The capacity of an unsuccessful tenderer to challenge a contract award which breaches public procurement rules will be strengthened on 20th December with the coming into force of new Regulations implementing an EU Directive on Remedies. The new Regulations introduce a declaration of “Ineffectiveness” as a remedy for certain breaches of procurement rules and provide for a harmonised standstill period between the decision on a contract award and the contract award itself to allow the decision to be challenged. This Note summarises the effect of the new Regulations and refers to a recent case in the Technology and Construction Court relating to court challenges.

Unsuccessful tenderers have had a raw deal in terms of remedies where they have been unsuccessful in winning a contract in circumstances where there has been a breach of the public procurement rules. Once the contract has been placed with a successful bidder, the only remedy available to the tenderer in the English courts (save in relation to framework contracts) has until now been damages.

On 20 December 2009 this position will be changed with the introduction of the Public Contracts (Amendment) Regulations 2009 (SI 2009 No 2992, “the 2009 Regulations”) which amend the Public Contracts Regulations 2006 (“the 2006 Regulations”) to give effect to amendments made by the new European Remedies Directive 2007/66/EC (“the Remedies Directive”).

The principal new remedy is that of a “declaration of ineffectiveness”. In broad terms, where a contract has been entered into (a) without being properly advertised, or (b) without respecting the standstill provisions (thereby depriving a person the opportunity of challenge) or (c) without respecting the rules on mini-competition under framework agreements or dynamic purchasing agreements, a court must make such a declaration. In addition a court will be required to fine the contracting authority in such circumstances and may award damages to an economic operator who has suffered consequential loss. Where a contract has not yet been entered into, existing remedies (such as setting aside, ordering amendment or the award of damages) are preserved.

The declaration operates prospectively but not retrospectively to invalidate the contract award. In deciding what orders to make, the court must not exercise its powers in any way which is inconsistent with provisions which the parties have agreed in advance for the purpose of regulating their mutual rights and obligations in the event of a declaration being made, unless and to the extent that the court considers that those provisions are an attempt to avoid ineffectiveness “by the back-door”.

A court will have a discretion not to make such a declaration where ‘overriding reasons relating to a general interest require that the effects of the contract should be maintained’. Economic interests in the effectiveness of the contract may be considered as overriding reasons ‘if in exceptional circumstances ineffectiveness would lead to disproportionate consequences’.

There are non-extendable time limits for applying for a declaration of ineffectiveness: 30 days where a contract award has been published which justifies the decision not to hold a tender or where the tenderers have been informed of the conclusion of the contract; otherwise 6 months. The commencement of proceedings to challenge a decision to award a contract will automatically require the contracting authority not to enter into the contract.

The second main change introduced by the Remedies Directive and implemented by the new Regulations is the harmonisation of “standstill” periods. The 2006 Regulations already provided for a 10 day standstill period between the date of dispatch of the contract award notice and entry into the contract following the ECJ’s decision in Alcatel. The 2009 Regulations make further provision for standstill periods: 10 days if the decision on contract award is sent by fax or e-mail; 15 days if sent by other means. An unsuccessful tenderer is entitled to be informed of the reasons for the decision.
Procedural issues relating to challenges to contract awards were considered during two interlocutory hearings in the important case of Amaryllis Ltd V HM Treasury earlier this year; [2009] EWHC 962 (May 2009) and [2009] EWHC 1666 (July 2009). In that case, breaches were alleged to have occurred in connection with the evaluation of tenders from framework contractors for the supply, delivery and installation of all types of furniture for use by the UK Public Sector Bodies. Damages of £11 million were claimed.
The first hearing involved an application to strike out the challenge for alleged non-compliance with notification and time limit provisions in the 2006 Regulations. Although the Authority had decided in March 2008 that the claimant had failed in the pre-qualification stage for an important lot within the range of potential contracts, the Judge decided that it had failed to provide a clear explanation of the reasons sufficient to enable the claimant to consider a challenge. It was not until July that the Authority had explained the reason why the claimant had been unsuccessful (in particular because of alleged failings in its environmental management). In these circumstances, Mr Justice Coulson decided that:
1. The notice of intention to challenge was compliant; it was sufficient in the light of the limited explanation of the reasons given at that time by the Authority (despite repeated requests);
2. The grounds for bringing the proceedings first arose when the specific breach of the Regulations actually occurred. The relevant period therefore commenced in this case when the decision to exclude the tenderer was made; it was not a case where the breach complained of defective tender documents where time might have run from the date of issue of such documents.
He therefore held that proceedings were commenced both promptly (given the Authority’s failure to give timely reasons) and in any event within the statutory time limit.
The second hearing concerned the issue of how to protect commercial confidentiality whilst ensuring fair process in the respective challenges. In Amaryllis, the essential complaint was that the Authority had an unstated and unfair preference for manufacturers rather than suppliers. A fair trial required a comparison of the Claimant’s Pre Qualification Questionnaire (PQQ) with the Defendant’s evaluation of the PQQs of other tenderers and those PQQs themselves. The Judge had to consider the applicable principles of Public Interest Immunity (PII) which raised the need to balance the public interest in non-disclosure with the public interest in the proper administration of justice. He decided on the facts that PII was not justified for the public authority’s documents. In relation to the commercial interests of the other tenderers he considered that this could be resolved by a mixture of redactions and substitutions. This was the same solution as that adopted by Mr Justice McCombe, in the earlier case of Lettings [2008] EWHC 1009 (at paragraph 18), who had added a step requiring the lawyers for each party to assess materiality on a confidential basis before any issue over disclosure would be addressed.

It seems safe to conclude that the various considerations set out in the 2009 Regulations bearing on the exercise of the new remedy and the complexity of the detailed provisions relating to time limits for commencing proceedings raise the prospect of interesting court challenges in the future.

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