Other points worth noting from the guidance…

• COLLATERAL CONTRACTS?  Parties to the contract may want to consider entering into a collateral contract which sets out the terms that will apply in the event that a declaration of ineffectiveness is made – ie, to manage the "unwinding" of the contract.  Courts will look to respect these.  In an outsourcing contract, for example, the collateral contract would look very similar to the exit and handover provisions that will be included in it.  The use of a collateral contract is recommended as this, by definition, is separate from the main contract and will remain in place when the main contract "falls".  Whether there is genuine appetite for this – on either the contracting authority or bidder side – really remains to be seen at the moment.  The OGC does, though, provide some principles and items that may be relevant to preparing such a contract, although stops short of suggesting some model clauses.

Whilst a draft collateral contract could be included with the main contract documents when first issued, the 2009 Regulations do allow for this to be prepared later in the procurement process (even after award, if that is merited).

• TIME LIMITS.  The time limit for bringing ineffectiveness proceedings is 6 months from contract award (longer than the 3 months for other remedies), but this can be shortened to 30 days.  The most common scenario to secure this will be in connection with procurements that have been advertised in the OJEU.  Separate from the formal standstill notice (which will be issued earlier in time), the contracting authority must inform the tenderers and candidates of the "conclusion" of the contract and provide a summary of the reasons for the decision with this notification (which could equate to a referral back to what was stated in the standstill notice).  The conclusion of the contract is when it is formally executed and entered into.
• FRAMEWORK AGREEMENTS.  The contracting authority that "owns" a framework agreement may wish to consider suspending the award of further call-off contracts when ineffectiveness proceedings are brought against the framework.   Whilst not mandatory, the OGC comments that this is a way that potential risks could be limited for those able to call-off contracts under the framework.
• CALL-OFF CONTRACTS.  Contracting authorities looking to call-off a contract under a framework would be advised to assess the following, in particular, in order to allay certain fears about ineffectiveness: (i) whether the framework itself is subject to the 2009 Regulations – if the procurement process which established it was started before 20 December 2009 then the new rules will not apply; and (ii) whether the times limits for bringing a claim have passed – if the framework has existed for more than 6 months then ineffectiveness cannot apply and, if the framework is less than 6 months old, check whether the 30-day time limit applied (and has elapsed, if it did).

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Public Procurement and land development

In recent years local authorities have become increasingly aware of public procurement requirements in relation to the development of land.  A line of recent cases has highlighted that local authorities now need to consider if an agreement for works carried out by a developer (under a section 106 planning obligation, development agreement or regeneration scheme) where it procures a benefit to the local authority, is subject to the procurement regulations as a "public works contract".  Private developers will have to be equally aware of this issue, particularly in light of the new remedies regime now in place and the potential declaration of ineffectiveness for non-compliant procurements.  

The latest case of Helmut Müller GmbH v Bundesanstalt für Immobilienaufgaben has sought to clarify the extent to which the procurement rules apply to the sale of development land. 

Although transactions in land are exempt from the procurement rules, the EU Directives and the UK Regulations are silent as to whether this exemption also covers additional conditions contained in the agreement for sale beyond the core conditions of disposal and payment. If there are additional terms concerning works to be carried out, which are more than ancillary to the transfer, then that agreement for sale may be caught by the procurement rules.

Facts

• The German federal agency responsible for administering public property (the Bundesanstalt) made a notification of its intention to sell land formerly used as barracks.  The land would be sold without pre-agreed urban planning permission but the authorised use of the land would be agreed with the Wildeshausen local authority (WLA) which had responsibility for exercising regulatory powers.
• Two development companies, Helmut Műller and GSSI made bids for the land and submitted their proposed plans for its use.  The WLA declared its preference for GSSI's bid on urban development grounds and, with the agreement of the WLA, the Bundesanstalt sold the land to GSSI.  However, the WLA made it clear that its decision in relation to the GSSI's urban development plan was not binding and the sale contract contained no reference to the future use of the land. 
• Helmut Műller brought an action claiming that the sale should have been carried out in accordance with the procurement rules.
• On appeal several questions were referred to the ECJ.  The ECJ ruled that:

a) for a public works contract to exist the works that are the subject of the contract do not need to be materially or physically carried out for the contracting authority, provided they are carried out for the contracting authority's "immediate economic benefit".  Here "immediate" can also be read as "direct." It is not sufficient that the works just fulfil an objective in the public interest - the exercise of standard urban planning powers will not constitute an immediate economic benefit.  A contracting authority is likely to receive a genuine economic benefit where an agreement provides for it to become the owner of a development, or acquire a legal right over use, so that the development can be made available to the public.  Whether the authority contributes financially or assumes risk in a development will also be an indication that a direct economic benefit may arise in the future from use of the works.

b) the contractor must assume a direct or indirect legally enforceable obligation to carry out the works that are the subject of the contract (an indirect obligation seems to apply to indirect delivery through a sub-contractor).  In this case there was no specific obligation on GSSI to undertake the works.  As no obligations were included in the contract for the sale of the land, there were no legally enforceable obligations and the procurement rules did not apply.  

c) where "requirements specified by the contracting authority" are provided to a developer, a decision to exercise existing urban planning powers will not constitute a specification of requirements if the contracting authority has not taken measures to define the type of work or does not have an influence on the design of the work.  In this case WLA had not drawn up a list of specifications, but had merely indicated it would examine GSSI's project. 

d) in certain cases, where a contract for the sale of land which will subsequently form the subject of a public works contract (with the same contracting authority or indeed another one).  The two elements could be considered a single contract, such that the sale itself would be subject to the procurement rules. That was not however the case in this instance.   

e) there cannot be a public works concession where the economic operator already owns land and so has the right to exploit it.  

This case it made clear that the mere exercise of urban planning powers in relation to land that is also sold by a contracting authority does not bring the arrangement within the rules.  In this case it was important that the sale of land and the subsequent execution of local authority planning powers were separated and that there were no contractually or legally binding obligations in relation to the execution of works on the land that had been sold. 

Helmut Müller has been important in the context of development as it has once again narrowed the concept of "works for the contracting authority" which had been significantly expanded following Jean Auroux v Commune de Roanne.

This is important for section 106 agreements (or planning obligations) in particular. Planning obligations are a creature of statute, and are restricted in their use by certain, now statutory, tests requiring the obligation to be necessary in order to make the development acceptable in planning terms, directly related to the development, and fairly and reasonably related in scale and kind to the development.  Planning obligations can only mitigate the impact of a development in planning terms, and there is no reason why certain planning obligations meeting those requirements will not also bring to a local authority an immediate or direct economic benefit beyond the objectives simply of good planning.  A school community hall or new highway required as part of a scheme may meet the statutory tests on obligations as well as bring a direct economic benefit to the local authority, especially when transferred to it.

In contrast if the involvement of a contracting authority in a development is limited only to the exercise of its regulatory planning powers, as will in fact be the case in most s106s for smaller developments, the procurement rules will not apply.

In practical terms, it remains important for contracting authorities and commercial developers to consider whether particular development agreements or section 106 arrangements constitute public works contracts that could potentially be subject to the procurement rules.  The purpose and detail of the contract must be examined to determine if it is such a contract, even if it contains other elements.

It may be possible to restructure planning obligations as financial contributions and/or transfers of land if necessary and if development plan policies allow, subject to restrictions imposed by the Community Infrastructure Levy Regulations 2010.    

Contracting authorities entering into development agreements should also be particularly careful where developers are only allowed to proceed on satisfying certain requirements (beyond those required in exercise of their planning powers), and should consider who bears the risk and funding obligations, and how far the authorities' specifications influence the development. 

Although the Helmut Müller case has clarified the application of the procurement regime in relation to land development, there remain many situations where the procurement rules will still apply.  In light of the new remedies for breach of the procurement rules, contracting authorities and property developers alike should examine their arrangements carefully to establish whether there is a need to comply with the public procurement rules, and seek advice on what to do if there is.

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Recent Case Reports

Transparency of weighting criteria

Lettings International v London Borough of Newham [2008] EWHC 1583

Facts

• Lettings International ("L") received an ITT to provide services to the London Borough of Newham ("N").  The invitation stated that tenders would be evaluated with reference to three weighted criteria: compliance with the specification (50%); pricing (40%); and suitability of premises, staff and working (10%).
• L submitted its tender but it was unsuccessful. 
• Following N's explanation, L issued proceedings claiming that N's assessment of the 'compliance with the specification' criteria was carried out unfairly.
• In particular, L alleged that assessment of this category was carried out by reference to 5 separately weighted sub-criteria which were not disclosed in the ITT.  L also complained about the method behind N's marking – in particular that, due to the varied weightings of the sub-criteria, a tender would actually have to exceed the specification in order to achieve full marks.  L argued that this lack of fairness and transparency was a breach of the procurement rules.
• The Court agreed, stating that if L had been informed of the weighting of the sub-criteria and approach to marking then it would have changed the way it prepared its tender.

This case demonstrates that contracting authorities must be extremely careful in ensuring they provide tenderers with full information of the criteria that will apply in the assessment of tenders.  Providing 'general headings' for each criteria, as in the above case, is not sufficient.  If a weighted marking system is to be used, especially one involving various differently weighted 'sub-criteria' which would affect the way bids are prepared, its mechanics should be fully disclosed to tenderers before they submit their bids.

Disclosure Obligations

Amaryllis Ltd v HM Treasury (No. 2) [2009] EWHC 1666

Facts

• Amaryllis Ltd ("A") claimed damages for breaches of the procurement regulations by the Treasury ("T").  A claimed that T had failed to deal with its bid in an equal and transparent way.
• In the course of the litigation, A applied for an order for disclosure and inspection of a large number of documents relating to the first-stage of the tender process.  T resisted this, seeking in turn its own order that it be allowed to withhold disclosure of numerous documents.  T argued that disclosure of these documents would damage the public interest.
• The Court ruled that the majority of the documents sought by A were relevant to the issues and their disclosure and inspection was proportionate.  Therefore, they should be disclosed.

This case demonstrates that both bidders and contracting authorities should be aware that, in proceedings brought under The Public Contracts Regulations 2006, a wide range of documents are potentially disclosable.  The documents in this case included minutes of meetings, PQQs and score sheets (including annotations).  The Court preferred to use a mixture of redactions and substitutions to deal with documents containing commercially sensitive or confidential information relating to bidders, rather than withholding such documents completely.  Accordingly, contracting authorities should take care to ensure that they conduct the procurement process in a genuinely equal and transparent way, as documents which undermine this position may have to be disclosed.

Freedom of Information Act

DoH v Information Commissioner

Facts

• A FoI request was made, requesting the disclosure of a contract between the Department of Health ("DoH") and Methods Consulting Limited ("M") to set up and then maintain an 'e-recruitment' website for the NHS.
• The DoH refused to disclose the contract and attempted to rely on, amongst other things, the fact that the contract contained a confidentiality clause and a considerable amount of commercially sensitive information.  
• Conversely, the applicant making the request argued that confidentiality clauses should not be used to provide such a blanket exemption and that the introduction of 'e-recruitment' by the NHS would have a huge effect on health sector workers in the UK.  Over 70% of all health sector workers are employed by the NHS.  Thus, it was argued, there is a strong public interest in the disclosure of the contract.
• The court agreed that the contract should be disclosed.

This case illustrates that, under the Freedom of Information Act, the public (including rival bidders of course) may be entitled to any information held by the relevant Authority, unless one of the specific grounds for exemption provided within the FOIA apply.  Therefore, it should be assumed that most public contracts cannot be withheld in their entirety simply by relying on a Freedom of Information Act exemption.

Initial Assessment of Prices and Costs

Henry Bros Ltd (No. 2)

Facts

• 12 contractors were invited to tender for design and construction work relating to the Department for Education's Northern Ireland Schools Modernisation Programme ("DE").  The invitation set out that bids would be evaluated on an 80% qualitative, 20% commercial basis, with the most economically advantageous bidders being included in a framework agreement.  
• The bidders were required to provide "fee percentages in relation to hypothetical contracts" and there was no assessment of actual price or cost.  The claimants ("C") were the four contractors who were not included in the framework agreement after the 'first stage' of the tender process.  
• C argued that, in deciding the most economically advantageous bid, DE should have directly analysed the comparative price and costs of each bid.  By relying on solely non-economical evaluation criteria, namely a combination of hypothetical fee percentages and qualitative assessment, it was argued that DE had breached the procurement regulations.
• The Court agreed, stating that it was not possible for DE to identify the most economically advantageous tender without carrying out a review of prices and costs.

This case demonstrates that if a contracting authority wishes to award a Framework Agreement based on the most economically advantageous tender, it must carry out some kind of initial assessment of prices and costs.  If the contracting authority relies solely on non-economical evaluation criteria, there is a risk that the procurement will be unlawful, particularly where the price of the goods or services in question is not fixed.

Adherence to Deadlines

J B Leadbitter & Co Ltd v Devon County Council [2009] EWHC 930

Facts

• J B Leadbitter & Co Ltd ("JB") were a construction company invited to tender to participate in a framework agreement for construction projects.  The submission of a completed case study containing pricing information was a vital aspect of the tender process.  
• The invitation clearly stated the deadline for submission and included a statement that the completed tender, including full case studies, had to be submitted electronically via a secure portal.  It further stated that submission of the tender online was a 'once-only option', and that only extremely limited supplementary information would be accepted via hard-copy.  
• Another bidder suffered a power failure on the 'deadline day' for submission of tenders and as a result the deadline was extended by several hours.  JB uploaded and submitted its tender online before the extended deadline.  Shortly before the expiry of the deadline, however, JB realised that it had forgotten to attach the case studies.  These were finally emailed after the deadline had expired.  
• DC informed JB that their tender would not be considered.  In response to this, JB issued proceedings claiming that DC had breached the procurement rules.
• The Court rejected the claim, stating that the conditions for the submission of a valid tender were clear and that the bidders were treated "equally and in a non discriminatory way" and also in a "transparent way".  
• JB also tried to argue that rejecting the 'incomplete' tender was disproportionate.  The Court disagreed again, stating that the deadline was a deadline and the rules surrounding submission were explicitly clear.  As the fault for late submission here lay solely with JB, the rejection by DC of the submission was considered a proportionate response.  

This case demonstrates the requirement on contracting authorities to act "proportionately" when applying selection criteria, as well as "equally" and "transparently".  However, this requirement to act proportionately may be interpreted strictly or flexibly.  A key factor in deciding whether a tender was dealt with 'proportionately' will be which party is to blame for any non-compliance. 

Variations to Public Contracts

Pressetext (C-454/06)

Facts

• An existing public contract was amended to change the fee structure in certain respects to reflect the 'internal reorganisation' of the contractor and also deal with Austria's conversion to the Euro.  
• The claimant ("C") brought proceedings claiming that these amendments violated procurement law – C argued that as the contract had been amended, it should have been put to a new tender.  
• Directive 92/50 sets out that a public contract should be put to a new tender if the changes result in a 'material difference'.  This includes the introduction of conditions which would have altered the result of the original tendering process, the extension of the scope of the contract into services not previously covered and any change of the economic balance of the contract in favour of the contractor in a manner not set out in the terms of the original contract.  
• The Court decided that the changes made to the existing contract did not constitute a 'material difference' and as such no new tender was necessary.

This case provides some guidance on the issue of how far variations can be made to public contracts without commencing a new tender process.  The court noted that the following changes to the contract were not material in this case:

- changes resulting from an internal re-organisation of the contractor;

- changes which are inevitable due to external circumstances (such as the introduction of the Euro);

- changes which merely implement provisions of the original contract (such as the change in fee structure here); and

- changes which are detrimental to the contractor.   

However in practice the 'material difference' standard remains one that can prove difficult to measure.  Each case will turn on its own individual facts.

Limitation Periods

Uniplex (UK) Ltd v NHS Business Services Authority

Facts

• Uniplex ("U") submitted a tender to the NHS for the supply of haemostats in July 2007.  This tender was unsuccessful and the NHS notified U of the reasons for this in November 2007.  In March 2008, U began proceedings in the High Court.  
• The Public Contracts Regulations set out that proceedings should be brought "promptly and in any event within 3 months from the date when grounds for bringing proceedings first arose, unless the Court considers that there is good reason for extending this period".
• The High Court stayed proceedings and referred two main questions to the ECJ:
  • When should the 3 month limitation period begin from?  Should this be the date upon which the actual breach by the NHS occurred, or should this be the date upon which U became aware of the breach occurring?  
  • How should the word 'promptly' be interpreted? The High Court requested clarification on the extent of their discretion to extend the limitation period.

The ECJ stated that the 3 month limitation period only begins when the unsuccessful bidder knew or ought to have known that a breach had occurred.  In practice, this means the limitation period invariably begins when the unsuccessful bidder is notified by the contracting authority of the reasons for the failure of their bid.

Secondly, the ECJ decided that the unsuccessful bidder is no longer required to act 'promptly' and that instead it must simply act within 3 months.  Further, the ECJ set out that National Courts must exercise their discretion to extend the 3 month period if doing so will make an 'effective remedy' available to the unsuccessful bidder.  

This case provides useful clarification of the rules regarding when proceedings should be brought by aggrieved tenderers.

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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 (paul.jones@farrer.co.uk) or your usual contact at the firm on 020 3375 7000.

© Farrer & Co LLP June 2010