Public Procurement - Working for the Man: Remedies: a new era

The European Remedies Directive has now been implemented into UK law. There is much talk of the new remedy of “ineffectiveness” and the automatic injunction. How will this change the face of procurement litigation?

03/02/2010

The European Remedies Directive has now been implemented into UK law.  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. 

Automatic Injunction

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 [1975] 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 authority 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 contracting authority 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.

We discuss some practical effects of the automatic injunction in case study 1. 

Case study 1:  In Henry Brothers (Magherafelt) Limited and Others v Department of Education for Northern Ireland  [2007] NIQB 116 the claimants sought an interim injunction restraining the department from concluding a framework agreement intended to implement a long-overdue multi-million pound schools modernisation programme in Northern Ireland.  The claimants complained that the department’s method of assessing price was manifestly wrong and that the regulations had been breached.  Coghlin J followed the American Cyanamid guidelines.  In considering the balance of convenience, Coghlin J said “…there can be no doubt  that the public has a strong interest in ensuring that the refurbishment of the schools estate takes place as speedily and efficiently as practicable.  Any further unjustified neglect of this vulnerable section of the community would be intolerable”.  On this basis, Coghlin J refused to grant the interim relief and the framework was allowed to go ahead. 

 

Below, we consider how this case might have unfolded had the automatic injunction been available. 

Under the amending regulations, the automatic injunction would take effect upon service of the claim by Henry Brothers on the department (Regulation 47G(3)).  This leaves the department with the difficult decision of deciding whether to apply to the court under Regulation 47H(1)(a) to have the automatic injunction lifted. 

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.  Contracting authorities 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. 

Further uncertainties arise: 

  • Will the courts continue to apply the American Cyanamid test?  There is nothing in the amending regulations to suggest what principles the court should apply when deciding whether to grant interim relief.  However, there would seem to be no reason why the courts should not continue to be guided by American Cyanamid.  It will be interesting to observe what effect the automatic suspension has on the balance of convenience.  In our view, this can only serve to favour the claimant contractor.
  • Who will discharge the burden of proof?  Under the old regime, it was for Henry Brothers as the claimant contractor to show that interim relief should be granted.  It remains to be seen whether it will now be for the contracting authority to show that the automatic injunction should be lifted or for the contractor to show that it should remain in place.  Our money is on the latter.
  • Will the defendant contracting authority be compensated if it successfully has the injunction lifted?  In our view, it will be unwise for a claimant to bring proceedings unless it has a good prospect of satisfying the American Cyanamid test.  In appropriate cases, if for example damages are an adequate remedy, the claimant contractor may consider conceding that the defendant can enter into the contract pending a full trial to avoid the risk of being on the wrong side of a compensatory order.  Otherwise, contractors could have to pick up a heavy tab.

In Henry Brothers, although Coghlin J did not in the circumstances award interim relief, there was at least a serious issue to be tried.   Under the new regime, there may well be instances where a claimant is able to put the contracting authority to considerable inconvenience and cost in a case which has little prospect of success (see for example BFS Group Limited v Secretary of State for Defence [2006] EWHC 1513 (Ch), a case which, in refusing interim relief, Blackburne J described certain points raised by BFS as “exceedingly weak” and “scarcely arguable”) or even in a case where the claimant is out of time for bringing a claim as was in issue in Henry Brothers  (although this point was decided in Henry Brothers’ favour in Henry Brothers (Magerafelt) Limited and Others v Department of Education for Northern Ireland [No.2] [2008] NIQB 105)).

Note also that the automatic injunction takes effect upon service of the claim on the contracting authority (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.  In Henry Brothers, had the framework been awarded after the issue and despatch of the claim form but before deemed service, it is not at present clear whether this would breach the automatic injunction.  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. 

Ineffectiveness

Under the old regime, subject to one or two limited exceptions (see for example Federal Security Services v Chief Constable of Northern Ireland [2009] 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. 

We discuss some practical effects of ineffectiveness in case study 2.

Case study 2:  In pressetext Nachrichtenagentur GmbH v Republik Osterreich (Bund) and Others C454/06 Austria asked the ECJ to consider the circumstances in which changes to an existing public contract will constitute a new contract which is subject to EU procurement rules.   In 1994 the Austrian authorities entered into an agreement with APA, a news agency, for the provision of news agency services.  During the contract term, several changes were made to the contract.  In 2006, pressetext, a competitor of APA brought an action alleging that the changes to the original contract constituted a new contract which had been awarded unlawfully (including in breach of the duty to advertise).  The ECJ held that amendments to an existing contract will constitute a new award of the contract where the amendments are materially different from the original contract and demonstrate the intention of the parties to renegotiate the essential terms.  On the facts, the ECJ held that the changes to APA’s contract were not material and that a new contract had not been entered into. 

 

Under the new regime, had the court found in pressetext’s favour, it would have been open to pressetext to ask the court to declare the new contract ineffective under Regulation 47K assuming that this was a UK case and the amending regulations applied. 

It is difficult to see what arguments the authority and APA (who would have to be informed of the proceedings under Regulation 47F(3) and may be joined in as a party) could make under Regulation 47L in favour of there being an overriding reason relating to the general interest meaning that the contract should stand.  There may be a public interest argument, perhaps related to public security but this will be for APA and the authority to prove.

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.  In pressetext, the court may have dealt with matters 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?;
  • should APA be compensated for the loss of the contract?

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.

Regulation 47M(2) makes clear that the Court may stay an ineffectiveness order and the Court may well do so if there is an appeal.  The amending regulations also specify that when the stay is lifted (for example, when the declaration of ineffectiveness is upheld on appeal) the contract is then considered ineffective from the time when the declaration was made.  In pressetext, APA and the authority would have to decide whether to suspend the contract voluntarily during the stay or continue the contract pending the outcome of the appeal.  Both possibilities are discussed in more detail in the OGC guidance. 

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. 

In pressetext, the authority could have limited the opportunity for pressetext to apply for a declaration by publishing a voluntary transparency notice 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).
 
For remedies other than ineffectiveness, claimants must bring their action promptly and in any event within three months from the date that the grounds for bringing the proceedings arose (Regulation 47D(2)). 

Conclusion

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.

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