Legal Briefing

Fast-track public procurement remedies for Scottish business?

The In-House Lawyer Logo

Scotland | 04 June 2011

Can it be a surprise that the number of public procurement challenges has recently increased, and continues to increase dramatically, resulting in new savage remedies legislation? Especially given the pressures on business of the global financial crisis and when the drivers for a litigation culture are as diverse as the rising costs of bidding and EU enforcement policy.

The Public Contracts (Scotland) Regulations 2006, applicable to all public sector procurements, whether for public works, services or supply contracts, were amended to introduce new stringent remedies rules on 20 December 2009. Similar rules apply in England, Wales and Northern Ireland. It has taken some time for the impact of these new remedies to be seen because they have only applied to procurement processes that began on or after 20 December 2009.

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 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 EMM G Lianakis & ors v Dimos Alexandroupolis & ors [2008] and ATI EAC Srl e Viaggi di Maio Snc & ors [2005] may be relied on by unsuccessful tenderers to persuade the UK courts to stop the award of the contract, leaving the contracting authority to decide whether or not to re-run the process. Cases in Scotland such as Lightways (Contractors) Ltd v North Ayrshire Council [2008] illustrate the importance of the principles of equal treatment and transparency. In England and Wales, Letting International v London Borough of Newham [2008] and in Northern Ireland McLaughlin and Harvey Ltd v Department of Finance and Personnel (No.2) [2008], where both an awarded contract and a framework agreement (worth £850m) were set aside, are significant examples of the devastating effects. If a contracting authority is found to have infringed the fundamental principle in 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, a court will often have little choice but to stop the procurement process, or to award damages if the contract has been signed.

Before cases like these, 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 both by contracting authorities and bidders. The recent Varney v Hertfordshire County Council [2010] demonstrates that the courts will always examine whether there is any chance that an unsuccessful bidder would be successful if the procurement process is run again, but that does not stop the courts in appropriate cases from taking the drastic measure of overturning an award decision.

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 amended Scottish regulations implementing the new EU Remedies Directive require the contracting authority to state the reasons, the score and the relative characteristics and advantages of the winning bidder in the award decision notice. Failure to do so means that the award decision notice is invalid and does not start the ten-day stand still period. The stand still period will only start when the contracting authority has provided all the information required in what used to be called an ‘accelerated debrief’.

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. Secondly, when the new rules on automatic interdict or suspension 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. Thirdly, 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 ten-day stand still period. It must be noted that, under the new regulations, the new remedies rules only apply to public procurement proceedings began after 20 December 2009. However, it is not certain that the European courts will agree this is the correct interpretation of the Remedies Directive, if they are asked on a reference from a national court.

At the same time, there is no longer any need to obtain an interim interdict from the court to prevent the awarded contract being entered into and to terminate the procedure. An automatic suspension 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 the court to set aside the automatic interdict, if it can show that no suspension is justified. The court is entitled to take into account the interests of all relevant parties and the public interest in reaching its decision. In particular, it will consider what harm the unsuccessful bidder will suffer if the interdict is recalled, as well as the position of the contracting authority and successful bidder, if the automatic interdict were continued.

Brodies has been involved in the first automatic interdict case in Scotland, in the Livingston Sheriff Court. Here, in this unreported case, the Sheriff decided to recall the automatic suspension of the procurement procedure on the basis that there was not a strong prima facie case and that continuation of the ‘automatic interim interdict’ would have harmed the interests of the public and the contracting authority. This was because if the authority had been required to retender the construction of council houses it was likely that central government grant funding would be lost. This outweighed the harm to the unsuccessful bidder. However, this case shows that where there is a compelling prima facie case and that the balance of convenience favours the unsuccessful bidder, the court should be persuaded to continue the automatic interim interdict until the substantive hearing.

Brodies has also been involved in the third automatic injunction case in England where it represented a Scottish-based international charity. In the three cases decided in England and Wales in the context of applications by contracting authorities to recall the automatic suspension of procurement award procedures arising from the automatic interim interdict or injunction rules, the English High Court again looked closely at the merits of the legal challenge and concluded in all cases that the claimants were unlikely to succeed at the substantive hearing (even though they might have an arguable case). The main reason in each case for recalling the automatic suspension was that the balance of convenience favoured the award of the contract. Even where damages were not an adequate remedy in one of the cases (Indigo Services (UK) Ltd v The Colchester Institute Corporation [2010]), it was still held to be in the public interest to continue the procurement process. In the Scottish case, which concerned a de-mining contract in Cambodia where land mines still kill and maim many people, the court was influenced by the need for the Department for International Development (DFID) to enter into a new contract in a short period of time because of the delays and extensions of the original contract that DFID had allowed. In this case the two most weighty complaints concerned the question whether mine action funding could be used to fund activities supplemental and clearly linked to mine action that contribute to realising development benefits for mine-affected communities in Cambodia and the second the short amount of time given to amend the tenders to take into account an increase in budget from £2.5m to £3.5m. On the first issue, the claimants had not made any complaint at the time so the court considered that they should have been able to deal with the change in budget. On the second issue, while the court accepted there was no explanation as to how much of the budget could be spent on the related development work, it found that this was the same for all tenderers and there was no specific limit. Somewhat unusually, the court said this was lawful, rather than a breach of the transparency principle.

Although the cases that have been brought so far in Scotland and England tend to indicate that the courts are going to apply a strict approach when asked to recall automatic suspension or the automatic interim interdict, that does not mean that the process is not of great value to unsuccessful bidders who are able, at a very low cost and with little effort, to stop a public procurement process so that they can review their position. It can be expected that in future there will be instances where there are compelling prima facie cases and the balance of convenience favours the unsuccessful bidder just as much as there are cases where the interests of the contracting authority or the general public should prevail.

WHAT ARE THE DRIVERS FOR PUBLIC PROCUREMENT LITIGATION IN SCOTLAND?

  • The introduction of a legally binding stand still period of ten days from the award of a contract, before the contract may be signed allows 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 millions of pounds.
  • 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 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 interdict’ once formal legal proceedings are served on a contracting authority in respect of procurement processes started after 20 December 2009.

WHAT DOES THIS MEAN FOR CONTRACTING AUTHORITIES, SUCCESSFUL BIDDERS, SPONSORS AND FUNDERS AND UNSUCCESSFUL BIDDERS?

  • There are going to be more legal challenges and more court cases – contracting authorities will need to continue to 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 that 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 the contract is set aside.
  • The successful bidder or sponsor or funders may seek to oblige the contracting authority to allow them to approve the contract award notice and the necessary ‘debrief’ information to be included with that notice, so as to ensure that the ten-day stand still period starts.
  • The successful bidder or sponsor or funders may seek to oblige the contracting authority to apply to court to set aside any automatic injunction or interdict 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 be 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, there are new opportunities for unsuccessful bidders (and those who finance or sponsor them) to bring legal challenges with less financial exposure and greater chance of stopping a procurement process that it is considered has been wrongly decided.