Is the tendering process being undermined by increased litigation from losing bidders?

Thursday, January 14, 2010

In recent months, the examples of Bristol's Hengrove Park leisure centre and the Greater Manchester waste PFI have shown that incidents of legal action brought by losing bidders are on the increase. Allied to this is the implementation of the new EU Remedies Directive, which could make it easier for contract awards to be challenged. In this edition's Digest, The PPP Journal investigates the challenges facing future PFI and PPP deals

---

John Tizard, Senior Director, Centre for Public Service Partnerships

The short answer to the question above is – 'No'. However, if there is increased recourse to legal action by bidders, this raises some fundamental questions about the competency and approach of both public sector procurers and the bidders.

Those engaged in public procurements should not expose themselves to the risk of legal challenge from any quarter. This is not a call for a totally risk averse approach, which could strangle progress and innovation, but a call to better manage the risk of challenge.

It is essential to ensure that due process is followed in accordance with the law. Furthermore, there is a need to ensure that the tender process is robust and that specifications issued are consistent throughout the tendering and evaluation process, up to and beyond letting contracts.

There is much to be gained from early dialogue with potential bidders pre-procurement – on a fair and equitable basis, of course – to ensure a good understanding of what might be possible, what the bidders' commercial considerations would be and to test the serious intent of bidders. There is equally a need to spend time and effort on the specification of the outcomes and outputs being sought, including full engagement of end-users and other interested stakeholders, in order to minimise the risk that these will have to change at some stage in the process.

If companies have been eliminated before such changes are made, or if contracts are let and then there are significant changes, there may be the foundation for a challenge. There is a need to be transparent about the tendering, evaluation and rewarding processes and to stick to these so that no one can shout 'foul' post-contract award. Indeed, all parties must be honest and transparent and work to create mutual trust.

If unsuccessful bidders are feeling the need to make legal challenges post-contract, this will be for a number of key reasons. They feel able to bear the negative reputation or that it is worth risking reputation with the client community to demonstrate to funders and shareholders that they will not be rolled over, especially in current markets. And, of course, funders may be more supportive of challenges than contractors.

It may also be that they are unhappy with bearing the not inconsiderable pecuniary and opportunity costs of unsuccessful bids and the pain is greater if there appears to be a flaw in the procurement process. Or it could be that these companies know that they can play in larger international markets and do not have to dance to the tune of nationally-based public sector clients.

Whatever the reasons for an increase in litigation, it will inevitably slow the pace of market and the application of public procurement; it will make the public sector think twice, given the costs involved; and it will sour relations in areas where competition is sought as a means to partnership.

Whilst the current position may not be undermining the market, if it were to continue and the use of legal challenge was to grow, the 'no' with which opened this commentary could turn to a 'yes', which is neither in the public sector clients' nor the bidders' interests.

---

Jonathan Davey, Chairman, Procurement Lawyers' Association

Litigation arising from procurement is undoubtedly on the increase, fuelled by a number of factors including the recession and credit crunch, increasing bid costs and improved remedies, but also by the fact that there seems less concern on the part of potential claimants that they will ultimately suffer reputational risk in the market if they pursue such challenges.

At the same time, there is greater awareness of procurement law and its requirements, both on the part of public authorities, who are striving to comply, and from bidders, who are more aware than ever of their rights of redress and to require transparency as to how their bids have been assessed and evaluated. Some of this litigation may also be due to experiences of bidders who come from other member states where such challenges historically have been more commonplace than in the UK.

The procurement rules remain poorly suited to the delivery of the most complex and innovative projects, despite recent changes. They reflect a position that has much more to do with suspicion about misuse of the rules than about facilitating project delivery. Getting the balance right between fairness and transparency of process on the one hand, and speedy and efficient contract award processes, on the other, is a difficult task to achieve. Given the increased risk of litigation, all parties are giving much more attention to demonstrating compliance with the rules and fairness at the outset. That, perhaps, is no bad thing.

---

Janet Lewis, Associate, Nabarro LLP

Bidders in public procurement processes are taking a greater interest in deselection decisions. This is evident through more frequent requests for feedback from deselected bidders, requests for more detailed reasons, and increased formal challenges to procurement decisions.

The principal grounds for challenge include:
• Lack of transparency on evaluation criteria – or changing criteria during the process;
• Varying a contract after award – thereby contravening the principles of the 'Pressetext' ruling; and
• Failure to advertise at all – including, for example, failure to advertise development agreements that are no longer outside the scope of the procurement rules following the 'Roanne' judgment.

Are these increased levels of challenge undermining tendering processes?

Or are they making procurements more robust? Certainly, authorities are thinking more about procurement decisions, including whether to advertise, what procurement procedure to use, transparency of evaluation processes, and giving full and meaningful feedback.

On the downside, there has been a consolidation of the market in certain sectors (notably schools and waste) – perhaps due to procurement challenges, but more likely due to high bid costs. This inevitably results in less competition. In reality, the result may be simply a reduction in the number of bidders involved in the early stages of a process and, since there is little true competitive leverage at these stages in any event, maybe this isn't such a bad thing – provided markets don't over consolidate resulting in a lack of suitable bidders, of course.

The other negative effect is a potential stifling of innovation. It is not so much that bidders are reluctant to put forward innovative solutions, but rather authorities finding themselves either unable to entertain innovation, due to overly restrictive tendering documents, or unable to allot appropriate scores to reward innovation, due to inflexible evaluation criteria.

Tendering processes, perhaps, are at risk, but only if authorities and bidders fail to respond to the new challenges. As long as procurements are well planned, appropriate market soundings are taken in advance, and flexibility is built into the evaluation process, bidders and authorities alike should see the benefits of more robust and transparent processes – which is, after all, the aim of procurement rules.

---

Rob Hann, legal director, Local Partnerships

It is not so much the tendering process that is in danger of being undermined – rather the certainty that hitherto went with being awarded a contract by a procuring authority following a usually lengthy and expensive competition. This affects not just procuring authorities but also all contractors who can now never be completely sure that they have shaken off their nearest rivals even after seemingly being awarded a contract. The range of remedies potentially available to such deselected bidders will also shortly be extended to include a new remedy of ineffectiveness that allows the court to set aside contracts in certain circumstances where serious proc-edural irregularity is uncovered. Fines, compensation payments and other remedies are also available.

At the same time, ECJ case law seems to be expanding the boundaries of procurement law to reach into areas that hitherto would have not been regarded as subject to public competition requirements. This means procurement law and its inherent risks have to be considered at a very early stage. If the decision to go to the market is taken, the process chosen needs to be carefully developed in advance to anticipate the potential for aggrieved bidders to attack the process (or some part of it) at a later stage. Such attention to detail should help the public body to then get on with the job of appointing the most suitable bidder selected, following a transparent and fair process. This approach should also give comfort to bidders during the process so they remain in the hunt and come away satisfied they have had a fair hearing if they are ultimately unsuccessful.

Public bodies need to think through these risks and issues and approach procurement positively, with the best chance of delivering an efficient and effective competition.

---

Catherine Wolfenden, litigation associate, Osborne Clarke

Increased litigation, and threatened litigation, in the PFI/PPP market-place is indicative of underlying problems that exist in the process. If anything, litigation and case law from the UK and Europe should be a driver for more robust tendering processes as public authorities work to ensure that tender processes are compliant with the law.

Arguably the key issues at this time, and the drivers for increased litigation, are the excessive cost of bidding and the complexity of the process. Until public authorities can work out a way of curbing the extensive bid costs of large-scale procurements and making the process more streamlined, the risk of challenge will remain. The cost of coming second is too much for bidders to take, especially in a still fragile economic climate.

If the ECJ follows the recent opinions of Advocate General Juliane Kokott in Uniplex and Commission vs. Ireland, the position of aggrieved bidders will be further enhanced. The new Remedies Directive coming into force shortly also gives bidders more powers to challenge.

While litigation is disruptive for all concerned, it is worth remembering that people only challenge if they are unhappy, not only with the outcome, but with the process itself. If a procurement is well run, fair, clean and efficient, then most bidders will be satisfied and content with walking away without challenge. The PFI/PPP model has proven value for both authorities and tenderers, and running robust and fair processes is the key to maintaining a strong sector.

---

Neil Harrison, Associate, Dickinson Dees LLP

Contracting authorities have recently seen an increase in court proceedings brought by losing bidders, and signs are that this is set to continue. The courts nowadays often provide greater latitude to bidders on time limits for bringing proceedings and impose increased obligations on contracting authorities to provide significant and detailed feedback to bidders. They have also been more willing to intervene in the overall conduct of the procurement process.

The introduction of the Remedies Directive into UK law in December is likely to accelerate this trend. Under the new law, the launch of a claim by a failed bidder will now automatically prevent a public authority entering into the contract pending the outcome of court proceedings. Previously, a failed bidder had to seek a court injunction to obtain suspension. But from December, the onus would be on the contracting authority to seek court intervention once proceedings have been served, or the procurement process is automatically suspended. In addition, there is also an entirely new remedy called 'ineffectiveness', which, for the first time, will enable contracts to be effectively cancelled by the courts, even after they have been signed.

This will not necessarily place increased strain on the overall tendering regime, but with this new power for losing bidders, contracting authorities need to be more careful than ever to follow correct procedure from start to finish, in the knowledge that they are more likely to receive a claim if they are in breach. In particular, they will need to ensure that their evaluation and scoring methodologies are compliant, the requisite notices have been published in the OJEU, the relevant debrief information has been provided to all bidders, and that there are no material changes to the scope of the contract before or after contract award. If their tendering processes become fully compliant and efficient, the volume of claims and threatened claims will decrease.

To see further debate on this key issue, or to have your say, please visit www.projectdatafile.co.uk.

---

Helen Randal, Partner and Head of Public Sector Commercial Department and Lucy Doran, Solicitor, Trowers and Hamlins LLP

With bid costs escalating since the introduction of the competitive dialogue and instances of bidders having narrowly missed out on major projects, it comes as no surprise that in recent months we are seeing more procurement challenges in the UK and aggrieved bidders trying to recoup their losses. This is exacerbated by contracting authorities having to disclose more detailed information on evaluation methodology to bidders. In the current climate, safeguarding against a procure-ment challenge is becoming a top priority.

Earlier in 2009, Bristol City Council settled with DC Leisure Management for an estimated £800,000 over the award to another bidder of a leisure contract. Currently looming is the legal battle between Greater Manchester Waste Disposal Authority and Sita UK (the unsuccessful bidder) over allegations that there had been changes to the project scope. Challenges are also being brought by bidders who have suffered from a cancelled procurement. This was demonstrated by Laing O'Rourke's lodging a claim in the High Court for abortive costs on bidding for Leicester Hospital PFI.

The key message for contracting authorities and contractors is to manage risk in the procurement process through practical steps such as procurement audits to ensure that there is no creep to the scope of the advertised project. With the potential for awarded contracts to be set aside under the Remedies Directive, a successful challenge is now as much a concern for a contractor as it is for the contracting authority.