Identifying ‘public service concessions’

By Ruth McNaught, Solicitor at Harper Macleod LLP 

Earlier this month, the Court of Appeal considered whether certain contracts awarded by the Ministry of Justice (MOJ) should be classified as public service contracts or public service concessions. The Court evaluated: the level of control retained by the MOJ over contract performance; the scope for the contractor to exploit its services in the market; the manner in which the contractor received payment; and the contractor’s exposure to risk (JBW Group Ltd v Ministry of Justice [2012] EWCA Civ 8, judgment 16 January 2012).

Under Article 1(4) of Directive 2004/18, a service concession is the same as a service contract except for the fact that the provision of services is made in return for either the right to exploit the service or the right to exploit the service together with payment. Service concessions are not regulated by the Directives and so are not covered by the Public Contracts Regulations 2006 for England and Wales (the “2006 Regulations”) nor the Public Contracts (Scotland) Regulations 2006. However, EU case law is clear that the award of service concessions that have an EU dimension are subject to the general EU principles of equal treatment, non-discrimination and the obligation of transparency.

In JBW Group (JBW), the MOJ tendered for bailiff services to be provided to Magistrates’ Courts involving the enforcement of warrants for non-payment of fines.

JBW was unsuccessful in its bid for a number of the contracts and raised proceedings alleging breach of the 2006 Regulations. The court dismissed the action on the basis that the contracts at issue were service concession contracts and, as such, not covered by the 2006 Regulations. JBW took the matter to the Court of Appeal.

In considering whether the contracts were correctly classified, the Court of Appeal considered a “typical concession”, as compared with how the MOJ contracts would work in practice.

The contracts were clear that the contractor would carry out its services in accordance with the MOJ’s specifications and that the MOJ could withhold monies if services were not so carried out. It was also apparent that, in practice, the contractor would receive payment for its services from the fine defaulters rather than the MOJ: the contractor would pay monies received from the defaulters into a client account and remit the monies referable to the warrant, retaining a proportion of the monies in respect of the fees due to it.

The Court considered a number of recent judgments of the European Court of Justice and noted that the contracts at issue lacked many of the “principal features of a typical concession”, such as:

• The fact that the contractor had no opportunity to exploit the service to maximise profits – it could only deal with those identified by the MOJ and it would be artificial to describe the defaulters as “customers” of the service.
• The fact that the contractor had no control over the way in which the services were to be provided.
• The fact that a typical concession would involve the authority having an interest in the service being performed for the benefit of third parties, but in this case, the MOJ was relieved of the burden of performing the service itself and, in addition, benefited from the recovery of the unpaid fines.

The Court of Appeal also found that the contracts were not classic service contracts, on the basis that:

• The contractor received no direct payment from the MOJ. Notwithstanding that there was no contractual relationship with the defaulters (as would be the case with a typical “customer”), they would, in reality, pay for the service.
• The contractor’s income would be unpredictable and subordinated to the fines. The contractor would therefore assume the risk of non-recovery of its costs. The Court found that the risk included, but went further than, the risk of being unable to provide a service under a public contract at the agreed price.

The Court of Appeal considered that it would be too simplistic simply to conclude that payment by third parties plus transfer of risk necessarily meant that the arrangement constituted a concession: the MOJ still retained considerable control over, and benefitted from, the delivery of the contract. The Court found, however, that this was inherent in the nature of the service being performed.

The fact that the MOJ wished to retain real control over the exercise of the bailiff’s powers was not enough to outweigh the other factors. As such, the Court concluded that the arrangements should be characterised as a concession.

Ruth is a solicitor at Harper Macleod LLP and can be contacted on ruth.mcnaught@harpermacleod.co.uk