Public Procurement: A Level Minefield

There has been a significant increase in the number of public procurement cases that have made their way through the higher courts in recent years, reflecting the hard face of competition for contracts in the downturn and also a shift from the previous culture of reticence in holding public authorities to account for their procurement decisions.

Framework agreements

Framework agreements have become an increasingly popular procurement tool as they enable public authorities to award contracts without the need to incur time and expense in re-advertising and re-applying the initial selection and award criteria for related or similar procurements. A framework agreement "establishes the terms (in particular in relation to price and, as appropriate, quality) under which the economic operator will enter into one or more contracts with a contracting authority in the period during which the Framework Agreement applies" (Regulation 2 of the Public Contracts Regulations 2006 "Regulations"). They are therefore distinct from the specific "call-off" contracts that are subsequently entered into under a framework agreement. This is a crucial distinction as being appointed to a framework panel does not usually carry any automatic entitlement to be awarded a specific contract.

Challenging a contract award

The Regulations reflect fundamental European competition law principles. Under Regulation 47 a procuring authority has a duty to economic operators to award contracts based on objective criteria, ensuring compliance with the principles of transparency, equal treatment and non-discrimination in conditions of effective competition. A procuring authority must state whether it will select tenders on the basis of the "lowest tender" or the "most economically advantageous tender" and, if the latter, it must set out all the criteria it will use to evaluate tenders and evaluate them strictly in accordance with such principles.
Until 2008, it was considered that a contractor's sole remedy for breach of procurement law was to claim damages for loss of potential profit and wasted tender costs. Alternatively, if the breach related to a framework agreement not yet signed the contractor could seek an injunction to prevent that agreement being signed. Two recent Northern Irish cases relating to framework arrangements have challenged the basis of remedies for breach.

In McLaughlin and Harvey Limited v The Department of Finance and Personnel (No3) [2008] ("McLaughlin"), the claimant narrowly missed out on being appointed to the framework panel for certain regeneration projects. They challenged the decision and sought information about the selection process. The Court found that one of the criteria for selection not disclosed to the claimant should have been disclosed as it would have been likely to affect the preparation of tenders.

To this end, the case merely confirmed an established principle, most recently in the case of Letting International Ltd v London Borough of Newham [2008] ("Letting") (which also related to a framework panel), that the transparency principle requires disclosure of "all the elements" taken into account in the procuring authority's evaluation. There remains an unanswered point before the European Court as to whether this extends to a requirement to disclose all the answers.

In McLaughin, the Court held that there had been a breach of the Regulations and that the claimant was entitled to a 'substantial remedy'. In the Letting case, the Court invited the parties to consider what remedy should be adopted and they elected for the contractor to be admitted to the framework panel. In McLaughlin, however, the Court reserved jurisdiction and did not allow the claimant to be added to the framework panel on the basis that it would be too difficult to assess damages quickly and accurately (until all the call-off contracts had been awarded) and it was in the public interest for a new framework panel to be put in place with the best contractors selected for the panel. The Court therefore considered the various remedies available to it under the Regulations. Under Regulation 47(9) the Court cannot set aside 'contracts' that have already been concluded but until McLaughlin it was unclear whether this extended to framework agreements. The Court took the view that a framework agreement was not a contract for the purposes of Regulation 47(9) because it was a call-off framework with no commitment to purchase services. It therefore had the power to set aside the framework agreement and did so.

In the second case, Henry Bros (Magherafelt) Ltd & Others v Department of Education for Northern Ireland [2008] ("Henry Bros"), the claimant was not appointed to the defendant's framework panel. In the selection process, the first phase tender only required tenderers to specify their fee percentage (profit and overhead) in relation to a number of notional values. During the term of the framework agreement a secondary competition was to be held to determine to which party the call-off contracts should be awarded, based on a more detailed pricing process. The claimant argued that, whilst pricing per se is not a mandatory element of the "most economically advantageous tender" criteria, it was anti-competitive to allow price to be determined only during the second phase in one to one negotiations for specific call-off contracts. The Court agreed and, following McLaughlin, set aside the framework agreement. It would therefore seem that, while price is not a mandatory criterion, where it is used it must be determined under competitive conditions.

The Henry Bros case is worthy of detailed analysis in its own right but it is of most relevance in the context of remedies. In Henry Bros, unlike McLaughlin, the defendant requested the Court to consider the Remedies Directive not yet implemented in the UK. The Court rejected this view and decided that framework agreements were a different species of contract and not intended to be captured by the Directive in spite of the express wording. enry Bros have appealed and this particular element of the judgment is likely to invite close scrutiny.

Interestingly, in McLaughlin, no specific call-off contracts had been entered into at the time the framework agreement was set aside but the Court considered that the procuring authority could proceed with contracts that it was ready to let. In Henry Bros, the call-off contracts already let were allowed to stand with damages being the appropriate and only remedy (consistent with the Regulations). It will be interesting to see whether the decisions are followed by the High Court in England and how this is addressed when the Remedies Directive is implemented in the UK later this year.

There are also some broader potential implications of Henry Bros for all two-stage design and build contracts. If the decision is upheld, then the general principles of transparency and equal treatment will require competition on the actual price or out-turn costs of a contract before the employer can assess which tender is the most economically advantageous.

Conclusion

These cases highlight the importance of complying with the letter of a transparent and fair tendering process. For the public sector it is evident that the risk of challenge to procurement decisions has never been greater and, whilst the cases establish an increasingly level playing field between contractors and procuring authorities, procurement law is becoming something of a minefield to be crossed only with expert assistance. Interesting times lie ahead.

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