Win Some, Lose Some: New Procurement Litigation Risks
Mark Clough -
Can it be a surprise that the number of public procurement legal challenges has recently increased – and continues to increase dramatically – given the credit-crunch pressures on businesses and the fact that the drivers for a litigation culture are as diverse as EU enforcement policy, resulting in savage new remedies legislation?
The UK Public Contract Regulations 2006, applicable to all public sector procurements (whether for public works, services or supplies contracts), were amended to introduce stringent new remedies rules from 20 December 2009. Similar rules apply in Scotland, England, Wales and Northern Ireland.
But even before the new remedies rules provided that a contract which has not been correctly advertised may be set aside for the future (declared ineffective prospectively), the recent focus of the European Court on the principles of transparency and equal treatment has wreaked havoc in numerous procurement procedures that did not live up to the higher standards required, in the context of the criteria used for the award of a contract (on the basis of the most economically advantageous tender).
A now familiar line of European court cases culminating in the Lianakis and ATI cases are relied upon by unsuccessful tenderers to persuade the UK courts to injunct the award of the contract, leaving the Contracting Authority to decide whether or not to re-run the process. In England and Wales, the Lettings case and in Northern Ireland, the McLaughlin case, where both an awarded contract and a framework agreement (worth £850 million) were set aside, are significant examples of the devastating effects of the procurement remedies. In both cases the contracting authority was found to have infringed the fundamental principle of EU law of transparency, by failing to disclose the criteria, sub-criteria or the weightings applied to these to assess the bids for the purpose of choosing the most economically advantageous tender.
Before cases like Lettings and McLaughlin, contracting authorities believed they had much greater discretion regarding their choice of criteria, whether and when to introduce new criteria or sub-criteria and what weighting or marks to award. As a result of the successful cases brought to court and the many more settled when legal proceedings had been threatened, contracting authorities have accepted that they need to improve their public procurement law compliance procedures. This in turn has required much greater review and advice from in-house and external lawyers.
If a contract has not been signed, the court has the power to order the contract award decision to be set aside and the procurement process terminated. Until the new remedies rules came into force on 20 December 2009, the only remedy available to an unsuccessful bidder, once the contract awarded had been signed, was damages. Under the new remedies rules, the court has the power to give a declaration of ineffectiveness, rendering the contract unenforceable for the future.
In addition, the new UK regulations implementing the amendments to the EU Remedies Directives require the contracting authority to state the reasons, the score and the relative characteristics and advantages of the winning bid in the award decision notice. Failure to do so means that the award decision notice is invalid and does not start the 10-day standstill period. The standstill period will only start when the contracting authority has provided all the information required in what used to be an “accelerated debrief”.
At the same time, there is no longer any need to obtain an injunction from the court to prevent the awarded contract being entered into and to terminate the procedure. An automatic injunction will arise once the legal proceedings challenging the contract award have been served on the contracting authority. It is the contracting authority which then must apply to court to set aside the automatic injunction, if it can show on the interlocutory injunction legal principles that no injunction is justified.
The new remedy of ineffectiveness is available only in certain narrowly defined circumstances: first, when a procurement contract is not advertised in the EU Official Journal (when required to be); second, when the new rules on automatic injunctions and award decision notices are infringed and there is also a breach of the substantive rules applying to public procurement, such as the general principles of transparency and equal treatment; and third, in certain circumstances, when a secondary competition contract is awarded under a Framework Agreement (or an equivalent situation in respect of dynamic purchasing) without following the optional 10-day standstill period. It must be noted that, under the UK regulations, the new remedies rules only apply to public procurement procedures begun after 20 December 2009. However, it is not certain that the European Court of Justice will agree that this is the correct interpretation of the Remedies Directive, if it is asked in a reference from a national court.
Drivers
- The introduction of a legally binding standstill period of 10 days from the award of a contract, before the contract may be signed (the so-called Alcatel period), allowing unsuccessful bidders time to reflect on the lawfulness of the award decision and to bring a legal challenge if they are advised that they have a case against the contracting authority for infringement of the public procurement regulations.
- Government investment in high-value contracts through PPP and PFI projects, increasing the stakes for competing bidders because of higher bid costs – many unsuccessful bidders now demand payment of their bid costs by the contracting authority, since these can be several million pounds.
- A central and local government-level culture that often attaches less importance to public procurement law compliance than is desirable.
- Legislative reaction in the form of the new EU Remedies Directive which amends the existing Remedies Directives in fundamental ways.
- The additional remedies available once a contract is signed for procurement processes started after 20 December 2009. A contract may now be set aside after signature, and at any subsquent stage during the lifetime of the contract, by means of a declaration of ineffectiveness when a contract has not been advertised in the EU Official Journal as required under EU procurement law.
- A shift in the balance of power in favour of the unsuccessful bidder through the introduction of an “automatic injunction” once formal legal proceedings (claim form) are served on a contracting authority, in respect of procurement processes started after 20 December 2009.
Consequences for Contracting Authorities, Successful Bidders, Sponsors and Funders and Unsuccessful Bidders
- There are going to be more legal challenges and more court cases, unless the contracting authorities improve their public procurement law compliance.
- Increasingly, contracting authorities, successful bidders, their sponsors and funders will turn to due diligence checks, with a view to minimising the risk that a contract which has been awarded and acted upon is not set aside as “ineffective”.
- Greater attention will be needed when making changes to contracts during their lifetime, since EU case law requires a new contract to be awarded and, therefore, a new procedure to be commenced when changes are significant. Failure to advertise in these circumstances will expose the contract to being declared ineffective and set aside.
- The parties to an awarded contract will need to consider potential termination provisions to cover the position of the parties and funders in the event that the contract is set aside.
- The successful bidder, sponsor or funders may wish to oblige the contracting authority to allow it to approve the contract award notice, and for the necessary “debrief” information to be included with that notice, so as to ensure the start of the 10-day standstill period.
- The successful bidder or sponsor or funders may wish to oblige the contracting authority to apply to court to set aside any automatic injunction that arises on service of legal proceedings by an unsuccessful bidder.
- All procurement procedures begun before 20 December 2009 will remain subject to the previous remedies system, but there may by hybrid challenges – for example, when a change is made after 20 December 2009 to a contract awarded before that date, in such a way as to trigger an application for a declaration of ineffectiveness.
In conclusion: in case there was any expectation that the legal rights and obligations of participants in public procurement processes were becoming clearer, the recent case of Varney has put that in doubt. In this case, a claim by an unsuccessful bidder relying on infringements of the transparency principle was rejected. Mr Justice Julian Flaux has held that, on the facts, the failure of the contracting authority to disclose sub-criteria and various weightings was compatible with EU public procurement law since that failure did not and could not have affected the claimant’s bid. The case has clearly been decided on its specific facts, and if not appealed successfully, may provide a timely reminder for all claimants.