The European Remedies Directive has now been implemented into UK law and will apply to RSLs. There is much talk of the new remedy of “ineffectiveness” and the automatic injunction. How will this change the face of procurement litigation?
EU Directive 2007/66/EC (the new remedies directive) was adopted in December 2007. It amends the original Remedies Directive 89/665/EEC. On 20 December 2009, the new remedies directive was implemented into UK law by the Public Contracts (Amendment) Regulations SI 2009 No 2992 (the amending regulations) which amend the existing Public Contracts Regulations SI 2006 No. 5 (the regulations). The purpose of this article is not to give a detailed overview of the changes introduced by the amending regulations. Instead we focus on the key changes that will affect procurement litigation. There is a similar legislative framework and amending regulations for the utilities sector.
Readers should note that the amendments do not apply to award procedures which were commenced before 20 December 2009 in which case the “old regime” will continue to apply.
Why was change necessary?
A common criticism of the old regime is that the remedies are not adequate to protect contractors’ rights. In the most serious cases, for example where there is an illegal direct award of a contract without advertisement or where the standstill period has not been observed, there is often no chance for the disgruntled contractor to challenge the award decision before the contract is entered into. Once a public contract has been entered into, a disgruntled tenderer’s only remedy is a claim for damages which can be highly speculative. Plus, damages will be no match for the commercial benefits of winning a contract.
The purpose behind the new remedies directive is to provide an effective remedy for (and a deterrent to) breaches of EU and national procurement law. The new automatic injunction and the remedy of ineffectiveness have been stealing the limelight in recent weeks.
The old regime
For procurements started before 20 December 2009, contractors who wish to hold up contract award have to apply to the court for an injunctive order usually as an emergency measure during the standstill period. This invariably includes satisfying the court that the principles set out in American Cyanamid Company v Ethicon Limited  AC 396 are satisfied:
- there is a serious issue to be tried
- damages are an inadequate remedy; and
- the “balance of convenience” favours holding up the procurement.
Claimants are also often required to undertake that they will compensate the RSL for any loss it suffers as a result of the injunction if the court subsequently finds that the injunction should not have been granted.
Until the injunction is actually obtained, the claimant is at risk of losing the contract for good.
The new regime
Under Regulation 47G(1) of the amending regulations, if the contract has not been entered into and the claimant starts court proceedings, the RSL must not enter into the contract. This is referred to informally as the ”automatic injunction” and although it does not arise by order of the court, it can truly be said to be automatic as it has immediate effect. The automatic injunction remains in place until the court sets it aside under Regulation 47H(1)(a) or the proceedings come to an end.
There is no longer a duty to notify contracting authorities of the alleged breaches of the Regulations or of an intention to bring proceedings before issuing a claim. RSLs may find that their procurement grinds to a halt, with very little (or no) notice. Starting a court application is expensive and there is no doubt that forcing the contracting authority to decide whether to make a court application is a powerful tool for the claimant contractor.
The automatic injunction takes effect upon service of the claim on the RSL (Regulation 47G(3)). The court rules on service provide that a claim form is deemed to be served on the second business day after the claim form is despatched to the defendant. This means that an RSL could receive a copy of a Claim Form by email, but it would not be “served” until 2 days later. Thus, assuming the standstill period had expired, there would be a delay of 2 days before the automatic injunction took effect. An RSL determined to defeat the automatic injunction could in theory sign during that two day period, although in our view this would be inadvisable. The new OGC guidance on the amending regulations issued on 15 December 2009 warns authorities against rushing to sign a contract when it knows that service of a claim is imminent.
Under the old regime, subject to one or two limited exceptions (see for example Federal Security Services v Chief Constable of Northern Ireland  NICh 3), once the contract has been entered into it cannot be set aside.
This is all set to change with the introduction of the new remedy of ineffectiveness. Regulation 47M(1) provides that when a contract is declared ineffective, all obligations which have already been performed can stand, but all others must be cancelled.
When will a contractor be able to obtain a declaration of ineffectiveness?
Under the amending regulations there are three grounds for ineffectiveness:
- where a contract is awarded without prior publication of an OJEU contract notice (in circumstances where prior publication was required) (Regulation 47K(2));
- where a contract is entered into in breach of the standstill period, automatic injunction or court order depriving the challenger of pre-contractual remedies and where there is also an additional breach of the procurement rules (other than the rules on standstill periods and remedies) which has affected the chances of the challenger winning the contract (Regulation 47K(5)); and
- where call-off contracts above the relevant EU financial threshold are awarded (without running a standstill period) following a mini-competition under a framework agreement or dynamic purchasing system and where the mini-competition rules (or rules for awarding specific contracts) have been breached (Regulation 47K(6)).
Can a contracting authority stop a declaration of ineffectiveness, even if it has breached the rules?
The amending regulations recognise that the courts may wish to
exercise their discretion not to declare a contract ineffective
(but to impose alternative remedies of fines and/or contract
shortening instead) when the court is satisfied that
“overriding reasons relating to a general interest require that
the effects of the contract should be maintained” (Regulation
47L(1)). Economic reasons cannot be “overriding reasons”
except in exceptional circumstances.
It is likely that the concept of “general interest” will be left to develop through the courts. The example given in the OGC guidance is of a contract to supply essential medical supplies to troops in a war zone where declaring the contract ineffective would result in hazardous disruption.
Assuming that the court makes a finding of ineffectiveness, it must also impose a fine on the authority under Regulation 47N(1) which must be “effective, proportionate and dissuasive” (Regulation 47N(4)).
Under Regulation 47M(3) the court also has the power to make orders addressing the consequences of ineffectiveness, such as:
- when will the cancellation take effect?;
- should any future obligations be performed (e.g. payment for a service already provided)?;
- what will happen to the provision of the service until a new procurement can be run?;
Whether the court deals with these issues or not, the parties will have to address the practical fall out from a finding of ineffectiveness. Parties can make provision in their contracts for this (Regulation 47M(6)). The OGC guidance recommends that parties make such provision in a collateral contract.
Guarding against a finding of ineffectiveness
There are several ways in which a contracting authority may guard against a finding of ineffectiveness and these are not addressed in detail in this article. Broadly however these include a combination as appropriate of observing the procurement rules, adhering to standstill periods and, in certain circumstances, publishing voluntary transparency notices in the Official Journal under Regulation 47K(3) and/or by reducing the limitation period for applying for such a declaration from six months to 30 days by properly publicising the award of the contract under Regulation 47E(2).
Claimants will now have much more leverage to prevent authorities from signing contracts. They will have more to gain and less to lose by issuing proceedings and triggering the automatic injunction. As a result, claimants are likely to have more bargaining power at debrief stage.
Authorities who enter into contracts in defiance of advertising requirements or standstill periods will be at risk of the court cancelling all obligations not yet performed and imposing potentially significant fines.
Despite the uncertainties of the new regime, it will give contractors a genuine opportunity to challenge unlawful procurements. An increase in litigation is almost certain as more contractors seek to protect their rights.