Procurement news blog

The Court of Appeal has just handed down its judgment in the case of Faraday Development Ltd v West Berkshire Council. This judgment is one of the most important developments in procurement law this year. As it concerned a development agreement, it is especially interesting to those working in the Projects and Construction sectors. However, it also involved a Declaration of Ineffectiveness and the drafting of a VEAT notice, meaning that its relevance extends to all sectors.

The case concerned a development agreement to develop land in Newbury, Berkshire. The contracting authority, West Berkshire Council, entered into a contract with developer St Modwen. The land was parcelled into leases, with the agreement giving St Modwen the option to activate or “draw down” a lease at a future point. Crucially, there was no obligation on St Modwen to take a lease or to start the development works. However, should St Modwen decide to take a lease, an obligation to develop would crystallise at that point and become binding. The arrangement was structured in this way to allow St Modwen the flexibility to decide whether to develop the land in the context of the well-known financial and commercial challenges within the sector.

The Council believed, given that (at the point the agreement was signed) there was no obligation on St Modwen to develop the land or even to take the lease, this contract could not amount to a public works contract as defined in the procurement regulations. Believing itself to be justified in this assessment it published a voluntary ex ante transparency (better known as VEAT) notice in August 2015, explaining that it was entering into the contract, that no OJEU process was required as this was a wholly exempt land transaction with no obligation to develop. The contract was entered into in September 2015, and the claimant Faraday brought a claim, arguing that this was an illegal direct award that ought to have been the subject of a full procurement process under the regulations.

The High Court heard the case at first instance, and, applying the decisions in Helmut Mueller and Midlands Cooperative, decided in the Council’s favour. As there was no obligation on St Modwen to develop, said the High Court, this could not be a contract for public works and therefore there could be no obligation to run a formal procurement process. However, the High Court did give permission for Faraday to appeal, noting that this area of procurement law was one where there was an interest in testing the principles established so far in case law around when a development agreement will (and will not) be caught by the procurement rules.

The Court of Appeal last week overturned that High Court judgment and found in favour of Faraday. It decided that, while it was true that, at the point the development agreement was entered into, there was no obligation on St Modwen to start work, nonetheless, should St Modwen take the option of a lease, the obligation to develop would be triggered. This option was entirely out of the Council’s control, meaning that at some point “down the line” there could potentially be a situation where a developer was developing land for the Council. In other words, the development agreement as signed could lead to a scenario where a public works contract came into being which had not been formally procured in accordance with the regulations.

The Council argued that even if this were the case, it had published a VEAT notice in good faith. This meant, said the Council, that the necessary transparency concerning the arrangement had been achieved as the market had been put on notice of it. The Court however (having looked at the transparency standards set out in the Fastweb case) decided that the VEAT notice was drafted in a way which did not give sufficient detail about the arrangement as a whole in order that other developers could, on reading it, understand the full scope of the transaction. The VEAT notice described the deal as an exempt land transaction without obligations and did not go into detail about the obligation to develop should the lease be drawn down. In reality, the deal was more complex than merely a simple land transaction; the Court held that the VEAT notice fell short of the necessary “clear and unequivocal disclosure”.

Having concluded that the development agreement was, when looked at in the round, a public works contract and that it had been awarded illegally without the necessary procurement process, the court was obliged to grant a Declaration of Ineffectiveness, overturning the contract from the date of the declaration. It was also required to impose a fine on the Council and the penalty was fixed at a nominal amount of £1. This has caused raised eyebrows amongst procurement lawyers, given the requirement in the regulations that these fines be proportionate and “dissuasive”!

However, as leading counsel for the Council explained at the White Paper Procurement Conference in London on Friday, this decision is not in any way a carte blanche to assume that all such civil penalties will be nominal. The circumstances in this case were unusual. The contracting authority had a genuine good faith belief that the procurement regime did not apply to this contract and there was no evidence that the transaction had been structured in this way to deliberately avoid running a procurement. The design of the option structure reflected not a hope to circumvent the rules but rather the commercial reality that developers face in the current climate.

Lessons to take away

Specifically in relation to development agreements, it is no longer safe to assume that where there is no obligation on the developer to develop, the procurement rules will not apply. Post-Faraday (assuming this judgment survives as good law; it is not yet clear whether the Council can or will pursue an appeal to the Supreme Court) it will be necessary to look at the deal in the round, particularly where obligations to develop may crystallise at a later stage in a contingent way.

There are salutary lessons too for those drafting VEAT notices – if you need to do so, you must have regard to the standards laid down in the Fastweb case and ensure that the notice truly reflects the nature of the contract being proposed.

The judgment means that we now have not one but two Declarations of Ineffectiveness in the UK. While on first reading it looks like the civil penalty imposed was anything but “dissuasive” authorities must remember that this case turned on very particular facts and should continue to assume that ineffectiveness fines could well be hefty.

Posted by Jenny Beresford-Jones

The lodestar of EU public procurement law is the application of the EC Treaty principles of transparency, non-discrimination, and equal treatment. Much of our work as procurement lawyers involves helping clients to apply these concepts in a practical way to real life situations, where the colour tones tend to be grey rather than black and white!

One of the questions we are regularly asked is about the operation of the equal treatment principle in a situation where an incumbent provider is taking part in the re-procurement of a contract. How far must you go to “level the playing field?” Surely the incumbent has an in-built potential advantage; how do we neutralise that?

A recent European case is helpful and suggests that we don’t need to tie ourselves in too many knots about this.

The claimant was a IT company called Proof. It took part in a competition to provide website and intranet services to the contracting authority, the European Institute for Gender Equality (“EIGE”). This was a re-procurement of a service that was originally set up in 2014. The incumbent provider also took part in the new competition, and emerged as the successful bidder.

Proof brought a claim alleging that the award criteria were vague and that EIGE had deployed excessive discretion in giving a higher score to the incumbent, because of the knowledge the latter had obtained through operating the contract since 2014. Proof cited in particular the following extract from the evaluation report of the winning bid which it said showed favouritism to the incumbent on the basis that it had had the opportunity to understand the contract in greater depth:

‘the tenderer presents a deep understanding of the objectives of the framework contract that is at the same time holistic and highly specific.’

The Court was not persuaded by this argument. It held that, even if the incumbent did enjoy an advantage, this advantage was not as a result of any conduct on the part of EIGE (such as unfair marking or other bias). The Court went on to say that it is “inevitable” that an incumbent will enjoy an “inherent de facto advantage” in any situation where a contract is to be re-procured and the incumbent decides to bid. The authority could only nullify that advantage by excluding the incumbent; this drastic action could not be expected as it would amount to discrimination against the incumbent and would itself be a breach of the EC Treaty principles.

The case illustrates that the equal treatment principle is not a mandate for dealing with all bidders in an identical manner. It shows too that, sometimes, to take this approach might in itself be a breach. Instead, you need to treat bidders who are in the same situation in the same way, and bidders who are in different situations, differently. The reality is that an incumbent and a new potential supplier are in two slightly different positions in relation to the procurement and in terms of their relationship with the contracting authority. While authorities must always guard against any overt actions or decisions that favour the incumbent, it is unlikely that the equal treatment principle will be breached merely for crediting the incumbent with "knowing what it knows" as a result of its prior contractual relationship with the authority.

Case T 10/17 Proof IT SIA v EIGE (16 October 2018)

Posted by Jenny Beresford-Jones

July 2018 will live long in the memory: long hot summer days, a World Cup semi-final and a Welshman winning the Tour de France. With all the excitement it is perhaps not surprising that the latest determination by a judge of what Regulation 69 requires a Contracting Authority to do (or not do) passed by without comment from this blog. However, with the arrival of Autumn it is time to look back at some of the summer’s most interesting procurement decisions.

One of those decisions was Fraser J’s latest analysis of Regulation 69 and whether Contracting Authorities have a positive obligation to investigate if a bid is abnormally low.

In a trial that included evidence that the Claimant might deliberately have over-bid in order to “hurt” the Defendant and in order to effectively create a scenario in which it could bring a challenge based on ‘abnormally low bids’ the judge was critical not just of the behaviour of the Claimant but, more pertinently, of the way it had attempted to demonstrate that the winning bid was ‘abnormally low’.

The judge described the approach to establishing “abnormally low” as “entirely ignoring commercial factors”. The Claimant chose to challenge the bid based on a comparison of rates for some items along with a consideration of its own profit margins. However, the judge was very clear that a simple comparison of numbers is not enough. In every case commercial judgement has to be allowed for including the experience and business skill of the tenderer.

The judge reiterated that the law on abnormally low bids remains that set out in NATS (Services) Ltd v Gatwick Airport Ltd despite the fact that this decision related to the 2006 Regulations and earlier Directive. In particular he emphasised the finding of the court in that case that the purpose of the Regulations is to encourage competition and that:

“A key aspect of this is price and tenderers who are keen to secure a project will want to pitch their prices at a level which will be the lowest. They might be keen to break into a market or establish their market share. There is nothing wrong with that for them or for the utilities or contracting authorities, who are (almost) always keen to place contracts at the lowest price and, preferably, at lower than they have budgeted. One needs to consider how, commercially, a tenderer, which is not the incumbent provider or not the market leader, will ever get a contract unless it puts in attractively low prices”.

Mr Justice Fraser approved the NATS judgment and concluded that the court should be “very slow to interpret the Regulations…as imposing some wide ranging obligation….to determine whether there is or might be an abnormally low tender”. As for whether failing to consider if a bid was abnormally low might amount to some kind of “manifest error” on the part of the Authority this risked “placing an impossible burden on contracting authorities, and stifling true commercial competition.”

The judge concluded that there was no obligation under Regulation 69 to investigate any allegedly abnormally low tender. Regulation 69 simply requires that if a bid is to be rejected as abnormally low then it must be investigated before that is done. There is no corresponding duty to investigate it if the bid is accepted albeit that many contracting authorities, including here, may carry out some form of independent verification of bids as part of their own due diligence process.

For anyone interested in the behaviour of bidders, and perhaps particularly incumbents, the case generally makes interesting reading not just because the judge found that the Claimant “took a conscious decision not to bid on a commercial basis….to try to engineer a situation where the other bids were far lower than its own, in order to justify an attack on the outcome…”. There was also some interesting evidence on the behaviour of (some) incumbents when providing TUPE information and the disclosure of some damning evidence on the decision making process which the judge refused to keep confidential. This included the presentation slide about seeking “to hurt” the Defendant.

It is possible that this case sounds the death knell of challenges on abnormally low bids. They are difficult anyway but the emphasis on commercial factors, nous and experience are all intangible factors which might be impossible to gainsay. That is not to say that we will see an end to Authorities rejecting abnormally low bids but it must be right that the factors the judge relied on here to dismiss the claim must also have to be factored into an Authority’s thinking when considering a bid under Regulation 69 and whether or not it can properly be rejected as ‘abnormally low’.

SRCL Limited v The National Health Service Commissioning Board (also known as NHS England)

Posted by Helen Prandy

The government has just published a tranche of papers outlining the potential impact of a “no deal” Brexit. One of the topic areas covers access to public contracts in the event that no deal is reached in time for 29 March 2019 (when Britain leaves the EU).

The paper is light on detail but there are a few points to note:

• if there is no deal, contracts will no longer be advertised in the OJEU but instead a replacement UK-specific e-notification service will be made available free of charge to all users;
• current procurement legislation (in particular, the Public Contracts Regulations 2015) will be amended accordingly;
• the requirements to advertise on Contracts Finder will continue; and
• further guidance will be issued as Brexit day draws closer.

Posted by Jenny Beresford-Jones

This firm recently successfully defended the Secretary of State for Health and Social Care against a claim by DHL Supply Chain Limited for summary judgment in connection with the procurement of a new logistics contract. The procurement is part of an overhaul by the Department of Health and Social Care of the NHS Supply Chain and disaggregating it from a single supplier, DHL, in order to drive efficiencies, leverage NHS purchasing power and generate savings which can be applied to front line services.

In an application before the Technology & Construction Court in early August DHL sought summary judgment on “a simple point of construction” relating to one of the requirements in the Selection Questionnaire. At the same time, the Court also heard our application to lift the automatic suspension imposed by Regulation 95 of the Public Contracts Regulations 2015 and allow the Department to enter into a contract with the winning bidder.

The case was unusual as it looked at summary judgment in the context of a procurement claim where no limitation argument was considered.

In order to defeat a claim for summary judgment a Defendant is required to show that it has a defence with “a realistic prospect of success”. The Court accepted that the construction of the Selection Questionnaire put forward by the Department was supported by other tender documents and in any event the wording should be construed against a factual basis on which the Court needed to hear evidence.

The application to lift the automatic suspension came down to a consideration of where the balance of convenience lay which is always fact specific. In this case, the judge held that the balance of convenience lay in favour of the Department allowing the automatic suspension to be lifted.

DHL were subsequently denied permission to appeal these decisions by the Court of Appeal although a claim for damages continues.

DHL Supply Chain Limited v Secretary of State for Health and Social Care [2018] EWHC 2213 (TCC)

Posted by Helen Prandy

We’ve recently had a decision in a case concerning child and adolescent mental health services in Lancashire. The contracting authority was Lancashire County Council. These services have up to now been provided by two local NHS Trusts (the “Claimants”) but on the re-procurement the winning bidder was Virgin Care, which was scheduled to start provision of the services on 1^st April.

The effect of the claim was to “automatically suspend” the award of the contract to Virgin. The Claimants’ scoring on price almost identical to Virgin’s and very close on technical / quality (2 actual marks difference, which equated to 4% on weighting).

The general trend has been for the Court to find in favour of the contracting authority; to lift automatic suspensions and allow contract award to proceed. This judgment is usually made on the basis that, were the Claimant to eventually show that the procurement rules were breached, a payment of damages could be made to compensate the Claimant for having lost out. More rarely, however, the Court maintains the suspension of the award process until a full trial can be held.

Unusually, the Claimants in this case succeeded in persuading the court to maintain the suspension of the award pending the main hearing of the complaint, such that the contract with Virgin was not signed. The Claimants demonstrated that, in the event their claim was successful at full trial, an award of financial damages could not be sufficient to compensate for, for example, the loss of senior staff and lost funding for sustainability and transformation. The judge decided that there would be a significant effect on the operational activities of the Claimants which would affect the quality of the healthcare they provided and which could not be compensated for in mere financial terms. The fact that it was possible in this case to have an expedited trial of the main claim so that the question could be resolved quickly, was also a factor in the judge’s decision to maintain the suspension.

We have now had judgment in that expedited main trial, where the judge upheld the Claimants’ argument and ordered the Council to set aside its decision to award the contract to Virgin. The Claimants argued, amongst other things, that the procurement process had lacked transparency, and that the evaluation had not been done properly, typical grounds on which procurement challenges are based.

The judge reminded us of the legal framework for assessing whether the Council’s running of the procurement process had met the required standards of transparency, non-discrimination and equal treatment. The Council was obliged to give details of the how the process would be run, how the evaluation would be conducted and how marks would be awarded, and to do so in such a way that was objectively capable of being understood by a reasonably well informed and normally diligent bidder (often referred to as the “RWIND tenderer”). Bidders should be put in a position of awareness as to how the Council would mark the tenders, including the relative importance of the various elements of the bid. The Council was then required to conform to the stated process in order to ensure transparency.

The Claimants argument was that the evaluation of Lot 1 was not done transparently as it departed from the stated process. Lot 1 accounted for 95% of the value of the procurement, weighted at 80% quality, 20% price, so representing the lion’s share of the overall contract. The general evaluation scheme set out award criteria; these were further developed (for the quality element) in an appendix using a list of seven questions (to each of which marks were attributed). Each of the seven questions were expanded into a series of sub-bullet points which were not separately given marks. The evaluators were instructed that “Scores must be based on the evaluation sub-criteria identified directly under each question.” In the absence of separate marks for each bullet point, the Judge decided each was to carry equal weighting.

There was evidence that the moderation of the scores given by evaluators was not carried out compliantly – moderators looked first at the scores achieved by Virgin and then went on to try and moderate these by looking comparatively at the Claimants’ tender and scores. This was not the permitted approach as it amounted to using the Virgin bid itself as an evaluation/moderation schema rather than the actual award criteria (set out in the seven questions and associated bullet points). The moderation process also meant that certain points of the original evaluation were altered, and on examination moderators were not always able to identify whether a comment was written in the “original” evaluation or was a product of the later process of moderation. This led the judge to agree with the Claimants’ argument that “a procurement in which the contracting authority cannot explain why it awarded the scores which it did fails the most basic standard of transparency”.

There was also evidence that record keeping fell below the standard required – the notes of the moderation were never agreed upon/signed off by the evaluators, plus there was more concerning evidence that the Claimants had been misled by the Council on the dating of the evaluation notes; the judge took a dim view of this practice, saying “to describe this (as the Council did) as merely “a regrettable episode of poor administration” is, to my mind, an unacceptable understatement.”

All this meant that the Claimant was not put in a position where it could understand how the evaluation had been done and the reasons for finding that the Virgin bid was the most economically advantageous tender. While the judge did expressly state that there is no requirement to disclose a full account of each individual moderating decision, the reasons given and the account of the moderation process must still be sufficient to allow a claimant to understand what has been done in the evaluation/moderation, and why.

The judge upheld the Claimants’ complaint and ordered the Council to abandon its decision to award the contract to Virgin. Presumably, a new procurement will now have to be run unless the current contract with the Claimants can somehow be lawfully extended (under Regulation 72).

The case is a reminder to contracting authorities of the important of adhering to a stated procurement process and of adequate record keeping. It is also a reminder that moderation needs to be done on a bid by bid basis against the award criteria for each tender, and not comparatively against the top scoring bid.

(1) Lancashire Care NHS Foundation Trust and (2) Blackpool Teaching Hospitals NHS Foundation Trust v Lancashire County Council [2018] EWHC 1589 (TCC)

Posted by Jenny Beresford-Jones

Readers of this blog may recall that last year the Supreme Court dealt something of a blow to bidders by limiting the circumstances in which damages for a procurement breach might be awarded (click here to read our blog post on this).

Now, almost exactly a year later, the High Court has further clarified the position on the court’s powers to order that a contract should be awarded to a bidder where a finding has been made that the Contracting Authority breached the Regulations.

This is an order commonly sought by bidders whose key interest is usually to secure a valuable commercial contract particularly where a court has already concluded that but for the Authority’s breach of the Public Contracts Regulations it would have been the winning bid. With some justification most bidders might consider that in those circumstances it is ‘only fair’ that the contract should be awarded to them.

The Public Contracts Regulations prescribe 3 potential remedies for bidders but these do not include a power to order an Authority to enter into a contract with a bidder who has been successful in proceedings. However, the Regulations do not fetter “other powers of the Court” and so in principle it is possible to ask the court to order that the Authority must enter into a contract with a bidder following the outcome of legal proceedings.

However, the High Court has reiterated that such a remedy will be granted only in “exceptional circumstances”.

As is often the case with such pronouncements there is no clarity around what might amount to an “exceptional circumstance” but the way English law stands at the moment it is in fact difficult to identify any circumstance where such an order might be made.

Why so pessimistic?

Well, English courts have had a long-standing aversion to forcing the provision of services. For example, an employee cannot be ordered to work and an employer cannot be ordered to employ someone. Even more importantly though, in most procurements, ordering an Authority to appoint a particular bidder actually places that bidder in a better position than it was in the tender process itself. Usually the tender documents will reserve a right not to award a contract so all bidders go into the process knowing that a contract may not be concluded.

English courts particularly dislike the principle of putting a litigant in a better position than it would have been in the ordinary course of events so as long as procurement documents retain the right not to award I cannot see any circumstance in which a court will take it upon itself to award the contract and oblige the Authority to appoint a previously unsuccessful bidder.

It is fair to say that the English legal system is not a particularly welcoming place for disappointed bidders: ineffectiveness is virtually unheard of, even now an automatic suspension can be relatively easy to lift , the path to a damages claim is not straight-forward and costs can be prohibitive. However, given the knots the UK Government already finds itself in over the terms of Brexit it is difficult to see this at the top of anyone’s list of legislative priorities any time soon.

MLS (Overseas) Limited v The Secretary of State for Defence and SCA Shipping Consultants Associated Limited (as Interested Party)

Posted by Helen Prandy