. Paragraph 2(2) of the 2010 Regulations provides that the marginal amount for the purposes of section 74(2A)(b) of the 1973 Act is 25% of the best consideration that can reasonably be obtained. There is, as I understand it, no dispute that these threshold levels are met in this case and nothing more therefore requires to be said about them. More generally, the respondents are as a local authority, subject to a duty to secure best value. That is in terms of section 1 of the Local Government in Scotland Act 2003. Again my understanding of the position of parties is that nothing of significance turns upon that provision.

[12] In addition to the statutory obligations to which the respondents are subject at a domestic level, they are also subject to EU law obligations. Of particular relevance in the present circumstances are the provisions in relation to State aid. Paragraph 1 of Article 107 of the Treaty on the Functioning of the European Union provides:

"Save as otherwise provided in the Treaties, any aid granted by a Member State through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market."

[13] Against the foregoing background, the submission of the petitioners was that the exercise followed by ACC in respect of the disposal of the subjects had been "beset by error and failure, both in procedure and in substance." It was submitted that as a result of an accumulation of errors, the decision by ACC to conclude a contract with Muse was so flawed as to be unlawful and should be reduced. A re‑run of the bidding process was said to be required.

[14] Paragraph 10 of the petition sets out, under six heads, various quantitative errors in the scoring matrix. ACC did not expressly concede these errors, but did intimate a revised scoring matrix, with the errors corrected on 9 July 2013 with an explanation of how the error had occurred. The explanation was that the document had been transposed from an Excel format to a Word format. Notwithstanding that it was submitted by the petitioners that there remained "puzzling discrepancies in the information relating to scoring provided at different stages." Details of the alleged discrepancies were set forth in the petition.

[15] Counsel for the petitioners accepted that, on the basis of the quantitative errors alone, the ranking in the scoring matrix was unaffected. She then presented a number of other arguments which were said to arise as a result of errors in the bid process which she characterized as being off a different magnitude. The first of these was that it was submitted that what was advertised was the sale of the subjects. The stage 1 guidance issued on behalf of ACC made it clear that it was disposal of its property assets that it intended. The stage 2 guidance was in the same terms. The Muse bid was made on the basis of a sale and leaseback with title returning to the respondent after 35 years. It was submitted that this was not what was advertised and that, on a proper construction of them, it was not open to bidders to submit a bid on sale and leaseback terms and that ACC ought not to have changed its position. There having been a change in position, ACC ought to have advised other bidders that a bid submitted on such a basis would be acceptable.

[16] It was submitted on behalf of the petitioners that the phrase "Joint Venture Agreements and partnership agreements" used in both the stage 1 and stage 2 guidance did not, as was submitted by ACC and Muse, make it clear that a sale and leaseback proposal was acceptable. A joint venture was said to describe a relationship between two (or more) entities coming together to carry out an activity. It did not describe the relationship between a landlord and a tenant. It was accepted that in recent years, local authorities have had greater freedom to enter into joint venture and partnership agreements and that such arrangements can take a variety of forms. However, that liberality was not so flexible as to encompass any contract between a local authority and a private sector contractor. In these particular circumstances, having regard to the terms of the issued guidance, it did not extend to an agreement to buy and leaseback the subjects.

[17] Support for this approach was said to be found in an affidavit of Stephen Lewis, a director of the petitioners. Independent expert support for that view was said to be found in the opinion of Mr Nick Ryden, a solicitor with experience of commercial property transactions and a partner in Shepherd & Wedderburn LLP.

[18] The petitioners further contended that it is was not clear that when it submitted its bid Muse believed it was offering a joint venture or partnership agreement. The petitioners had seen only limited information in relation to the Muse bid. The sole document available to the petitioners was part of an Appendix to a report before a committee of ACC on 1 May 2013 relating to the Muse bid. That document contained no reference to a joint venture agreement or to a partnership agreement. It refers to Muse having made a joint offer with an institutional investor and it contained references to profit sharing. That feature did not of itself make the proposal a joint venture agreement. Further, what is described in the bid summary relating to Muse prepared by ACC is a sale and leaseback with some provision for profit sharing. It is not a joint venture.

[19] It was submitted that ACC had not considered entering into a head lease before the process had begun, this proposition being founded upon a statement in the affidavit of Stephen Lewis (at paragraph 21). Having received the bid from Muse, and being satisfied in principle with the sale and leaseback proposal at Stage 1, ACC ought to have recommenced the process by issuing documents making it clear to all prospective bidders that a sale and leaseback proposal would be acceptable. Even if ACC took the view that its stage 1 Guidance had been sufficiently broad in its terms to encompass a sale and leaseback proposal, it had the opportunity at stage 2 without causing any delay in the process, to make it clear to the preferred bidders that it would accept bids submitted on a sale and leaseback basis.

[20] In conclusion, in relation to the bid process, the submission of the petitioners was that ACC having failed to issue accurate documentation at either stage 1 or stage 2, having decided that the Muse bid was acceptable, and having failed to give other bidders the appropriate opportunity to submit bids on the same basis, had created a situation in which it was inevitable that the competing bids could not be compared on an equal footing. Those failures meant that there was procedural unfairness built in to the process. That was said to amount to procedural unfairness and irrationality.

[21] Counsel for the petitioners' second main argument related to the revised version of its bid submitted by the petitioners on 10 May 2013. This bid was prepared on the basis of sale and leaseback. ACC's position in relation to this bid is that it was received after the closing date and was not assessed. It was submitted that even if the respondent was not in a position to accept the petitioners' revised bid because it was late the existence of this bid demonstrated to ACC that a better deal was available than that offered by Muse. Even if ACC considered themselves precluded from accepting a revised bid, they were not bound to conclude a contract with Muse. Receipt of the revised bids ought at least to have given ACC pause to consider its position. Sensible reflection and recognition of its legal obligations would have prompted recognition that the appropriate course was to recommence the procedure.

[22] In response to these arguments, senior counsel for ACC submitted that in relation to alleged errors in the scoring matrix, the discrepancies identified by the petitioners were immaterial and did not affect the overall ranking. In relation to the argument that ACC did not fulfil its duties under section 74(2) of the 1973 Act when it refused to accept the petitioners' revised bid which was submitted after the closing date, it was submitted that having set a closing date, ACC was under no contractual obligation to accept the petitioners' late bid. By letter dated 12 March 2013 the respondents' professional advisers, Ryden, advised the petitioner and other bidders of the closing date and advised that bids received after the closing date would not be accepted by ACC. Further, ACC's refusal to do so did not breach their obligations under section 74(2) of the 1973 Act; Morston Assets Ltd v Edinburgh City Council 2001 S.L.T. 613 where Lord Eassie held: (i) that even accepting that the setting of a closing date did not, as a matter of strict law, prevent a seller from accepting a higher offer made after the closing date, for understandable reasons this was not well regarded and in the present case would involve the respondents departing from the clearly stated basis of the competitive tendering exercise, which would rightly be seen as an act of bad faith, putting in question the reliability of any such future exercise by them (page 616H-J); (ii) that "reasonably obtained" in the context of section 74 was not confined purely to the quantum of consideration but was directed in large measure to the method of obtaining best price, and accepting the late offer would be seen as the best price obtained unreasonably. Accordingly, ACC did not act unlawfully or unreasonably in refusing to accept the petitioners' further bid which was submitted after the closing date.

[23] In relation to the principle argument of the petitioners, it was submitted that ACC had followed proper and lawful procedures at all times. In particular, it was submitted that ACC acted impartially and transparently at all times. The guidance documentation which was issued to the petitioners and to the other bidders contained advice that ACC were not averse to the consideration of Joint Venture Agreements or partnership arrangements for the development of the subjects. The guidance also made it clear that ACC would be under no obligation to proceed with any proposal presented. Stage 2 guidance stressed ACC's wish to ensure that it could demonstrate best value in the sale/redevelopment of the site encompassing not only the best financial option from the development but also the best development solution for the site. Accordingly, the guidance made clear to the petitioners and to the other bidders that the respondents would consider Joint Venture Agreements and partnership agreements, such as a sale and lease back, for the development of the subjects. The Muse offer was submitted at its own financial risk. The financial basis of the stage 2 Muse bid was the same as that of the stage 1 Muse bid. No change occurred in the type or format of the Muse bid from the stage 1 process to the stage 2 process. No question was raised in April 2013 about submitting a bid in a different format, as the stage 2 Muse bid was not in a different format from its original bid. Having regard to these considerations, and bearing in mind this was a commercial arrangement, there was no foundation in the petitioners' arguments.

[24] Senior counsel for Muse adopted the submissions made on behalf of ACC to the effect that ACC followed proper and lawful procedures at all times. In particular, the respondent acted impartially and transparently at all times. The Guidance made clear to the petitioner and to the other bidders that the respondents would consider Joint Venture Agreements and partnership agreements, such as a sale and lease back, for the development of the subjects.

[25] In determining the issues between the parties, I first have regard to the alleged deficiencies in the scoring matrix. As was conceded by counsel for the petitioners these errors were not of themselves of sufficient materiality to impugn the bidding process. They did not affect the overall ranking of bids. It follows that this argument of itself could not justify any of the remedies sought by the petitioners. The only significance of this argument would be as a factor, to be viewed in conjunction with the other arguments advanced by the petitioners, when considering whether or not the bidding process was flawed to such a degree as to justify the granting of the remedies sought by the petitioners.

[26] The next consideration is the nature of the bids evaluated by ACC at the conclusion of the bid process after the closing date and, in particular, whether ACC were entitled to entertain a bid such as that made by Muse on a sale and leaseback basis. In determining this issue, I consider it necessary to have regard to the fact that this was, plainly, a commercial arrangement. ACC sought to dispose of subjects in a manner which was consistent with their statutory duties to obtain best price and value, whilst at the same time fulfilling certain development objectives. The subjects in question were both of significant capital value and in a prominent and important area of the city for which ACC are the responsible local authority. They engaged skilled external agents to assist them in this disposal process. The significance of the disposal of the subjects to ACC is, in my view, self-evident. The petitioners and other bidders in this proposed transaction were also commercial bodies with expertise in the property market who no doubt, also had access to skilled professional advice in the preparation of bids. These factors cannot in my view be ignored when considering construction of the guidance documents which provided the source of information on the terms upon which ACC were prepared to transact in relation to the subjects and upon which bidders were entitled to rely. It is plain from the evidence presented to me that there is scope for differing interpretation of the guidance documents. Persons both appropriately qualified and with experience in the commercial property market entertained different views as to whether or not the words used in the guidance documents were habile to cover an arrangement of the sort proposed by Muse.

[27] I also have to have regard to the nature of the guidance documents. As their name suggests, they were in my view intended to provide assistance or guidance to, in the stage 1 document, potential bidders or, in the stage 2 document, preferred bidders. They were not in my view intended to be regarded as in the nature of, for example, conveyancing writs where exactitude of language might be expected and required. There is also the consideration that by reference to the language of the documents, it is tolerably clear that ACC were actively seeking and encouraging innovative proposals for what was clearly a major commercial development so far as they were concerned. Viewed in this way, I have come to the view that counsel for ACC and Muse were correct in their submission that the language of the documents was sufficiently wide to encompass an arrangement of the sort proposed by Muse.

[28] Having reached that view, there remains the petitioners' argument that ACC failed in their statutory obligations under section 74 of the 1973 Act to obtain best consideration by reason of their refusal to consider the petitioners' revised bid submitted after the closing date. This argument is plainly dependent upon ACC's ability to entertain a late bid. I am persuaded that the reasoning of Lord Eassie in Morston Assets Ltd v City of Edinburgh Council (supra) in relation to this issue is correct. Lord Eassie stated:

"I am prepared, at least for present purposes, to accept that in Scotland the setting of a closing date does not, as a matter of strict law, prevent a seller from accepting a higher offer from a potential purchaser, made after the closing date. But, for what are in my view understandable reasons, the adoption of such a course on the part of a seller is not well regarded, as is indicated by all of the textbooks on conveyancing practice to which I was referred. For example, Cusine and Rennie refer (para 1.36) to a seller adopting such a course as an 'unscrupulous' seller. In the present case, to exceed to the view that the respondents were bound to consider - and thus by implication accept, if appropriate - the facts to offer of 11 August 2000 would involve the respondents departing from the clearly stated basis of the competitive tendering exercise upon which they were engaged. Such a departure would be seen - I think rightly - by those who had participated in the submitting of bids before the published closing date as an act of bad faith on the part of the respondents, putting in question the reliability of any such future exercise upon which the respondents were to embark."

I respectively agree with that reasoning and consider that the same considerations would apply to ACC in the present case. I might simply add that if such a practice were to be routinely sanctioned by the courts, then the degree of certainty which a bidding process is designed to achieve, would be lost. The commercial results of this would be both significant and, in my view, deleterious. I consider that the same reasoning applies in relation to the argument advanced by the petitioners that on receipt of Muses' offer, ACC should have halted the bidding process and started afresh, giving the other bidders the information that a bid of the sort received from Muse would be entertained. In my view, such a course if adopted by ACC would be commercially dangerous and unadvisable, effectively providing other bidders with information from a commercial rival. I also consider that such an approach would be in breach of the confidentially arrangements imposed upon ACC by the guideline documents. In the event, I do not consider that ACC were obliged to entertain the petitioners' late offer. Further, I do not consider that they were under any obligation to halt the bidding process on receipt of Muses' offer. These arguments having been unsuccessful, the petitioners' submissions in relation to failure to obtain best value and state aid fall away.

[29] For all the foregoing reasons, I will sustain the second plea in law for ACC, the third plea in law for Muse and refuse the prayer of the petition.