Northern Irish High Court sets aside framework agreement due to breach of procurement rules

Practical Law UK Legal Update 7-383-9356 (Approx. 7 pages)

Northern Irish High Court sets aside framework agreement due to breach of procurement rules

by PLC Competition

Background

Legal background

The Public Contracts Regulations 2006 (the Regulations) govern public procurement in England and Wales and Northern Ireland. They implement Directive 2004/18 on the procedures for the award of public works contracts, public supply contracts and public services contracts, and came into force on 31 January 2006 (see Legal update, New public procurement regulations published).

The Regulations contain specific provisions relating to the award of a framework agreement: an agreement between one or more contracting authorities and one or more economic operators which establishes the terms (in particular in relation to price and, as appropriate, quantity) under which the economic operator will enter into one or more contracts with the contracting authority in the period during which the framework agreement applies (Regulation 2).

For the purposes of this case, relevant provisions of the Regulations (which apply to the award of framework agreements and other types of contracts) include:

A contracting authority must treat economic operators equally and in a non-discriminatory way and act in a transparent way (Regulation 4(3)).
The contracting authority must inform each economic operator selected to tender of the relative weighting of criteria for the award of the contract, or where appropriate, the descending order of importance for such criteria, if this was not already specified in the contract notice (Regulation 16(15)(d)).
A contracting authority may award a contract on the basis of the offer which is most economically advantageous (rather than merely offering the lowest price) on the basis that criteria linked to the subject matter of the contract, including quality, price, technical merit, functional characteristics, environmental characteristics, running costs, cost effectiveness and period of completion (Regulation 30(2)). The weighting to be given to each criteria must be stated in the contract notice or the contract documents (Regulation 30(3)).
Under Regulation 47, a contracting authority owes a duty to an economic operator. A breach of that duty is actionable by an economic operator which suffers, or risks suffering, loss or damage (Regulation 46(6)). The court does not have power to order any remedy other than an award of damages in respect of a breach of the duty if the contract in relation to which the breach occurred has been entered into (Regulation 46(9)).

Facts

The Central Procurement Directorate (CPD) of the Northern Irish Department of Finance and Personnel published a contract notice in March 2007 seeking tenders for a framework agreement. The CPD was seeking to select five contractors to lead integrated supply teams to undertake construction projects, as the need arose. The particular projects would be awarded by means of secondary competitions among those appointed to the framework agreement. Specifically, the framework agreement related to a number of construction contracts for urban regeneration projects, and further education, arts and sports developments which would be implemented over the next four years.

McLaughlin and Harvey Limited (the plaintiff) submitted a tender in October 2007. In December 2007 it was informed that it had been unsuccessful. A debrief meeting was held in January 2008, at the request of the plaintiff. The plaintiff had come six out of 11 bidders and its scores were within 1% of the contractors awarded fourth and fifth places.

The plaintiff claimed that it learnt for the first time at this debriefing session that the CPD had marked the tenders in accordance with a particular methodology that had not been disclosed in advance. It claimed that this methodology amounted to new and undisclosed criteria and that reliance on this criteria by the CPD was a clear breach of the principle of transparency and the obligations of fairness.

The documents provided to bidders for the framework agreement stated that the tenders would be evaluated on both quality (70%) and price (30%). The tender documents also contained an "evaluation matrix" setting out the relative weightings to be applied to aspects of the quality submissions. However, when evaluating the bids, the CPD panel used a scoring methodology which allocated points to items under a range of headings.

The plaintiff brought an action before the Northern Irish High Court.

Judgment on liability

The key issue to be determined was whether the items in the scoring methodology were evaluation criteria which should have been disclosed in advance.

The Court reviewed relevant EC and UK case law on this issue:

The ATI case. The European Court of Justice (ECJ) held that tenderers must be in a position of equality both when they formulate their bids and when those bids are assessed. The express provisions of the EC procurement directives and the principles of equal treatment and transparency mean that potential tenderers must be made aware of all the factors that will be taken into account in the assessment of their bid.
When considering whether it is necessary to disclose the weighting given to sub-headings of stated criteria, it must be determined whether the decision to apply such weighting altered the criteria for the award of the contract set out in the contract documents or the contract notice, whether tenderers would have prepared their bids differently if they had known about the weighting, and whether there was discrimination against one of the tenderers (see 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).
The Lianakis case. The ECJ held that 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 weighting 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 (see 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 Letting International case. The English High Court applied the two EC cases and held that the contracting authority had breached the Regulations by failing sufficiently to disclose contract award criteria and weighting 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 (see Letting International Ltd v London Borough of Newham [2008] EWHC 1583 (QB), judgment of 7 July 2008, see Legal update, High Court finds that local authority breached procurement rules in application of award criteria).

The Court held that:

In the absence of any definition of criteria or sub criteria in either Directive 2004/18 or the Regulations, the ordinary meaning of the words must be applied, namely " a standard of judging or testing".
The weighting applied in this case to each topic in the scoring methodology were not predictable by a reasonable bidder, in light of the published criteria (although they appeared to be reasonable and consistent with the principal award criteria). Therefore, aspects of the scoring methodology (amounting to 39 headings covering 186 items) were relevant elements of the award criteria that ought to have been disclosed to the plaintiff and the other bidders.
There was no basis in case law for the defendants to try to draw strict distinctions between "criteria" and "sub-criteria". It is clear from the ATI case, that the bidder must know all the elements or sub elements which could affect their preparation of the bid. This may be onerous on the contracting authority, in particular in the context of a framework agreement covering a range of different tasks. However, having chosen to have a framework agreement covering all those tasks, the 39 items and their weightings ought to have been disclosed. The Court considered that it was likely that disclosure of these items would have affected preparation of the bids.
The Court did not rule directly on whether disclosure of the 186 items under the 39 sub criteria was necessary. It did note, however, that such disclosure would have been likely to have undermined the efficacy of the procurement process (even an incompetent bidder would be able to put together a bid referring to these so making it very difficult to assess the best bid). It may be that these 186 items could be described as pieces of evidence for performance of the criteria or sub criteria, rather than amounting themselves to sub criteria. Further, these 186 items were not allocated specific weighting, so distinguishing them from the 39 sub criteria.

The Court found that there was no evidence that the defendant had intended to discriminate against the defendant. No other bidder had been provided with the information. However, it also criticised the defendant for the fact that no notes seem to have been taken during the bid evaluation process and the marking of the bids, in accordance with the methodology.

The Court concluded that the 39 headings and their weighting were elements or sub-criteria relating to the evaluation of the bids which ought to have been disclosed in advance to bidders. The defendant contracting authority, the Department of Finance and Personnel, had therefore breached the duty owed to the plaintiff under Regulation 47.

Judgment on remedies

The plaintiff requested that the Court should either:

Order the Department of Finance and Personnel to add the plaintiff to the list of preferred economic operators under the framework agreement, so increasing the number of contractors from five to six.
Set aside the framework agreement, dated 28 April 2008, which embodied the decision of December 2007, which selected five economic operators. It would then be up to the Department to decide whether to rerun the competition or to dispense with the framework agreement completely.

The Court held that it is empowered by Regulation 47 to grant a wide range of relief to a party which has suffered or risks suffering loss and damage as a result of a breach of the procurement rules. However, Regulation 47(9) imposes restrictions on what relief can be granted (limiting it to the award of damages) once a "contract" has been awarded.

The Court considered that there is evidence throughout the Regulations that "framework agreements" were distinguished from "contracts" (for example, they are referred to separately in the definition of a contracting authority under Regulation 2 and are dealt with separately in Regulation 19). It concluded that "contract" is used to mean a specific contract and does not cover a framework agreement. At no point in the Regulation, or Directive 2004/18, is the term "contract" extended to include framework agreements.

Therefore, the Court concluded that the restriction in Regulation 47(9) applies only when a "contract" has been entered in to. This would include a specific contract entered into under a framework agreement but does not include the framework agreement itself.

The Court noted that the purpose of Regulation 47(9) is that it would be unfair and inappropriate to remove a contract from a contractor, which might already have begun works or supply under it. However, the situation is different in relation to a framework agreement. A framework agreement consists of the pre-selection of certain economic operators who will be allowed to bid (only against each other) for specific contracts during the life of the framework agreement. No promises have been made to the parties to the framework agreement that they will actually be awarded any contracts. No contracts have, in fact, been awarded under the framework agreement in this case.

The Court therefore concluded that it would be entitled to set aside the framework agreement. In deciding whether to do so it considered the following:

The Court rejected the defendant's submission that setting aside the framework agreement would put it at risk of significant litigation from the five successful bidders. It considered that these parties might, at most, complain at having to re-apply. If they were unsuccessful in reapplying for a tender that was lawfully organised (and is fairer and more transparent) they would not have lost anything to which they were lawfully entitled. If they were genuinely the best bidders then they would succeed if the framework agreement were retendered.
Adding the plaintiff as a sixth contractor to the framework agreement would dilute the availability of work for the other five parties. They had agreed to be one of five potential contractors and dilution of the opportunities under the framework contract would be unfair to the best of the tenderers. While not considering that this would necessarily give them a cause of action, there would be a risk of litigation which could cause further delay and uncertainty. Rerunning the contract would better achieve fairness and transparency in accordance with the law.
There was no precedent for adding the plaintiff to the list of contractors. Although on a literal interpretation, the Court may have power to require the contracting authority to "amend any document" (Regulation 47(8)(b)(ii)), requiring the amendment of the framework agreement to add a new party might be stretching this interpretation too far.
While damages might be an adequate remedy, the Court concluded that they would be manifestly an inferior remedy to setting aside the framework agreement. It would take time and would be difficult and costly to value the percentage loss of chance suffered by the plaintiff.
There are public policy reasons in favour of setting aside the contract. At present there is a question mark over whether the best five contractors have been selected. Given the value of the works covered by the framework agreement, it is in the public interest to try and ensure that the best five (which may or may not include the plaintiff) are selected. Further, it would be a waste of public money to not only pay the contractor who fulfils a contract, but also to pay damages to the plaintiff for loss of opportunity to do so.

The Court therefore ruled that the most appropriate remedy is an order to set aside the decision of the Department of Finance and Personnel to enter into the framework agreement with the five selected contractors, and also the framework agreement entered into in April 2008.

The Court noted that it is up to the Department whether it wishes to persist with a new framework agreement. If it does then it should conduct a new process, which must be open only to the 11 tenderers who bid previously. Alternatively, the Department could hold separate procedures for the contracts which were to be awarded under the framework agreement.

Comment

According to this judgment, parties to a concluded framework agreement would remain vulnerable to the agreement being set aside, following successful challenge to the procurement procedure by an unsuccessful bidder. This would appear to be the case at least until individual contracts have been awarded under the framework contract, which would be subject to the generally accepted rule at present that the only relief available would be damages.

Although the Court did not consider that the parties to a set aside framework agreement would have grounds for complaint in these circumstances, it does not seem to have taken account of the substantial bidding costs that may be involved.

The Court's ruling reflects the view that framework agreements give rise to a different type of contractual vehicle than the actual supply, works or services contracts awarded under them.

The Office of Government Commerce (OGC) has recently consulted on the implementation into UK law of Directive 2007/66, which amends the existing public procurement remedies directive, Directives 89/665 (currently implemented in the Regulations) (see Legal update, OGC consults on approach to implementation of new Remedies Directive). Under Directive 2007/66 even completed contracts can be rendered "ineffective" for certain breaches of the procurement rules (in particular, direct award of contracts). The Directive leaves it to member states to determine the legal consequences of a contract being considered ineffective. It allows for either retrospective cancellation of all contractual obligations or prospective cancellation of only those obligations that have yet to be performed (in combination with additional penalties).

The OGC particularly sought views on whether the national law should provide for retrospective cancellation (which can give rise to practical difficulties where work under a contract is already underway), prospective cancellation, or whether the courts should have discretion.

Source: McLaughlin & Harvey Ltd v Department of Finance & Personnel, judgment on remedies, 30 October 2008 ( [2008] NIQB 122 ) and judgment on liability, 11 September 2008 ([2008] NIQB 91).

Northern Irish High Court sets aside framework agreement due to breach of procurement rules | Practical Law