Another case on the new automatic suspension regime

Earlier in the month, you may have seen our blog post about the first known case of a court lifting an automatic suspension under Regulation 47G Indigo Services Limited v Colchester Institute Corporation in which Mills & Reeve acted for the successful contracting authority.

On 21 December judgment was handed down in Exel Europe Ltd v University Hospitals Coventry & Warwickshire NHS Trust. Following Indigo this is the second case this month where the court has decided to lift the automatic standstill period imposed by Regulation 47G of the Public Contracts Regulations 2006.

In this latest case the NHS Trust decided it wanted to transfer to a private sector provider a collaborative procurement hub that it had previously established called the Healthcare Purchasing Consortium (the HPC). The Trust proposed to do this by letting a new single provider framework agreement for the management and operation of the HPC.

Before advertising the framework the HPC and the Trust had already had discussions with a company experienced in procuring goods and services for hospitals HCA International Ltd (HCA).

Five bidders including HCA and the challenger in this case Exel were invited to tender. Exel expressed concerns about the lack of information contained in the Invitation to Tender and later withdrew from the process. Only HCA submitted a tender. Later through a Freedom of Information Act request Exel discovered that the Trust had previously been in discussions with HCA.

Exel brought a claim on six issues during the standstill period. Under the new regime the effect of this is to automatically suspend the award of the contract until the court has looked at the claim and decided what should be done. The NHS Trust applied to the court strike out the claim and to lift the automatic suspension.

Following the Remedies Directive amendments to the regime in December of last year there has been some uncertainty as to how the courts would approach the new automatic suspension. Previously when deciding whether to uphold a claim for an injunction preventing a contracting authority from entering into a contract the courts had applied the test in the landmark case American Cyanamid. Briefly this test sets out that the courts will make this decision taking into consideration three factors:

  • whether the claimant can show that there is a 'serious issue' with the procurement process that ought properly to be examined in a full court hearing; and
  • what is the 'balance of convenience' (which usually boils down to the question of whether the contract is in the public interest generally); and
  • whether monetary damages would be an adequate remedy for the claimant if the court allows the public body to go ahead and enter into the contract.

Together with the Indigo case this case shows that the courts are approaching the new automatic suspension regime in very much the same way as they used to approach an application for an injunction during the standstill period. This is welcome clarity and shows that the new regime isn't all that different from the old in terms of what the claimant has to prove to prevent a contract being awarded.

In this case Exel was unsuccessful in preventing the NHS Trust from lifting the suspension. The court rejected five of the six 'serious issues' Exel put forward (although interestingly it did find there was a serious issue to be tried in relation to the discussions with HCA prior to the tender so contracting authorities would do well to take care in this area).

The court also decided that the NHS Trust had shown that the efficient and economic running of the NHS (in which the HPC played its part) was an important area of the public interest especially as efficient procurement is essential in helping the NHS to make savings. Many of the HPC's existing contracts would have had to be put on hold if this procurement process had to be re-run. The judge also that decided that damages would be an adequate remedy for Exel in any event and therefore that looking at the three factors in the round it was clear that the suspension should be lifted.

The case is obviously good news for contracting authorities and it demonstrates the persuasiveness of the public interest test with the courts provided that a genuine public interest can be proved by the public body.

12/23/2010 Another-case-on-the-new-automatic-suspension-regime-12-23-2010 Challenges,Remedies Beresford-Jones, Jenny 48 In-house procurement - new ruling is good news for contracting authorities

The recent decision of the Supreme Court in the case of Risk Management Partners v London Borough of Brent (RMP v Brent) is good news for contracting authorities as it confirms that the courts are not minded to apply the procurement regime in situations where public bodies genuinely co-operate to perform one of their public functions.  In the current economic climate public bodies are increasingly turning to shared services models to meet their requirements rather than risking the cost and delay that is sometimes associated with running a full procurement process and this decision is encouraging to shared services arrangements.

In RMP v Brent the London Borough together with several similar boroughs clubbled to together to create a mutual insurance company called London Authorities Mutual Limited (LAML) a private company limited by guarantee established and wholly owned by the local authorities concerned. Earlier Brent had also commenced a procurement process inviting bids from insurance providers of which RMP was one. When the project to establish LAML became a reality Brent terminated the procurement process it had been running and entered into a contract directly with LAML with no further competition. RMP brought a claim arguing that this contract should have been opened up to competition.

In its defence Brent relied on the exemption in the European Teckal case. This dispenses with the requirement to run a procurement where a contracting authority has set up a wholly-owned service provider:

  • over which it exercises a degree of control similar to that which it would have over one of its own departments (the control test); and
  • the service provider carries out the essential part of its business with the owner contracting authority/ies (the function test).

The Court of Appeal in 2009 upheld RMPs claim that the Teckal exemption did not apply on the grounds that the necessary degree of control was not established. There were various reasons for this judgment including (1) the governing document of LAML contained conflict of interest provisions preventing an authority from being involved in deciding its own insurance claim and (2) the company had outsourced the day to day management of the company to private sector providers which the Court of Appeal decided prevented the owner-local authorities from having a decisive influence over the direction of the company.

However the Supreme Court has recently overturned the decision of the lower courts. The key points were:

  • that there was always possibility of 75% of the local authorities directing the company via the special resolution procedure. This is a useful insight for contracting authorities which are currently considering how the constitutions of companies should be drafted to fit within the Teckal exemption;
  • the fact that a local authority could not vote in relation to discussion of its own insurance claim did not automatically signify that that local authority did not have the necessary degree of control in the round and jointly with the other local authority shareholders; and
  • the fact that there were two independent directors was not fatal to the control test either particularly as this is now a requirement of the FSA.

The Supreme Court really took a purposive view of the procurement law regime when deciding whether to apply the exemption. The purpose of the procurement rules it said is to preserve competition and prevent unfair discrimination against bidders. However the regime imposes no positive duty on public bodies to go out the market in every possible case; rather public bodies are totally free to place work in house if they so choose. This given it would be a nonsense to prevent local authorities from working together to exercise their public functions. This approach echoes the view from Europe where we are increasingly seeing the European court being prepared to apply the Teckal exemption in cases of genuine co-operation.

However readers should bear in mind that the Teckal test itself has not changed and that it still remains a very narrowly construed exemption. It is unlikely to be of much assistance to any public body wishing (as many do in this economic climate) to set up a company which will be able to generate a new source of profit in from the private sector. Features such as private sector shareholdings or a substantial volume of business transacted with private sector customers are likely to prevent a company qualifying.

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