Playing by the rules - avoiding a claim for ineffectiveness

The Public Contracts (Amendment) Regulations 2009 revised the procurement regulations to create a new remedy of ineffectiveness empowering the court to declare a contract ineffective.  The court must make such a declaration on the application of the bidder if any one of three grounds applies, including failure to publish a tender notice in the Official Journal of the European Union (OJEU), and certain non-compliances with the Regulations.  To avoid an application for ineffectiveness, authorities should carefully consider whether the procurement regulations apply to their tender procedures and if so, ensure proper compliance.

Consequences

A declaration of ineffectiveness runs from the date when the declaration is made.  The Regulations provide that if a declaration is made, 'obligations under the contract that are yet to be performed will not be performed'.  This wording is taken from the applicable directive and may mean the contract is treated as terminated from the date of the declaration and all subsequent (but not preceding) obligations under it are extinguished.

Potentially harsh consequences could follow for third parties, (eg sub-contractors or TUPE transferred employees).  These consequences may be remedied by the court's power to 'make any order that it thinks appropriate' for addressing 'any consequential matters arising from the ineffectiveness' either when the declaration is made or any time afterwards.  However, a direct remedy for third parties seems doubtful as the regulations envisage that the court may use its powers to 'address issues of restitution and compensation between those parties to the contract who are parties to the proceedings' (our emphasis).

Contracting parties can agree provisions which will apply between them if the court makes a declaration.  If they do that, the court will be bound to exercise its powers in a way which is consistent with their agreement unless it is incompatible with a declaration of ineffectiveness.

Whenever the remedy of ineffectiveness is imposed, the court must also make an award of civil damages at a level which is based on the merits of each case. 

Alstom case

In July 2011, Eurostar and Siemens applied to strike out a claim made by Alstom for a declaration of ineffectiveness under the parallel (and amended) Utilities Contracts Regulations 2006.  It was held the claim was time barred and that none of the grounds claimed by Alstom applied.  It was not possible to argue that there had been no OJEU notice merely because there was evidence that in some respects the contract departed from it.  A declaration of ineffectiveness required (under the first ground) a total absence of an OJEU notice.  Damages were the only remedy available to Alstom for any proven breaches of the procurement regulations which caused them loss. 

This case illustrates the robust approach which the court is likely to take, accepting only those cases which fall clearly within the grounds laid down.  Their approach is likely to be welcomed by contracting authorities and successful bidders as ineffectiveness is potentially very expensive, involving considerable wasted bid costs, a wholesale re-tendering, substantial delays, with a wide range of third parties likely to lose out. 

Despite the court's approach, contracting authorities should still be alert to the pitfalls which may see them fall foul of the regulations and facing an application for a declaration of ineffectiveness.

In particular, they should be cautious when deciding whether the procedures in the Regulations requiring a competition have to be applied.  The following examples are common areas where mistakes can arise:

Thresholds – where a framework agreement is in place, the aggregate value of the contract over its full term is used to determine whether it exceeds the thresholds in the regulations.  Authorities may fail to aggregate the values and apply the incorrect threshold.  This can also happen if works which have high thresholds are confused with services.  The latter, which can include substantial planned and reactive maintenance, will still attract far lower thresholds.

Part B services – services categorised as 'Part B' are largely excluded from the procurement regulations but can be miscategorised particularly where a contract combines both Part A and Part B services.  Under these circumstances, the services which account for the majority will dictate the category that applies.

Teckal exemption – the principle that there is no need to comply with the procedure if the contract is deemed to be an 'in house' award.  This may be incorrectly applied, for example if a contracting authority makes an award to a company which it has established, along with a number of other authorities, to provide certain services but that company has retained some independence in the management of its affairs.  In this instance the authority does not exercise a power of decisive influence over both the strategic objectives and significant decisions of the company.

Negotiated procedure - an authority can negotiate a contract direct with a bidder in certain circumstances but there must be a strong justification for this approach.

Material variations – authorities should refer to the guidance in the Pressetext case to determine whether a proposed variation requires re-tendering. 

Land transactions – whilst land acquisitions and disposals are generally excluded, development agreements may fall under the regulations unless acquisition/disposal is the dominant purpose of the transaction.

To find out more, please contact Rachael Scarfe