EXCLUSIVE: Councils may find themselves in the deep end on procurement

Monday, August 03, 2009

Following the case of an unsuccessful PFI bidder winning £800,000 compensation from Bristol City Council, it seems unsuccessful bidders are more prepared to challenge contract awards decisions. Lawyer Graeme Young looks at the implications

Between now and the end of the year public sector bodies need to consider how they will comply with new EU procurement rules on public sector contracting.

The Office of Government Commerce (OGC) has just closed its consultation on the detailed amendments to the Public Contracts Regulations 2006 (the regulations) required to implement in England, Wales and Northern Ireland the EU's Remedies Directive (Directive 2007/66/EC).

The amendments introduce changes to the current 10-day standstill period between contract award and signature, but more importantly they make it possible for the courts to terminate contracts awarded in breach of the regulations and to impose financial penalties on public bodies found to be in breach of the rules. The Scottish Government is consulting separately on amendments to the Public Contracts (Scotland) Regulations 2006.

Until a few years ago the legal remedies available to aggrieved bidders in the UK were generally considered to be ineffective. This was recognised in the preparatory work undertaken for the Remedies Directive, which reported that a review of cases brought between 2000 and 2004 showed the UK had the lowest number of cases in the then 15 EU member states. For example, the two reported cases in the UK within the period compared with 1,092 cases in Germany (and represented 0.02 per cent of invitations to tender compared to an EU-15 average of around 2.5 per cent).

The risk profile for failing to comply with the EU tendering rules has changed dramatically over the last two years. Unsuccessful bidders are more prepared to challenge contract award decisions. Increasing bid costs and tighter markets have helped to drive what some see as a cultural change in the public procurement markets. But the changing culture is also driven by a number of important judgments, such as the judgment of the High Court in the Lettings International v London Borough of Newham case in July last year, which emphasised the need to transparency in relation to contract award criteria and evaluation.

The risk profile is set to increase further with the amendments to the current Regulations, which will apply to all procurement commenced after 20 December this year.

The two principal changes to be introduced for procurements commencing after 20 December this year are:
1. Contracting authorities will immediately have to suspend contract award processes if legal proceedings are issued against them (unsuccessful bidders will no longer have to apply for an interim order – injunction - suspending the contract award process); and
2. The courts will have the power to set aside (declare "ineffective") contracts and impose financial penalties on contracting authorities for failing to comply with the Regulations.

At present, the regulations do not permit the courts to set aside a contract once it has been entered into with the successful bidder. Currently, post contract-award the only remedy available is an action for damages. For procurements initiated after 20 December this year failure to comply with the Regulations risks contracts being declared to be "ineffective". The consequences of this will depend on the individual contract terms and conditions but will terminate all future contractual obligations and preserve any obligations already fulfilled (i.e. ineffectiveness will be 'prospective' as opposed to 'retrospective'). In addition, or as an alternative to any ruling on ineffectiveness, the courts will have to consider imposing financial penalties on the contracting authority. The threat of having a contract set aside and being fined by the courts will no doubt focus public sector minds on compliance with the regulations.

A number of important technical issues on the implementation of the Remedies Directive remain to be decided (including the transitional arrangements and the treatment of "live" call-off contracts awarded under terminated framework agreements). In our response to the OGC consultation we have commented on these technical issues. Perhaps more importantly, we have also highlighted a number of concerns in relation to the detail of the draft amendments to the current regulations. As ever, there is devil in the detail, particularly as regards the standstill period where the proposed amendments to the regulations appear to "gold plate" the requirements of the Remedies Directive.

The OGC will now consider the responses to its consultation and prepare the final amendments to the regulations, to be effective from 20 December this year. The changes are likely to have a significant impact on public sector procurement in the UK. Public sector organisations will need to review their procurement practices and procedures to ensure that they are compliant with the amended rules and the developing case-law.

Graeme Young is senior associate, EU & competition, at Dundas & Wilson LLP