Lifting the automatic suspension: when will damages be adequate for non-profit organisations?

The judgment of Mr. Justice Stuart-Smith in the recent case of Kent Community Health NHS Foundation Trust v NHS Swale and NHS Dartford, Gravesham & Swanley Clinical Commissioning Groups [2016] EWHC 1393 (TCC) ("KCH") brings the scores as between disappointed bidders and contracting authorities in this quintet to 2-3: Missing Link and Counted4Community for the Claimants; Solent, OpenView, and now KCH for the Defendants.

Although the cases follow the well-trodden path through the test as set out in American Cyanamid v Ethicon Ltd [1975] AC 396, the courts have reached starkly differing conclusions on what is the correct outcome of that exercise. This creates uncertainty for public sector contractors that exist solely for the public benefit and for whom the loss of a key contract may not be so readily quantifiable in purely financial terms (i.e. damages) as it would be for a profit-making private sector provider.

In determining whether to lift the automatic suspension the court must ask itself three questions:

1. Does the claimant's case raise a serious question to be tried?
2. If so, would damages be an adequate remedy (for either party) by the court's decision to lift, or not lift, the automatic suspension?
3. If not, where does the balance of convenience lie? In the context of public procurement disputes the court is entitled to have regard to the public interest in considering this last question (Newcastle upon Tyne Hospital NHS Foundation Trust v Newcastle Primary Care Trust & Ors [2012] EWHC 2093 [9]).

 

Background of the case

The defendant CCGs ran a procurement for the provision of adult community services in North Kent. The Claimant (KCH) had been the incumbent for a number of years. On 22 December 2015 the CCGs informed KCH that it had been unsuccessful and that the contract would be awarded to Virgin Care. KCH had scored better than Virgin Care on quality, but less well on price.

 

The High Court decision

It was common ground, for the purposes of the application to lift, that KCH had raised a serious issue to be tried, so the two issues for the court's determination were the adequacy of damages and the balance of convenience.

 

Adequacy of damages

KCH argued that NHS procurement cannot be treated as if it were an ordinary commercial exercise, and that its true interest in pursuing the litigation could not be reduced to a lowest common denominator of financial returns. It further argued that its attempts to provide an integrated service would be undermined if the contract were awarded to Virgin Care, and that the interests of its patients would suffer, which could not be compensated in damages. Finally it argued that lifting the suspension would result in a 10% drop in turnover which would require savings to be made elsewhere, with the consequential impact on patient care.

The Trust relied on the statement of Coulson J in Bristol Missing Link that "a non-profit making organisation, which has bid for a contract making no allowance for profit at all, and a minimal amount for overheads, is entitled to say that, in such circumstances, damages would not be an adequate remedy." Stuart-Smith J questioned whether the breadth of that apparently general statement was justified, and stated that "I can see no reason why damages should be regarded as an inadequate remedy simply because the Claimant, whether as a not-for-profit organisation or for other reasons, has not suffered and will not suffer substantial financial loss." The cases of Bristol Missing Link and Counted4 Community (in which the injunction was not lifted) were distinguished on the grounds that in the former the lifting of the suspension would have a catastrophic effect on the Claimant's ability to provide its services, and in the latter that the Claimant would lose its uniquely trained workforce.

Regarding the Trust's status as a public body existing solely to serve the public good, Stuart-Smith J said that in the context of public procurement which creates a level playing field between public and private sector bidders, there can be no justification for approaching the question of adequacy of damages differently depending on whether the disappointed bidder was a private or public sector provider, and stated that "in purely financial terms, the losses that would be incurred if the Trust fails to win the contract can be assessed without obvious difficulty and can be made the subject of an appropriate award of damages." The Trust argued that the court is not doing justice to a claimant who does not engage in public procurement in order to make money, by saying that all it can recover is money. The judgment does not provide a direct answer to this point as the judge construed it as essentially a question about public interest and stated that the court can only rule on whether a procurement process is flawed, and will never rule on the question of how the public interest is best served. In this case there were diametrically opposing views about how the interests of patients would be best served, and the court cannot express a view on the respective merits of the different services that are proposed to achieve that aim.

 

Balance of convenience

The Claimant argued that the case could be brought to trial within 6-8 weeks and that any delay caused to the CCGs would therefore be modest.  The Claimant relied on the analysis of the Court of Appeal in DWF LLP v The Secretary of State for Business Innovation and Skills (acting on behalf of the Insolvency Service) [2014] EWCA Civ 900, where it said at paragraph [50] that:

"Having passed the first hurdle the next question is to ask how long a period the suspension might be and to what extent it should be in force. You cannot assess the later Cyanamid questions without this essential background."

In DWF the Court of Appeal (which maintained the suspension as regards the award of a contract to Shepherd and Wedderburn) noted that competent lawyers ought to be able to prepare a case for trial within a very short timeframe (in that case the Court of Appeal hearing was on 11 June and the earliest listing was in early August).  

In KCH the Claimant made clear it would be willing to make use of the better listing availability in the regional TCCs, and informed the Court that a specific listing in the middle of July had been offered by the TCC in Manchester. Despite this, Stuart-Smith J observed that accommodating the legal teams away from home would result in an increased cost which did "not sit easily with the Trust's reasonably expressed concerns about the costs of the present exercise for the NHS as a whole".  

Stuart-Smith J also expressed some reservations about whether such an expedited timetable was achievable. However, even if it could be, the CCGs had legitimate public interest (patient safety) reasons for wanting mobilisation to commence before the winter period. The judge noted that because he was "not in a position to conclude that the public interest would be better served by the Trust being the provider of services or Virgin Care [he was therefore] not in a position to bring public interest arguments relied upon by one side or another into account when assessing the balance of convenience."

On the facts the judge found the balance of convenience did not weigh substantially in favour of either maintaining or lifting the suspension and that, even if damages were not an adequate remedy for the Trust, the status quo should be maintained.

A question then arose as to what was the status quo. The Trust argued that as it was the incumbent provider, the status quo favoured maintaining the suspension. The CCGs argued that the Trust's contract had expired and the status quo was to allow it to enter into a contract with Virgin Care rather than to compel it to continue dealing with the Trust under a temporary extension of the current arrangements. The judge accepted the CCGs' definition of the status quo, and concluded that (1) damages would be an adequate remedy for the Trust, (2) the balance of convenience was not shown to support the granting of an injunction, and (3) the status quo favoured not granting one.

 

The consequences of the decision

The circumstances in which damages will be an adequate remedy for non-profit making suppliers is a key issue on which there appears to be a divergence of judicial opinion. In the absence of catastrophic effects (Bristol Missing Link) or a significant impact on workforce (Counted4Community) can it really be said to amount to equal treatment for non-profit making entities to be restricted to a remedy in damages for loss of profit, which in many cases will be very modest or even non-existent? Where the suspension is lifted in such a case a claimant may not be motivated to pursue to trial its claim for modest or non-existent damages and would consequently be denied an effective remedy.

Had the claimant in Bristol Missing Link not been able to show that lifting the suspension would have had a catastrophic effect on its ability to deliver its services, then applying the approach of the court in KCH would have meant the suspension would almost certainly have been lifted. The inevitable consequence of such a decision would have been the discontinuance of its claim for damages in respect of the modest profit it expected to make from the contract. The problem is brought into sharp relief by the news that, following independent re-evaluation, Missing Link was in fact found to have submitted the most economically advantageous tender and has since been awarded the contract by Bristol City Council.

It is unclear what weight the Court attributes to the importance of the remedy of review: In R (on the application of Edenred (UK Group) Ltd v Her Majesty's Treasury and Others [2014] EWHC 3555 (QB) Leggatt J said:

"I do not, however, consider that detriment [delay in implementing the scheme] to be sufficient to outweigh the strong public interest in compliance with the law and the benefits that implementing the scheme in a lawful way may be expected to bring. That is particularly so given the arrangements that have been made for an expedited trial and the fact that, as I have assumed for the purpose of this judgment, a decision on the question of legality can be expected within a relatively short time".

In KCH Stuart-Smith J remarked briefly that he did not "ignore or underestimate the public interest in procurement exercises being conducted lawfully". It is to be noted that in Openview Security Solutions Ltd v The London Borough of Merton Council [2015] EWHC 2694 (TCC) Stuart-Smith J agreed with Leggatt J's analysis above in Edenred but distinguished Edenred from Openview on the basis that Edenred was "far from the normal run of public procurement disputes and raised important issues going to the legality of an important plank of national government policy".

If the Court were to rank procurement challenges by reference to a "sliding scale" of importance this would create even more uncertainty for claimants.

Finally there must be some doubt about the Court's approach in KCH to the issue of what is the status quo where there remains an incumbent providing services albeit that its main contract has ended. By way of analogy, a commercial tenant whose lease has expired and who seeks a renewal which is opposed by the landlord on the grounds that the expired lease was a tenancy at will, may seek an interim injunction preventing the landlord from granting a lease to another tenant pending trial of the main action. The status quo in such a case is surely for the current tenant to remain in the property albeit that his contractual right to do so may have come to an end. It is unclear why the presumption should favour the incoming provider in an analogous situation in a procurement context.

Bevan Brittan's specialist procurement litigation team acted on both the Bristol Missing Link and KCH cases. We have considerable experience of advising bidders and contracting authorities on challenges under the Public Contracts Regulations 2015, including dealing with pre-action correspondence and disclosure requests, applications to lift the automatic suspension, the management of all stages of High Court litigation, and pursuing alternative dispute resolution.

 

If you would like to speak to one our team about this please contact Emily Heard, Laura Brealey, Jessica Irvine, or Trevor Watt.