Tender trouble

Public bodies across Scotland are increasingly nervous about the prospect of legal challenges to their procurement processes. That nervousness is understandable given the increasing number of cases reaching the courts across the UK, and interpretations of the EC directives and EC Treaty rules being handed down by the European Court of Justice.

In Scotland, compliance with the European Union’s rules on the procedures for the awarding of public contracts became front page news in 2004 after the European Commission initiated an investigation into the tender procedures for the appointments of the architect and construction manager for the Scottish Parliament building at Holyrood.

Compliance with the EU public procurement rules was given further focus with the publication of John McClelland’s report and recommendations following his review of public procurement in Scotland, published in March 2006.

The scene in 2008

Fast forwarding to 2008, it is clear that much work has been done to improve public sector procurement in Scotland. Equally, with a greater awareness of the EU rules, it is perhaps not surprising that an increasing number of public tender processes are being challenged. Having previously had only three decisions dealing with public procurement reported in the 30 years plus that the UK has been a member of the EU, the Court of Session delivered judgment in the Aquatron case last year and Lightways earlier this year. In themselves, Aquatron and Lightways are not big cases, but they represent what appears to be the tip of an iceberg.

For obvious reasons, disputes generally arise at the point bidders are told that they have been unsuccessful, either following a pre-qualification stage or, more often, following the evaluation of bids.

When faced with a challenge, contracting authorities need to try and predict with some degree of accuracy what the outcome of the challenge might be – or at least identify the key factors that will impact on the outcome.

In considering what to do, there are two key questions:

1. How robust is the tender process that was followed?

2. Will the procurement process be allowed to proceed – i.e. what are the prospects of an interim order being granted?

The decisions in Aquatron and Lightways provide useful points of reference. Lord Carloway’s opinion in Aquatron illustrates critical pitfalls that might undermine the robustness of the tender process. Lord Bracadale’s opinion in Lightways highlights important issues for contracting authorities to consider when trying to resolve legal challenges.

Aquatron: flawed evaluation

Aquatron involved a tender process by the Strathclyde Fire Board for the award of a three-year contract for the servicing, maintenance and repair of breathing apparatus. Aquatron was one of three companies that submitted a tender in response to an OJEU notice published on 20 March 2004. The tenders submitted by Aquatron and by the third bidder (CompAir UK Ltd) were both rejected on the grounds that they were non-compliant.

Aquatron issued proceedings against the Fire Board, claiming that, both in rejecting its tender as non-compliant and in concluding that the tender from MB Air Systems (the incumbent providers) complied with the specification, the Fire Board acted in a manner that was arbitrary and capricious and did not treat the tendering parties fairly, thereby breaching the regulations (the precedessors of the Public Contracts (Scotland) Regulations 2006).

In his judgment, Lord Carloway described the various stages in the tender process and highlighted a series of failings. Having concluded that the evaluation reports had incorrectly decided that Aquatron’s tender was non-compliant, his Lordship went on to consider what ought to have happened if the correct approach to evaluation had taken place; in other words, which tender was most economically advantageous in terms of the stated contract award criteria.

The OJEU notice had provided that the contract would be awarded to the “most economically advantageous tender complying with technical specifications, i.e. price, delivery date, running costs, cost effectiveness, after sales service, compatibility, but not necessarily in that order”. His Lordship remarked: “curiously and of significance, the quality of the service to be provided is not included, nor is the technical merit of the tender”.

During the proceedings the Fire Board explained that the procurement manager had instructed that only three criteria were to be used for the evaluation: price (50%), quality (25%) and technical merit (25%). Lord Carloway concluded that the manager’s instruction was irrelevant and that the regulations required that the Fire Board evaluate the tenders against the award criteria it had set out in the OJEU notice. Other than price, all the other criteria listed in the notice had to be discounted “as inapplicable or of little significance”. That essentially left price as the decisive criterion for the award of the contract. Aquatron’s tender was lower in price than that of MB Air Systems. It followed that if the criteria had been applied correctly, Aquatron would have been awarded the contract.

Without dwelling on the case law and policy on remedies, his Lordship was prepared to accept Aquatron’s basis for calculating its loss – based on the price it had tendered less the costs of providing the services – and granted decree for £122,149.20.

Lord Carloway was undoubtedly aided in his decision to award damages by the clear failures on the part of the Fire Board. The OJEU notice had contained inappropriate award criteria for this type of contract – a clear lesson against copying and pasting or otherwise relying too heavily on standard template documents. There were also patent issues with the lack of experience (as well as continuity) of the tender evaluation team carrying out the evaluation exercise.

Lightways: interim suspension

Lightways concerned a motion for an interim order to suspend the award of a lighting maintenance contract by North Ayrshire Council to the incumbent provider, Centre Great (1991) Ltd. After having been given notice of the award of the contract to Centre Great, one of the unsuccessful bidders, Lightways, requested reasons why it had been unsuccessful and there followed two debriefing meetings. The 10 day standstill period was subsequently extended by the council.

Lord Bracadale refused to grant an interim order suspending the award process in his judgment delivered on 20 June 2008. Whilst his Lordship found that Lightways had demonstrated a prima facie case on three of the four grounds claimed, he concluded that the balance of convenience was to refuse to grant an interim order.

At para 57 of the judgment, his Lordship stated: “I recognise that if the contract is entered into, the only right with which the pursuer would be left would be the right to damages. While that would be certainly put the pursuer at a disadvantage, I am not persuaded that the difficulties associated with quantifying damages would be undue. If the order is made, the defender, which is a local authority, will require to pay out a significant sum of additional money each month until the matter is resolved. That seems to me to be a powerful consideration shifting the balance of convenience in favour of the defender. I do not consider that, looked at as a whole, the prima facie case is sufficiently strong to tip the balance back in favour of the pursuer”.

Lord Bracadale’s judgment sits uncomfortably with the ECJ’s judgment in the Alcatel case, the judgment that was the driver for the introduction of the “Alcatel letter” provisions in the Public Contracts (Scotland) Regulations 2006.

In Alcatel the ECJ ruled that: “Member States are required to ensure that the contracting authority's decision prior to the conclusion of the contract as to the bidder in a tender procedure with which it will conclude the contract is in all cases open to review in a procedure whereby an applicant may have that decision set aside if the relevant conditions are met, notwithstanding the possibility, once the contract has been concluded, of obtaining an award of damages.”

Whilst the UK courts have discretionary powers to grant interim orders suspending the contract award process, Lord Bracadale’s judgment also sits uncomfortably with the approach taken in some other UK cases, for example the approaches taken by the High Court in England & Wales in Rapiscan, the Court of Appeal in England & Wales in Lettings International and the High Court in Northern Ireland in Partenaire.

Practical guidance

So, what guidance can contracting authorities take from the judgments in Aquatron and Lightways when considering how best to respond to a legal challenge?

Aquatron – avoiding pitfalls

The pre-selection criteria for selecting candidates to be invited to tender and the contract award criteria to be applied to select the winning tender must have been clearly stated in the tender documentation provided to bidders, and followed in the evaluation process.

Those criteria must have been economic criteria, they must have been measurable and they must have been relevant to the performance of the contract to be awarded.

The tender documentation, including the OJEU notice, must have been consistent and free from any material ambiguity or contradiction.

The evaluation process must have been fair, in accordance with the stated award criteria, and not have discriminated against individual bidders; and

Unsuccessful bidders, as well as other candidates excluded earlier in the process, must have been informed of the contract award decision, and the procedural requirements in relation to debriefing and standstill must have been complied with.

If any of these conditions have not been met, the process is likely to be fundamentally flawed.

Lightways – resolving challenges

An application for interim orders will not be granted automatically and the Scottish courts may be reluctant to suspend the contract award process if there is no strong prima facie evidence of a breach of the regulations.

The Scottish courts may be more willing to consider damages as an adequate remedy and allow the contract to be awarded.

However, the approach in Lightways should not be relied on as indicative of future decisions of the Scottish courts, and should be treated with caution in terms of establishing a precedent.

In the nightmare scenario of an objection to a contract award decision, it will be necessary quickly to review the process and make an assessment of whether it would be better to either: (1) attempt to drive the process through and defend any subsequent litigation; or (2) attempt to rectify the situation, either by rewinding the procurement process back to before the stage at which it has been challenged or by simply re-starting the process from the beginning with a fresh OJEU notice.

In simple terms: if you are exposed on Aquatron you will be exposed on Lightways; and if you are not exposed on Aquatron you will be less exposed on Lightways. However, it should be borne in mind that the economic implications of delaying a contract award will not guarantee that an interim order will not be granted. Contracting authorities should not take a narrow view of the risks of proceeding to contract award or otherwise rely on a literal interpretation of the regulations. The regulations implement the EC directives and have to be interpreted purposively, primary regard being given to the objectives the EC directives seek to achieve – which in the procurement context is ensuring transparency and non-discrimination in the award of public contracts.

Strengthening remedies

When considering the approach to procurement challenges, contracting authorities will also have to be aware of the amendments that will be made to the current set of regulations to transpose the new Remedies Directive, which has to be transposed into the domestic laws of the UK and other member states by the end of December 2009.

The Remedies Directive is intended to improve the effectiveness of remedies for aggrieved bidders, specifically pre-contractual remedies. In other words, remedies allowing an aggrieved bidder to challenge the contract award decision before the contract is entered into, rather than having to rely on damages as a post-contractual remedy.

Article 1 of the directive requires member states to take the measures necessary to ensure that decisions in relation to the award of public contracts may be “reviewed effectively and, in particular, as rapidly as possible”. Arguably, as the judgment in Lightways might suggest, no such protections exist in the current regime in Scotland, at least in terms of pre-contractual remedies.

Interestingly, the impact assessment report produced by the European Commission in the legislative process for the adoption of the directive reported that a review of cases brought between 2000 and 2004 showed that the UK had the lowest number in the then 15 EU member states. The two reported cases in the UK compared with 1,092 cases in Germany for the same period. These two cases represented 0.02% of invitations to tender within the same period (the EU-15 average being around 2.5%). Why is this? One reason is that a number of member states, including Germany, operate specialist administrative tribunals that deal specifically with public procurement disputes.

The Office of Government Commerce and the Scottish Government (the Scottish Procurement Directorate) are consulting – separately – on the necessary amendments that will be made to the set of implementing regulations.

The principal changes can be summarised as follows:

the introduction of a new EU-wide requirement for a “standstill period” following the communication of the contract award decision to unsuccessful bidders (similar to the UK’s own “Alcatel letter” provision);

an automatic “suspension period” requiring the contracting authority not to conclude a contract within a minimum 10 calendar day period following its reply in response to a formal complaint;

a requirement to ensure that contracting authorities do not conclude the contract pending the outcome of a review by an independent review body; and

a requirement that member states ensure that in certain circumstances independent review bodies declare contracts to be “ineffective”, or otherwise impose alternative penalties being financial penalties and/or a shortening of the duration of the contract (at present the only remedy under the 2006 Regulations once the contract has been entered into is an award in damages).

Clearly, these changes will have a dramatic impact on the approach that contracting authorities and, ultimately, the courts will have to adopt when considering future procurement challenges.

Colin Hutton is a partner and Graeme Young is a senior associate at Dundas & Wilson CS LLP. This paper was prepared for the Law Society of Scotland In-house Lawyers Group Symposium which took place in Edinburgh on 21 November 2008. Thanks are due to Judith Chisholm and Catriona Weir at Dundas & Wilson for their assistance in researching and writing the paper.