Contractors ready to challenge public contracts

From next year new legislation will mean aggrieved bidders for public contracts have more chance of challenging an award. Paul Henty explains how court cases are already on the increase.

The EU Public Procurement Directives require that any contracts over a certain value, awarded by a public body or certain utilities companies, be subject to advertisement in the Official Journal of the European Union (OJEU), followed by a free and fair competition between bidders, before the winning bidder is chosen and the contract concluded.

The previous Public Procurement Remedies Directive allows for breaches of the main directives to be challenged before national courts, who must provide effective redress. That might involve the granting of an order to restrain the continuation of the award process, or to have some aspect of it set aside. Damages must also be available to compensate any loss suffered.

Despite these rights and obligations, it was rare to see a court challenge from aggrieved tenderers. Even ahead of the new directive taking effect, that has begun to change. It has been estimated that 70% of all procurement challenges in the UK were brought in the previous two years. Possible reasons for this upsurge include economic conditions and a downturn in the number of project opportunities as a whole. Also, following the EU Alcatel case and subsequent changes in the law, UK contracting authorities became obliged to allow a standstill period of 10 days from the date of notifying tenderers of their award decision and having the contract signed. That gave bidders a better chance to bring timely proceedings.

The proposal of the new directive was motivated by concern over the number of contracts being awarded without advertisement or competition and a desire to 'codify' the requirements of Alcatel on an EU-wide basis. Published in 2007, it sets out additional minimum requirements for EU national laws (see below).

The Office of Government Commerce is now nearing the end of its consultation on the new directive's implementation into UK Law. Draft regulations have been released for consultation and a number of observations have be made (see below).

Increase in cases

The greater possibility to challenge a concluded contract is likely to bring about a perceptible increase in the number of cases brought. Although ineffectiveness will only be available for specific, serious breaches of the rules, these do occasionally arise in practice.

Contracting authorities are likely to be more cautious in ensuring compliance. Few will want the adverse publicity of a contract set-aside, or, for that matter, the risk of unlimited fines. For contractors, this cautiousness may mean more formality, delay, competition and expense.

Authorities may, for example, wish to award further works on a project through a new competitive process, rather than rely on an existing OJEU notice whose scope arguably covers such works. If that happens, contractors may try to persuade authorities to use the new 'transparency notice' procedure. This requires an authority to publish a notice in OJEU indicating its intention to directly award the contract, (stating why it considers that to be allowed). If the authority then allows a 10-day standstill before signing the contract, any subsequent action for ineffectiveness will be time-barred.

There is also greater risk for successful bidders. Whereas previously, procurement compliance was viewed as the problem of the contracting authority, that may change. Where upfront investments have been made, contractors will want to be sure that the contract is not jeopardised or shortened. Likewise, where funders are involved, they may conduct more thorough due diligence into procurement issues and seek increased security from contractors to protect against the risks of set-aside.

Paul Henty is a solicitor at Speechly Bircham

Requirements of the regulations

• Contracting authorities must observe a minimum standstill of 10 days (where award notification is given electronically) or15 days (where given by other means).
• A compulsory suspension of award procedures must be made where a challenge is brought.
• Challengers are entitled to go to court to seek to have a signed contract declared ineffective where there have been certain breaches. That would be a major change to the laws of many member states (including the UK), in which challengers' rights were usually limited to seeking damages at a post conclusion stage.
• Financial penulties can be imposed against a contracting authority and/or shortening of the awarded contract, in certain cases.

OGC observations on the regulations

• The UK will not go beyond the minimum 10/15 day standstill period required by the New Directive;
• Ineffectiveness will be available where a contracting authority has made an illegal direct contract award (one without a prior contract notice in OJEU), where a well founded challenge has been prevented by a breach of the standstill or mandatory suspension requirements or, in certain circumstances, where a large call off contract has been based on an illegal framework agreement;
• Ineffectiveness will be applied by UK courts prospectively (cancelling out future rights and obligations) but must be sought by a challenger within 30 days of notification of an award to concerned bidders or publication of the award in OJEU or, where there has been no such notification, within six months of the contract's conclusionwithin time-limits laid down in the New Directive (varying between 10 days to 6 months, depending on the circumstances);
• UK courts will have discretion not to apply ineffectiveness where there are "overriding reasons in the general interest". What is meant by that is not entirely clear although this is likely to include such matters as national security and public health and safety;
• Only iin exceptional circumstances can "overriding reasons" include cost considerations linked to the contract. The cost of re-running the competition, of changing the selected bidder or of delaying the procedure cannot be cited as overriding reasons.