High Court finds that local authority breached procurement rules in application of award criteria

Practical Law UK Legal Update Case Report 6-382-5213 (Approx. 7 pages)

High Court finds that local authority breached procurement rules in application of award criteria

by PLC Competition

Background

Legal background

The Public Contracts Regulations 2006 (the Regulations) implement Directive 2004/18, on the procedures for the award of public works contracts, public supply contracts and public services contracts, and Directive 89/665 (the Remedies Directive).

Under Regulation 30(2) of the Regulations, a contracting authority is required to use criteria linked to the subject matter of the contract to determine that an offer is the most economically advantageous. Where a contracting authority intends to award a public contract on the basis of the offer which is the most economically advantageous it must state the weighting which it gives to each of the criteria chosen in the contract notice or in the contract documents (Regulation 30(3)).

Under Regulation 47, the duties under the Regulations are legally enforceable. A breach of such a duty is actionable by any economic operator which suffers, or risks suffering, loss or damage (Regulation 47(6)).

Facts

In March 2007, the London Borough of Newham (the council) issued a tender notice stating its intention to enter into two framework contracts: one for the procurement, management and maintenance of private sector leased properties and the other for the management and maintenance of such properties.

The proposed framework contracts were intended to establish the terms on which the council would procure the relevant services from time to time over a three year period. The council invited bids for separate lots within each framework contract. The contract notice stated that the contracts would be awarded to "the most economically advantageous tender in terms of the criteria stated in the specifications, in the Invitation to tender or to negotiate or in the descriptive document".

Lettings International Limited (Lettings) expressed an interest in bidding and received a form of Invitation to Tender. The Invitation to Tender indicated that tenders would be evaluated by reference to three criteria: compliance with specification (carrying 50% of the total score): price (carrying 40% of the score) and suitability of premises, staffing and working conditions (carrying 10% of the score).

Lettings submitted its tender within the set deadline. It was informed by the council in November 2007 that its bid had not been successful. Lettings requested an explanation. Following correspondence with the council, Lettings considered that the council had failed to act in a fair and transparent manner in handling the tender process and that it had failed to comply with the requirements of the Regulations.

Lettings brought proceedings before the High Court, on 27 November 2007, alleging breach of the Regulations. It claimed that:

The council's assessment of compliance with specification was done by reference to five sub-criteria (divided into a number of further headings) to which different weightings were applied. The detail of these sub-criteria and their respective weightings had not been disclosed and this breached the obligations of transparency in the Regulations.
The council's marking of the tenders had been unfair because maximum marks were available in relation to some of the sub-criteria only if the requirements of the specification were exceeded (compliance with the specification only resulted in the award of three marks out of a possible five). However, in accordance with the principle of transparency, full compliance with the specification should have resulted in the award of full marks, unless the tender document stated otherwise.
The council made a number of manifest errors in marking the tenders, which are objectionable in themselves and demonstrated that the council did not treat Lettings fairly and objectively.

Lettings was already providing the services in question to the council so it claimed that its failure to be awarded a new contract would cause it significant losses.

Lettings also sought an interim injunction to prevent the council from awarding further contracts under the framework agreements. Such an injunction was granted by a High Court judge but then discharged on the application of the council. On appeal by Lettings, the Court of Appeal restored the interim injunction originally granted (see Legal update, Court of Appeal allows interim injunction to prevent award of contracts).

Judgment

Alleged failure to disclose the award criteria and weightings sufficiently

Lettings claimed that the council did not disclose to it before it submitted its tender all the features that the council was going to take into account in considering the tenders or the relative weightings of each of these features. The council, however, argued that it had fulfilled its obligations under Regulation 30(2) of the Regulations and that it was not obliged to provide precise details of how it would go about assessing compliance with each of the criteria.

The High Court reviewed relevant EC case law on this issue. In particular, it referred to the recent Lianikis case (Case C-532/06 - Emm.G. Lianakis AE and others v Dimos Alexandroupolis and others, judgment of 24 January 2008; see Legal update, ECJ ruling on award criteria under public procurement rules). The European Court of Justice (ECJ) ruled in this case that:

The principle of equal treatment involves an obligation of transparency. Therefore, where a contract has to be awarded to the most economically advantageous tender, the contracting authority must state the award criteria that it intends to apply in the contract documents or contract notice. Further, potential tenderers should be aware of all the elements to be taken into account by the contracting authority in identifying the economically most advantageous offer (and their relative importance) when they are preparing their tenders.
A contracting authority cannot apply weightings or sub-criteria in respect of award criteria which it has not previously brought to the tenderers' attention. As all tenderers must be placed on an equal footing throughout the procedure, the criteria and conditions governing each contract must be adequately publicised by the contracting authorities.

Therefore, in light of the principles of equal treatment and transparency, the ECJ ruled that Article 36(2) of the Public Services Contracts Directive (the predecessor of Directive 2004/18) precludes a contracting authority in a tendering procedure from stipulating at a later date the weighting factors and sub-criteria to be applied to the award criteria referred to in the contract documents or the contract notice.

On the facts of the current case, the High Court found that:

Award criteria. The factors (such as procurement of accommodation, resource allocation and monitoring) relied on by the council in assessing compliance with specification (in its "Method Statement") were "award criteria" (within the meaning of Regulation 30(2)) aimed at identifying the most economically advantageous tender and not criteria aimed at the evaluation of the tenderers' ability to perform the contract. The matters went to the quality, technical merit and technical assistance to be provided, factors referred to in Regulation 30(2). Further, the council itself referred to these as "award criteria" and they also relate to similar issues to those in the Lianakis case.
If these factors were not considered to be award criteria then this would mean that a council would be able to disclose very limited information about the award criteria and then divide up the assessment marks however it liked at a later stage in the process. This would be contrary to the intent of Regulation 30 and would mean that tenderers would not know which matters would be taken into account by the contracting authority and precisely what weight would be attached to them.
Therefore, the council was obliged to explain the weighting given to each of the sub-criteria and to disclose the marks to be allocated to each of the heads in the Method Statement.
Effect of the sub-criteria. The High Court accepted Lettings' submissions that if it had known the weightings to be applied to each of the headings in the Method Statement it would have taken a different approach in its tender. It had assumed that each factor listed as a heading in the Method Statement would be given equal weighting (10% of the total 50%). In fact, the council gave unequal weighting to each of the five factors. Lettings was not able, therefore, to focus its bid on the factors which the council considered to be the most important.
Therefore, if the sub-criteria and their marking allocation had been disclosed to Lettings its tender could and would have been different. Further, the meaning of certain of the sub-criteria was not clear. If they had been disclosed in the invitation to tender as being relevant criteria then Lettings would have sought and obtained clarification such that its tender submission would have been more focused.
Therefore, if the council had provided details to Lettings of the details of the sub-criteria, their weighting and their precise meaning prior to the submission of Lettings' tender this could have affected the preparation of the tender. In accordance with the ruling of the ECJ in the ATI case such disclosure should, therefore, have been made (Case C-331/04, ATI EAC Srl e Viaggi di Maio Snc and others v ATCV Venezia SpA and others; see Legal update, ECJ ruling on weighting of award criteria).
Whether disclosure would have changed the outcome. The council argued that its failure to disclose the weightings of the award criteria made no difference as Lettings had addressed each of the matters specified in the Methods Statement in its tender. The High Court rejected this argument. Breach of Regulation 30 does not give rise to a cause of action only if there would have been a different result if proper disclosure had occurred. Regulation 30(3) contains an express and unqualified obligation to disclose the weightings of the award criteria. This is not dependent on whether the weightings would have made a difference to the outcome. The only grounds for non-disclosure is where it is not possible on objective grounds to disclose relevant weightings (Regulation 30(5)). It has not been suggested that it was not possible in this case.
Further, the High Court rejected the council's argument that Lettings had not established that it would have formulated its tender any differently following disclosure or that there would have been a different outcome to the tender procedure. There is no requirement in ECJ case law or the Regulations that a failure to disclose criteria, weightings and sub-criteria is only a breach of the principle of transparency if it makes a material or significant difference to the conduct of tenderers or the outcome of the tender process. The disclosure obligation is an inevitable consequence of the overarching principles of transparency and equal treatment.
In any event, as above, the Court stated that it was satisfied that proper disclosure by the council could and, indeed would, have made a difference to the preparation of the bid.
Whether Lettings ought to have anticipated some of the award criteria. The High Court rejected the council's submission that the tenderers ought to have anticipated that certain factors (such as customer care and responsiveness) would have been given a higher priority. There is no basis in ECJ jurisprudence or in the wording of the Regulations to include such an implied exception to the obligation to disclose weightings and criteria. In any event, the council had not established that the relative weightings of the criteria was in fact predictable to tenderers and ought to have been known to Lettings.
The rationale of requiring a contracting authority to state its award criteria in advance is to ensure that tenderers will not have to second-guess what the award criteria are and how they will be weighted. A contract should not be awarded to a tenderer simply because they are the most experienced or the most successful at guessing the relative priorities of the contracting authority.
Whether the sub-criteria were a mere scoring methodology. The High Court rejected the council's submission that the sub-criteria constituted a mere scoring machinery or methodology rather than sub-criteria as such. In determining what a contracting authority must disclose, the focus of the court must be on substance and not on labels. The five quality award criteria in this case were broken down into 28 separate elements and the tenders were marked against them. These were clearly relevant sub-criteria for the purposes of assessing the bids, in accordance with the approach taken by the ECJ in ATI and Lianakis.
The ECJ has expressed the overriding principle that "all the elements to be taken into account by the contracting authority in identifying the economically most advantageous offer, and their relative importance" must be disclosed. This is irrespective of how the elements are labelled. The High Court held that the elements in the score sheets used by the council were clearly used to judge and assess the tender and so should have been disclosed.
Whether Lettings was prejudiced by failure to disclose. The council claimed that Lettings was not prejudiced by its failure to disclose the award criteria and weightings as there was no limit on the matters which Lettings could have put in the tender. The High Court held that Lettings was entitled to receive information which would have enabled it to submit a tender which focused not only on all the relevant award criteria and also took account of the weight to be given to each of these criteria.
Finally, the High Court rejected an argument that Lettings would have obtained little work even if it had been awarded a framework agreement. This claim was speculative. Further, there is no minimum level of loss requirement for bringing an action under Regulation 47 of the Regulations. The risk of any loss or damage is sufficient. The council's argument amounts to saying that the award of framework agreements can never be challenged because tenderers can never establish that they would have suffered any particular amount of loss or damage.

The High Court, therefore, concluded that Lettings had established that the council had failed to act with the requisite degree of transparency required by Regulation 30 in failing sufficiently to disclose contract award criteria and weightings in advance, and by not setting out in advance the detailed criteria and sub-criteria against which it actually marked the tenders, nor the way in which these factors were weighted relative to each other.

Alleged unfair marking methodology

Lettings claimed that the council breached the Regulations by only awarding three out of five available marks for full compliance with specification, while awarding the remaining two marks for exceeding the contract specification.

The High Court concluded that the marking regime adopted by the council was clearly an element of the weighting criteria and so had to be disclosed under Regulation 30. It could not be presumed from the invitation to tender that the requirement that the tenderer must "fully meet" the specifications in fact meant that the specification should be exceeded.

Again, the High Court rejected the council's submission that disclosure of the marking system would not have affected Lettings' tender. This is not a necessary criteria for bringing an action. In any event, the Court accepted Lettings' submission that it would have approached its tender differently if it had known that it had to exceed the specification.

Therefore, the Court concluded that the council had failed to act with the degree of transparency required by Regulation 30 by failing to disclose criteria relating to the approach it took to awarding marks for each head of compliance.

Alleged failure to mark tenders fairly, reasonably and objectively

The Court referred to the judgment in Lion Apparel Systems v Fireby, which held that the court must review the procedure to ensure that there has been no manifest error of assessment or misuse of powers, while recognising that the contracting authority has a margin of appreciation (see Legal update, High Court rejects application for interim order to prevent award of contract).

Accordingly, the Court considered whether the council had made any manifest errors in assessing the tenders and whether these would have led to a different result. It examined each of the relevant aspects of the bids of the different tenderers, including Lettings. It rejected certain of the claims and found that the evidence of the approach taken by the council in relation to the respective bids did not amount to evidence of a manifest error. However, it identified two areas where there were manifest errors:

Lettings was marked too low in relation to the size of the accommodation that it would procure. Its bid was found to be unsatisfactory despite the fact that it made a firm commitment to procure accommodation of the size required by the council. Further, it was accepted in evidence by the council that the mark given to the successful bidder in this respect was "generous".
Lettings was given a low mark for its compliance with the Disability Discrimination Act, despite the fact that its premises were fully compliant.

However, Lettings had not established that these errors in marking would have led to a different result. It would not have been the successful bidder even if correct marks had been applied. Therefore, Lettings had not made out its case that there had been a failure to mark the tenders fairly, reasonably and objectively such that it would have scored higher marks than successful tenderers.

Application of Regulation 47(6)

The council claimed that Lettings' claim must fail as it had not shown that it had suffered actual loss in that, in the absence of the council's failures, it would have been awarded a contract. Lettings claimed, however, that it had satisfied Regulation 47(6) if there was a chance of it suffering loss.

The High Court rejected the council's argument and held that Lettings was not precluded from claiming that there had been a breach of Regulation 30 provided that it could show that it had suffered the loss of a significant chance of obtaining the contract. It was not necessary for it to show actual loss.

In reaching this conclusion, the High Court referred to the Court of Appeal ruling granting an injunction in this case. The Court of Appeal concluded that Regulation 47(6) provides a cause of action and does not establish a precondition to the commencement of proceedings. In order to claim damages, it would be necessary to show loss. However, it may not be necessary in every case to show that the bidder would have been successful in obtaining the contract. A breach of the principles of transparency and fairness represents a loss of opportunity to take part in a properly conducted tender process. The loss of a significant chance of winning a contract is enough to found a claim.

The High Court also noted that the position put forward by the council would substantially undermine the transparency obligations as in many cases it would not be possible for tenderers to bring proceedings in cases where an authority has failed to have any tender procedure. In such cases the claimant would not be able to show that it would have succeeded in winning a contract if it had been correctly advertised. Further, it would preclude an action ever being brought in relation to incorrect tendering of a framework agreement: a party who tendered successfully for a framework agreement would always be in the position that it might receive no work under that agreement.

On the facts of this case, the High Court concluded that if Lettings had been informed of the weighting of the sub-criteria and of the council's approach to marking then it would have submitted a tender which would have been likely to have been accepted. It would, therefore, have had a significant chance of being a successful tenderer and then of successfully obtaining at least some work under the framework agreement.

Next steps

The High Court has invited the parties to agree on the remedy which should be adopted on the basis of its findings. It suggested that, rather than having a new tender procedure, the council might "consider it prudent merely to add the name of the claimant as one of the successful tendering parties".

Comment

This case demonstrates the care that contracting authorities must take in ensuring that they provide tenderers with sufficient information as to all the criteria that they intend to apply in assessing bids. It seems that it is not sufficient merely for the contracting authority to state the general headings of the criteria to be applied where it then adopts a detailed and weighted marking system on the basis of a number of sub-criteria. Any criteria and weightings on which the contracting authority intends to rely, and which would affect the way in which bids are prepared, must be made available to all bidders.

Source: Letting International Ltd v London Borough of Newham [2008] EWHC 1583 (QB), judgment of 7 July 2008

High Court finds that local authority breached procurement rules in application of award criteria | Practical Law