· The Public Contracts (Amendment) Regulations 2009 – amending The Public Contracts Regulations 2006 to implement the requirements of the latest EU Remedies Directive. The amendments enhance the existing procedures and significantly develop the remedies regime for breaches of the public procurement rules. The amendments come into force on 20 December 2009.
· Recent Case Reports – cases on and around public procurement are, in relative terms, few and far between. With public funding constraints tightening this is set to change, and the implementation of the latest Remedies Directive will no doubt see this continue. Here we summarise a collection of recent cases that deal with some interesting issues in terms of public procurement.
· Office of Government Commerce (OGC): Recent Materials – in the UK the OGC is an invaluable resource in terms of all things public procurement. Here we report on some of the OGC's recent guidance and completed initiatives.
· The Contract Value Thresholds - new thresholds will be in place from 1 January 2010.
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The Public Contracts (Amendment) Regulations 2009
"Ineffectiveness is the most effective way to restore competition and to create new business opportunities for those economic operators which have been deprived illegally of their opportunity to compete." Recital 14 – Directive 2007/66/EC (the (new) Remedies Directive)
Whilst this demonstrates the justification for the most significant change in terms of the remedies that will now be available for a breach of the public procurement rules, it also neatly captures the backdrop against which the remedies regime has been enhanced. The OGC itself comments that "…for those provisions that are amended, the changes in procurement policy and the extent of the textual amendments, are substantial."
Until now there was a very clear threshold in terms of the remedies available to an aggrieved bidder, and this was set at the point of contract award. After this point the only remedy available against the contracting authority was a claim for financial damages to reflect the loss suffered as a result of the breach of the procurement rules. This had seen the introduction of the mandatory standstill period following the Alcatel case (in order to allow a period of time to apply for certain interim remedies pre-contract award) but this clearly did not address the perceived deficiencies of the existing system and so saw the adoption of the new Remedies Directive in 2007.
Member States are required to implement the Directive by 20 December 2009 and the UK's legislative instrument doing this - The Public Contracts (Amendment) Regulations 2009 ("the Amendment Regulations") - has now been published.
This note comments on the most significant changes that will come into effect on 20 December 2009. In summary these are:
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Substantive Changes
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Procedural Changes |
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· A new penalty of ineffectiveness
· Two further new penalties:
Ø Civil financial penalties; and
Ø Contract shortening
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· Automatic suspension of contract award
· Contract award notification
· The standstill period
· Notification of excluded applicants
· Time limits for starting proceedings |
Substantive Changes
1. Ineffectiveness
This is a new penalty that will enable the Courts to strike down a contract that has been awarded in serious breach of the procurement rules. In headline terms there are three grounds for ineffectiveness. These are where the contract:
· has been awarded without prior publication of a contract notice (where prior publication is a requirement);
· has been entered into in breach of certain procedural requirements (eg, connected with the standstill period or automatic suspension of contract award) where the claimant's chances of obtaining the contract are affected and the breach has deprived the claimant of the possibility of starting proceedings, or pursuing them to a proper conclusion, before the contract was entered into; and
· is based on a framework agreement and there has been a breach of the requirement in certain circumstances to re-open the competition amongst those parties to the framework agreement.
Implementation Basis. Whilst the implementation of this new penalty was mandatory, how it would take effect in practice was left to each Member State to decide. There was a choice between: (i) retrospective cancellation; (ii) prospective cancellation; and (iii) allowing Court discretion between retrospective and prospective cancellation on a case-by-case basis. Following the OGC's two-stage consultation process, it was convincingly felt that in the UK ineffectiveness should only be prospective. This means that all future (ie, as yet unperformed) obligations are rendered ineffective but all obligations that have been performed at the point of the declaration will not have to be undone.
Having elected prospective cancellation it becomes a requirement for a Court that whenever it orders a declaration of ineffectiveness a civil financial penalty (see below) must also be imposed. This is the quid pro quo for not retrospectively cancelling the contract.
Public Interest Exception. If, upon application, a Court is satisfied that "overriding reasons relating to a general interest require that the effects of the contract should be maintained" then the Court will not have to make a declaration of ineffectiveness. Economic interests may be considered overriding reasons if, in perceived exceptional circumstances, ineffectiveness would lead to disproportionate consequences. That said, economic interests directly linked to the contract (eg, costs resulting from delay in execution of the contract, for commencing a new procurement procedure or that are linked to a change of supplier) cannot be taken into account. Even if a contract is kept "alive" on this basis a Court must still shorten the contract term and/or order the payment of a financial penalty (see below).
Framework Agreements and "Specific Contracts". The Amended Regulations deal separately with what are termed "specific contracts" - these are contracts that are called-off (i) under a framework agreement and (ii) before a declaration of ineffectiveness (if any) was made in respect of the framework agreement. A specific contract is not considered ineffective simply because a declaration has been made in respect of the framework agreement. Instead, subject to the same exception above, the Court must make a separate declaration of ineffectiveness in respect of each relevant specific contract - meaning that a separate claim for ineffectiveness has to be made in connection with the specific contract.
If a declaration is made in connection with a specific contract the requirement to impose a financial penalty does not apply. But, if the declaration is not made on the basis of the overriding general interest exception, the Court must order that the contract term be shortened.
Impact. Whilst the significance of this new penalty should not be under-estimated, in terms of its impact on the practice of the contracting authority this should, in theory, be negligible. The whole reason for the new remedy is to be an additional deterrent against acting illegally. There is a simple choice: comply with the rules and suffer no impact of this change; or act unlawfully in which case the impact is potentially significant. Accordingly, the contracting authority's responsibility will be on understanding and applying the public procurement rules.
The impact on the successful tenderer might be seen as more substantial - it is potentially stripped of a contract it believes was awarded legitimately. This is unavoidable, but choosing only prospective cancellation is seen as the lesser of two evils. It is the unsuccessful tenderers that stand to benefit the most - the ineffectiveness remedy adds to the suite of remedies already available and enables them to bid again if successful in pursuing a claim.
The OGC is planning to issue some further guidance on the Amendment Regulations generally, but one area it has already said will be included is around the inclusion of (and possibly suggested drafting for) contract terms anticipating a declaration of ineffectiveness, ie the parties agreeing specific contract terms which would establish the effects of a subsequent ineffectiveness ruling and signposting the various obligations of the parties in unwinding the contract.
2. Civil Financial Penalty & Contract Shortening
These are also new penalties introduced under the Remedies Directive. The Amended Regulations prescribe when they can/should be used.
· Where a declaration of ineffectiveness is made the Court must also order that the contracting authority pay a financial penalty.
· A Court must order at least one, and may order both, that the contracting authority pay a financial penalty and/or that the term of the contract be shortened where:
Ø there are grounds for a declaration of ineffectiveness but the Court is satisfied that there are "overriding reasons in the general interest" (see above) so the declaration is not made; or
Ø there is a breach of certain procedural requirements (ie, less serious breaches which do not give grounds for a declaration of ineffectiveness).
When making an order, the Court's overriding consideration is that these penalties must be effective, proportionate and dissuasive, and factors such as the seriousness of the breach and the behaviour of the contracting authority must be taken into account.
If an order shortening the contract term is made then the Court may also order what it thinks is appropriate for addressing the consequences of the shortening, including addressing issues relating to restitution and compensation as between the contracting parties to achieve an outcome which is "just in all the circumstances". A Court must also be sensitive to any contract terms that are agreed between the contracting parties in anticipation of such an order being made.
Procedural Changes
1. Automatic suspension of contract award
A contracting authority is now required to automatically suspend a contract award procedure whenever legal proceedings are started in respect of a contract award decision. The Amendment Regulations go on to provide that a contracting authority must refrain from entering into a contract until any proceedings "at first instance" are determined, discontinued or otherwise disposed of and no order has been made continuing the need for the suspension (eg, in connection with an appeal). The suspension means that the procurement will not move forwards until the legal challenge is resolved, which could in some case be quite a considerable time.
2. Contract Award Notification
In terms of who the obligation to provide the required information about a contract award decision is owed to we now have a distinction between "tenderers" and "candidates" (where previously only "economic operators" were referred to). Both tenderers and candidates must be informed of the contract award decision, although the information that needs to be notified to each is ever so slightly different (see below). A tenderer is an economic operator that submitted an offer. Short of this, a candidate is an economic operator that applied to be included among the economic operators to be selected to tender or to negotiate the contract, or to be a party to a framework agreement.
All information (ie, that prescribed in Regulation 32) must be notified to both tenderers and candidates and it includes an obligation to notify the reasons for the award decision (whereas previously the reasons only had to be provided on request). This means that unsuccessful tenderers will now have the reasons for the award decision as of right at the start of the standstill period. The slight difference is that with candidates, in giving the reasons for the decision, they need only be told the characteristics of the successful tender (as opposed to the "characteristics and relative advantages of the successful tender") and, in addition, why they were unsuccessful.
There was always a 'common-sense' exception to this obligation (where a contracting authority, using the negotiated procedure, only received one tender for the contract). This remains but has been developed slightly, mainly for consistency's sake in light of the rest of the rules.
3. The Standstill Period
It remains the case that a contract cannot be awarded during the standstill period. Whilst the opportunity has been taken to give the rules around the standstill period their own regulation (new Regulation 32A) nothing in the Amendment Regulations changes the existing position save only to clarify some timing issues.
· The duration of the standstill period is now determined by the method of issuing the contract award notice under Regulation 32:
Ø where the notice is sent by fax or electronically – the standstill period ends at midnight of the 10th day after the notice was sent; and
Ø where the notice is sent "by other means" – the standstill period ends on the earlier of (i) midnight of the 15th day after the notice was sent; or (ii) midnight of the 10th day after the date when the last recipient received the notice.
· If the end of the standstill period falls on a non-working day then the period is automatically extended until midnight of the end of the next working day.
· The contract award notice issued under Regulation 32 must now include a clear statement of the exact standstill period.
4. Notification of Excluded Applicants
The Remedies Directive did not introduce any new notification obligations in relation to participants who are eliminated from a procurement exercise before the point at which a contract award decision is made. However, the OGC felt that the Amendment Regulations presented an opportunity to clarify the position and crystallise what was otherwise seen as "good practice"; plus it was felt in the spirit of the Remedies Directive to introduce this. New Regulation 29A requires a contracting authority to notify "applicants" of their exclusion from a tender process. "Applicants" for these purposes are those that (i) submit an offer (ii) apply to be selected to tender or negotiate or (iii) apply to be a party to a framework agreement.
The circumstances where a notification will have to be given are:
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· Where the applicant is excluded on the grounds of:
Ø ineligibility;
Ø failure to meet the minimum standards of economic and financial standing; or
Ø technical or professional ability. |
· Where the applicant is not amongst those selected to be invited to:
Ø tender in a restricted procedure;
Ø negotiate in a negotiated procedure; or
Ø participate in a competitive dialogue procedure. |
5. Time Limits for Starting Proceedings
Before looking at these changes introduced by the Amendment Regulations, it is worth noting that there is no longer a requirement to send a letter before action before commencing any legal proceedings. Meaning the first a contracting authority may hear about the commencement of formal proceedings is when it is served with a claim form.
General Time Limits. These apply in all circumstances except where the claim is for a declaration of ineffectiveness, for which special rules apply (see below). As is already the case, proceedings must be started "promptly" and in any event "within three months" from the date when the grounds for starting the proceedings first arose. Proceedings do not have to be started during the standstill period and the time limits can be extended "for good reason" at the Court's discretion (see new Regulation 47D). Save in connection with the new remedies introduced under the Amendment Regulations, the existing rules as to what remedies (interim or otherwise) are available depending on whether the contract has been entered into or not remain. These are now set out in new Regulations 47H, 47I and 47J respectively.
Seeking a Declaration of Ineffectiveness. Slightly complicated (and fact specific), but proceedings must be brought within:
· 30 days from, as the case may be:
Ø the day after the date on which a contract award notice (pursuant to Regulation 31) was published in the Official Journal but only if (i) the contract was awarded without prior publication of a contract notice and (ii) the contract award notice includes justification of the decision of the contracting authority to award the contract without prior publication of a contract notice; or
Ø the day after the date on which the economic operator has been informed by the contracting authority of (i) the conclusion of the contract and (ii) a summary of the "relevant reasons" (being equivalent to the information that a contracting authority would have to provide in response to a request for information under Regulation 32(9)); or
· in all other cases, 6 months from the day after the date on which the contract was entered into.
· These deadlines cannot be extended.
Transitional Arrangements
The Amendment Regulations will not affect any contract award procedure commenced before 20 December 2009. For these purposes "commenced" means where:
· a contract notice has been sent to the Official Journal;
· the contracting authority has published any form of advertisement seeking offers or expressions of interest in a proposed public contract, framework agreement or dynamic purchasing system; or
· the contracting authority has contacted any economic operator to seek expressions of interest or offers or responded to an unsolicited expression of interest or offer.
Also, for the sake of completeness, the Amendment Regulations will not apply to the award of a specific contract "called-off" under a framework agreement where:
· the framework agreement was established before 20 December 2009; or
· on or after 20 December 2009 following a contract award procedure that was commenced before 20 December 2009.
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Recent Case Reports
Veolia ES Nottinghamshire Ltd v Nottinghamshire County Council [2009] EWHC 2382
A member of Nottinghamshire County Council's electorate sought to inspect certain confidential documents relating to a waste management contract between the Council and Veolia. Section 15(1) of the Audit Commission Act 1998 allows interested persons to inspect a local government's accounts and documents relating to them. The Court upheld the Council's decision to disclose the confidential documents relating to the contract on the basis that local authority accounts are required to show "all the financial movements or items of account of the Council's funds". There is no exemption for confidential commercial information.
The Court's decision clearly has important implications for both local government and its suppliers. It appears that local government will no longer be able to maintain confidentiality in commercially sensitive documents provided by successful tenderers for public contracts. The risk is that this could act as a disincentive to suppliers tendering for contracts, and may make it difficult for local authorities to attract the best suppliers. To minimise this risk, local authorities must be clear with suppliers about the information that they are required to disclose, and should not agree to contractual confidentiality restrictions which prevent them from complying with the 1998 Act as these will be ineffective.
Veolia is currently seeking permission to appeal.
Commission v Germany (Case C-536/07, judgment of 29 October 2009)
A private contractor entered into a 30 year "lease" with the City of Cologne. Under the agreement, the City agreed to pay "rent" to the contractor in return for the use of exhibition halls that were to be constructed by the contractor on the contractor's site. Contracts for the acquisition of rights over land, such as leases, are expressly excluded from the public procurement regime and it was on this basis that the City did not run a competitive tender process.
The European Commission claimed that there was a breach of the public procurement obligations on the basis that the main purpose of the contract was the construction of the exhibition halls (not the lease arrangement). The ECJ upheld the claim. The exhibition halls did not exist at the time of the lease, and without being constructed the contract had no purpose or value. In addition, the contractor was required to construct the exhibition halls in accordance with detailed specifications set by the contracting authority, which exceeded the usual requirements of a tenant in relation to a newly constructed building.
The decision highlights the need for contracting authorities to consider very carefully the scope of the public procurement regulations and potentially seek advice early on if there is any doubt over whether they apply or not, even in relation to contracts which on the face of it seem to fall within an excluded category. This case emphasises that it is the main purpose of a contract that will determine whether the regulations apply.
Acoset SpA v Conferenza Sindaci e Presidenza Prov. Reg. ATO Idrico Ragusa and others (Case C-196/02, judgment of 15 October 2009)
The ECJ considered the legality of directly awarding a services concession for the integrated management of water to a specifically created semi-public company. Services concession contracts are excluded from the public procurement regulations. However, contracting authorities are still required in awarding such contracts to comply with the fundamental principles of the EC Treaty (ie, according to the principles of non-discrimination, equal treatment, transparency and proportionality).
It was held that the direct award of a services concession contract to a public-private company would not breach these principles provided that: (i) the company was created for the specific purpose of carrying out the service contracted for (ie, it has a single corporate purpose); and (ii) the private partner in the company must be selected by an open procurement procedure.
Sea Srl v Comune di Ponte Nossa (Case C-573/07, judgment of 10 September 2009)
This case concerned the legality of an Italian contracting authority's decision to award a contract to provide waste collection, transportation and disposal services directly to a publicly owned company without any competitive tender process. The company was owned by several municipalities in the region.
The ECJ confirmed that the regulations do not apply to contracts where the contracting authority exercises a level of control over the company awarded the contract similar to that exercised over its own departments. A contracting authority will exercise such control in cases where it owns part of the company and the company's governance structure includes managing bodies with representatives of the contracting authority. In addition, the company's activities must be carried out within the contracting authority's "area of influence", and be for the contracting authority's benefit. If there is a mechanism allowing private investment in the company then this is not relevant unless there is a real possibility of such investment in the near future, and contracting authorities must be careful in any event to avoid such subsequent private investment as this may be construed as an attempt to avoid the requirements of the regulations.
Consorzio Nationale Interuniversitario per le Scienze del Mare (CoNISMa) v Regione Marche (Case C- 305/08, opinion of Advocate General Mazak of 3 September 2009)
The Advocate General's opinion concerns the meaning of "economic operator" for the purposes of the public procurement regulations. The duty to comply with the regulations is owed to economic operators, who have the right to submit offers in response to a contracting authority's invitation to tender. In this case, an Italian contracting authority excluded the Italian National Inter-University Marine Sciences Consortium (CoNISMa) from its tendering process on the basis that it was not an economic operator. CoNISMa is a not-for-profit group of 24 universities and 3 ministries whose purpose is to promote and co-ordinate marine sciences research. It receives the majority of its funding from the Italian Ministry for Universities and Research.
Advocate General Mazak is of the opinion that the definition of "economic operator" set out in the regulations is not intended to exclude non-profit-making entities such as CoNISMa. The concept of an economic operator is very wide, and includes entities offering services on the market on an occasional or even one-off basis. In addition, tenders from a non-profit-making tenderer which are lower than those of other tenderers as a result of that tenderer's receipt of state aid must be accepted unless the state aid was granted illegally.
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Office of Government Commerce (OGC): Recent Materials
1. Guidance on the Application of Procurement Rules to Development Agreements
The OGC has published preliminary guidance on the application of procurement rules to development agreements between local authorities or other public bodies and developers. This is an issue of particular interest following the judgment given in 2007 by the ECJ in the case of Auroux v Rouanne (Case C-220/05). The OGC guidance sets out some of the circumstances which reduce the likelihood that the procurement rules will apply to a development agreement, helping contracting authorities to understand whether a development agreement is within the scope of the procurement rules or not.
To summarise, the guidance suggests that a development agreement is less likely to be subject to the rules where:
· it is undertaken at the developer's initiative;
· it is incidental (cf. its "main purpose") to a transfer or lease of land to the developer;
· it is based on proposals put forward by the developer rather than requirements set out by the contracting authority;
· it does not impose specific contractually enforceable obligations on the developer to realise a development, even if such realisation is the general intent of both parties; and/or
· the developer receives no direct or indirect pecuniary interest from the contracting authority.
However useful the guidance in interpreting the public procurement rules is in this context, it is just that - guidance. It is still imperative to assess each instance on a case-by-case basis and take advice where necessary.
2. New OJEU Notice Guidance
Notices of particular procurement processes must be published in the Official Journal (the so-called 'Contract Notice'). The OGC has recently published new guidance to assist contracting authorities in this area, focusing particularly on the completion of Contract Notices. The overriding message being the need for these to be accurate and to cover all the requirements of the contract being procured.
The guidance is informed by the fact that the Contract Notice will set the scope and parameters of the subsequent procurement process. Once a Notice has been published in the OJEU, the parameters of the procurement are effectively defined and any departure from those limits may be open to challenge. As a result, the OGC advise contracting authorities to consider their requirements very carefully before placing an OJEU Notice, and set out a fitness for purpose checklist which can be used to ensure that the requirements included in the Contract Notice reflect both current and future requirements of the contract being procured. Examples of suggested wording for more standard requirements are included.
3. New ICT Model Services Agreement
The OGC, in conjunction with its delivery partner Partnerships UK, has published a new version (v2.3) of its ICT Model Services Agreement for major/complex ICT projects. The free-to-use agreement aims to save public sector organisations both time and money, as they will not need to develop contracts from scratch. Previous versions have been widely used by public sector bodies, with users reporting positive delivery benefits and reductions in negotiation time.
The new version features updates in key areas, including financial distress and security management.
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The Contract Value Thresholds
The estimated value of a particular contract is one of the determining factors as to whether the public procurement regulations apply to the award of certain contracts by a contracting authority. The regulations provide minimum threshold values and these are renewed every 2 years. The new threshold values will be in place from 1 January 2010.
The OGC has just issued a Procurement Policy Note (13/09) giving advance notice of the thresholds and the main ones are set out here.
The sterling equivalent figures are based on the average exchange rate between the Euro and sterling during the period 1 Setember 2007 to 31 August 2009 meaning that, whilst the Euro thresholds are reduced, the sterling figures have acutally risen.
The Commision's formal notification of these thresholds is still outstanding.
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This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
If you require further information on public procurement or anything covered in this bulletin please contact Paul Jones (ppj@farrer.co.uk) or your usual contact at the firm on 020 7242 2022.
© Farrer & Co LLP December 2009
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