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January 2018


January 22, 2018 12:05 PM | Posted by Beresford-Jones, Jenny | Permalink

The collapse of Carillion brings uncertainty for its employees, suppliers, sub-contractors, creditors and customers. The company’s liquidation raises a wide ranging set of questions, many of which cannot yet be answered. Of particular interest to public sector customers of Carillion will be the procurement law implications, including those of novating/retendering contracts (discussed further below).

It remains to be seen how Carillion will be wound up but the liquidators state that all the options are being explored, including a potential sale of the businesses and assets in whole or part.

A look at the raw statistics shows the scale and potential complexity of the construction giant’s liquidation. Carillion employs around 20,000 people in the UK directly, while many more workers will be affected by virtue of their being employed by major suppliers to or sub-contractors of Carillion, particularly if they are small or medium-sized entities.

Carillion’s customers will also need to consider their position, with the company being party to around 450 contracts (around one-third of its business) with public bodies (e.g. central and local government, NHS Bodies, schools, prisons and transport).

The firm PWC has been appointed to assist in the liquidation by the Official Receiver and has set up a webpage here, with advice to the various different categories of person/organisation affected.

The official line, at least for the present, appears to be that Carillion is continuing to trade for now, that employees should continue to turn up for work, and suppliers to supply goods and services, as normal.

Customers under current contracts are told that for now Carillion will continue to perform those contracts. How long this will continue is not made clear. Customers will be contacted on a contract by contract basis to discuss ongoing arrangements.

Creditors are advised to register with the liquidator.

Implications from a procurement law perspective

The immediately obvious question will be around whether contracts will have to be retendered competitively or whether the provisions of the Public Contracts Regulations 2015 can be relied on to avoid the need to do this.

Joint venture arrangements may contain step-in rights for one of the other partners to take over Carillion’s role in the delivery of the project. Assuming that these step in rights were included in the original deal then it is reasonable to hope that the exercising of the step in right will qualify as a “clear, precise and unequivocal” review clause and, as such, that the change in supplier will be permitted under Regulation 72. Legal advice would obviously need to be sought to confirm this on a case by case basis.

If parts of the Carillion business are sold then it is possible that contracts within that business will “novate” to the new provider as part of an asset sale. Regulation 72(1)(d)(ii) is helpful here as it provides that no retendering is needed where a new contractor replaces the old upon its succession into the position of the initial contractor following insolvency. A key difficulty here, however, is that the successor contractor must meet the selection criteria used when the contract was originally let. This could be difficult to satisfy if the original competition “set the bar high” in terms of the financial and economic standing required of contractors in order for them to qualify.
Where Regulation 72 cannot confidently be relied on, then contracting authorities are likely to have to run a new procurement for the services/supplies/works concerned.

If a Carillion contract were to be terminated abruptly as part of the liquidation, it is potentially possible (but by no means certain) that this could be done without running a competition. This would be in reliance on Regulation 32 (negotiated procedure without notice) on the grounds that the “extreme urgency” test, due to the novel and unforeseen situation, was met. However this exemption is very narrowly construed by the Courts and should only be relied on after legal advice has been taken and the risks considered.

In the longer term there are also likely to be procurement policy implications of the fallout from the Carillion collapse. Noises are already being made in the press about the systemic failures of procurement processes to identify financially sound tenderers (including those who might previously have issued profit warnings), and about the over-reliance in the construction and other sectors on a few dominant PLCs, at the expense of smaller suppliers.

If you have queries around how to protect your position or manage stop-gap arrangements in the interim period, do contact our free to access to set up an initial chat.

By Jenny Beresford-Jones

January 5, 2018 12:22 PM | Posted by Beresford-Jones, Jenny | Permalink

Just before Christmas we had sight of the judgment in the recent case of MLS (Overseas) Limited v The Secretary of State for Defence. The case highlights how an apparently simple error in drafting an evaluation methodology can lead to significant consequences for the progress of the procurement. It also shows how wide the gap can be between what the contracting authority thinks it has communicated in the methodology and what a bidder's actual understanding of that methodology may be on reading it.

The Contract

The Ministry of Defence (“MoD”) ran a procurement for a contract valued at around £350 million for global port, maritime and other logistical support services for the Royal Navy. Given the sector, the procurement was regulated by the Defence and Security Public Contracts Regulations 2011, as amended. However, the principles on which the case turned apply equally to procurements regulated by the Public Contracts Regulations 2015.

In particular, in running the procurement, the MoD was under a duty to conduct the competition in a manner which respected the EC Treaty principles of transparency, non-discrimination and equal treatment.

The claimant, who was also the incumbent provider, emerged from the evaluation as the most economically advantageous tender, according to the stated award criteria. However, on one particular question (“question 6.3”) relating to ensuring safe working cultures not only within the tenderer's own organisation but also down the supply chain, the claimant’s response was judged to be inadequate as it did not fully address how the tenderer would pass on health and safety obligations to its own contractors. Question 6.3 was a “pass/fail” question; both evaluators and a further moderator marked the response as a “fail”.

On this basis, following requests by MoD for the claimant to clarify its response and a further moderation meeting, MoD marked the claimant's tender as uncompliant and excluded it.

The Claim

The claimant commenced the claim prior to the award of the contract to the second-placed bidder, which suspended the award process pending legal proceedings.

The claimant argued (amongst other things) that the ITT did not state, or at least was ambiguous as to, the consequence of a "fail" score in respect of Question 6.3. This meant, argued the claimant, that the MoD was not entitled automatically to reject its tender for a single fail score. In rejecting its tender, the MoD acted unlawfully in breach of its obligations of transparency and equal treatment.

The MoD argued, in return, that the evaluators and moderator were entitled to conclude that the claimant’s tender failed to meet the minimum requirements specified in the evaluation criteria for achieving a "pass" score for Question 6.3.

The MoD accepted that, due to an administrative error, the MoD had omitted to include an express statement in the ITT that the consequence of a "fail" score would be rejection of the tender, However, said the MoD, it would have been apparent to a reasonably well-informed and normally diligent tenderer from the ITT that a "fail" score for Question 6.3 would lead to automatic or discretionary rejection of the tender.

The ITT

The section of the ITT on technical requirements contained an example technical evaluation table, which showed the weighting and scores available, up to a possible score of 100%, for the following questions:

• Question 1 – Capability;
• Question 2 – Customer Relationship;
• Question 3 – Supply Chain Management;
• Question 4 – Value for Money; and
• Question 5 – Insurance

It was clearly stated that failure to meet a minimum standard of “good confidence" for any of these five questions would result in rejection of the tender.

Significantly though, the technical evaluation for Question 6, Safety and Quality Management (of which question 6.3 was obviously a part), was not included here. The methodology for this question was clearly stated to be a simple “pass/fail” judgment, but it was not made clear that a “fail” result here would amount to a judgment that the response fell below “good confidence” level and would consequently be non-compliant, leading to the rejection of the tender.

The Law

The question before the court was whether the failure to expressly state that a “fail” result on question 6.3 would result in exclusion was a transparency breach by the MoD (as the claimant argued)?

Or, on the other hand, as MoD argued, was it a reasonable expectation that tenderers looking at the ITT should have “put two and two together” and realised that exclusion would be logical consequence of a failure on question 6.3?

The judge considered some of the leading cases in this area, in particular the SIAC and Healthcare at Home cases. These established the principle that the award criteria must be formulated in such a way as to allow all reasonably well informed and normally diligent tenderers (“RWIND tenderers”) to interpret them in the same way.

The judge noted that this was an objective test: the question was not whether it had been proved that all actual or potential tenderers had in fact interpreted the criteria in the same way, but whether the court considered that the criteria were sufficiently clear to permit uniform interpretation by all RWIND tenderers.

The judge also looked at the more recent Nuclear Decommissioning Authority case, where the transparency obligation was considered in the context of the contracting authority’s obligation to adhere to a procurement process/rules that it has previously stated. In that case, the judge said this:

The principles of equal treatment, non-discrimination and transparency require a contracting authority that has adopted a decision-making procedure for assessing bids to comply with it once it has begun to do so. A different way of expressing the same principle is to state that a contracting authority that has set rules for that procedure must follow them, applying those rules in the same way to the different bidders. Changing the decision-making procedure during the process of assessment risks arbitrariness and favouritism, a risk that it is the purpose of such requirements to avoid”.

Judgment

The judge concluded that the MoD had indeed breached the obligation to act transparently.

The ITT did not indicate that a "pass" score for each part of Question 6 was a minimum standard that had to be met to make the tender technically compliant.

The judge disagreed with the MoD’s argument that a RWIND tenderer should have understood, that a "fail" score for Question 6.3 would be treated as an assessment of lower than "good confidence" and lead to automatic rejection of the bid. The judge said, conversely, that the RWIND tenderer would assume that there would be a difference in treatment between Questions 1 to 5 and Question 6 because the ITT identified different categories of assessment for such responses. The ITT could have stipulated that a "pass" would equate to "good confidence" but did not do so.

Conclusion

The case highlights to contracting authorities the risks of ambiguity in the evaluation methodology and need for the evaluation criteria to make it absolutely and explicitly clear where a “fail” result will lead to rejection of the bid.

Note that this is the case not only in relation to the ITT stage (as in this case) but also during the selection phase. Indeed, Cabinet Office guidance explicitly states that SQ evaluation methodologies must make candidates expressly aware of any SQ questions where a “fail” result will lead to disqualification on that ground alone.

You can read the full judgment in the case here.

Posted by Jenny Beresford-Jones

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