Challenging UK Public Procurement Decisions – The Ineffectiveness Remedy

Even in times of budget cuts and reduced public spending, the value of public sector contracts in the UK is considerable. For 2009-10, it is estimated that £165,000 million was spent on procurement with the figure for 2010-11 set to reach £168,000 million.  Notable ongoing projects include London’s Crossrail link and the 2012 Olympics.

Bidding for public sector work is invariably a time consuming and costly exercise for suppliers who are invariably faced with many hoops to jump through during the bid process.  It is vital therefore that throughout the process suppliers are treated in a fair, transparent and non-discriminatory way.

To try and ensure greater fairness in the procurement process, the EU has over the years implemented a variety of directives which in the UK are principally contained in the Public Contracts Regulations 2006 and in the Utilities Contracts Regulations 2006.  One of the main aims of these Regulations is to provide bidders with remedies to address breaches by public authorities of their procurement law obligations. 

Until recently, one of the major shortcomings in the remedies available to suppliers was the inability to get a contract award overturned, once the contract had been entered into, even if there had been a flagrant breach of procurement law.  Once the contract had been entered into, the only remedy available was damages.  If a bidder wanted to stop the award being made then an injunction had to be obtained in the short ten day standstill period between notification of the award and the entering into of the contract.  Not surprisingly, the difficulties of preparing and mounting a legal challenge in such a short timeframe, combined with the inability to overturn a contract once it had been entered into, meant that disappointed bidders were often reluctant to pursue claims.

It was to provide suppliers with a more effective means of redress that in 2007 the European Commission adopted a new Remedies Directive which was implemented in the UK in December 2009 through amendments to the 2006 Regulations. 

One of the principal changes was to introduce a remedy of “ineffectiveness” which enables courts to declare contracts ineffective up to six months after they have been entered into. The remedy, which operates to cancel obligations prospectively rather than retrospectively, is available in cases of serious breaches of procurement law, including where a public authority has failed to give prior notice of the competition or has entered into the contract during a standstill period.

The ability of the court to declare public contracts ineffective is an important development and one which, in theory at least, has the potential to address what many see as an imbalance in power between suppliers and contracting authorities.  The remedy also has an additional sting in its tail because in cases where it is ordered the court is obliged to impose a financial penalty on the contracting authority which is required to be “effective, proportionate and dissuasive”.  In any major project such fines are likely to be significant indeed.

Many contracting authorities viewed the ineffectiveness remedy with some foreboding not least because the length of the challenge period (which can be up to six months), could leave commercial projects in a state of limbo where challenges are threatened or made. 

A year-and-a-half has now passed since the new Regulations came into effect, but it is only recently that the courts have had an opportunity to consider a case where the ineffectiveness remedy was sought.

The case concerned the upgrade of Eurostar’s train fleet ahead of the Channel Tunnel being opened up to Eurostar’s competitors in 2013.  In October 2010 Eurostar announced that the contract was to be awarded to Siemens (one of two final bidders, the other being Alstom).  In response, Alstom (the incumbent) initially sought an interim injunction to stop the contract being awarded to Siemens.  The injunction application failed and in December 2010 Eurostar entered into the contract with Siemens.  Alstom subsequently brought a claim for ineffectiveness arguing that because the final contract entered into between Eurostar and Siemens was materially different from that sought by the tender process, there was in effect a new contract in existence which required a fresh notification and standstill period, neither of which had been given. Accordingly, the grounds for ineffectiveness were established.

Alstom’s claim for ineffectiveness was rejected by the court. In rejecting the claim, the court adopted a pragmatic approach to the requirements which Alstom had to establish before ineffectiveness could be awarded.  On the first ground of the claim (whether proper notice of the competition had been given), the court took the view that Eurostar had given sufficient notice on the facts (which the court described as being a “mechanistic test”) which was not invalidated even assuming that the contract had been varied subsequently.

The judge also held that the second ground for the remedy (failure to observe the standstill period) was unavailable.  An important element of this ground was for Alstom to show that the breach had deprived it of the ability to bring a claim because the standstill had not been observed.  The judge concluded that either there was no breach of the standstill period, or any breach that did occur did not prevent Alstom from initiating proceedings before the contract was awarded (it had in fact brought injunction proceedings in October 2010, which had failed). 

One of the key observations made by the judge in his reasoning was that:

“To some extent the ineffectiveness provisions are obviously intended to operate only when anticipatory proceedings could not be brought…[a claim for ineffectiveness] should only be available when [an anticipatory claim] has not been possible because of the act of the utility in not holding its hand on contracting to the requisite extent.”

One final point of note concerns the time limits for an ineffectiveness claim.  Although the long-stop date for the remedy is six months, this can be reduced to 30 days where notice of the award (or, if later, a summary of the reasons as to why the tenderer was unsuccessful) is given.  In the Eurostar case the judge decided that, even if Alstom had been successful in satisfying the grounds for ineffectiveness, its claim was time-barred in any event.  It was not necessary for the summary of reasons to be in any particular form and on the facts the information supplied by Eurostar was sufficient; accordingly, the 30 day time limit had expired well before the proceedings were commenced. The rationale for the decision is based on the importance of commercial certainty and the requirement that the trigger for the remedy should be clear.  Being overly prescriptive as to the form of the information to be provided would only promote uncertainty.

In summary,  while a claim for ineffectiveness remains the nuclear option for suppliers, the Eurostar case highlights that it is only likely to be available in circumstances where public authorities have entered into contracts without giving suppliers the opportunity to object, either because the procurement was not properly advertised, or because the standstill period was not observed.  These grounds are unlikely to be available to a disappointed supplier unless it can show that the contracting authority’s failures prevented it from bringing a claim before the contract was awarded.  In looking to see whether the grounds for ineffectiveness are established the courts are likely to take a fairly robust approach.

Jeremy Sharman is a partner and Russell Williamson is an associate in the Dispute Resolution Group of international law firm Bird & Bird LLP.  Jeremy can be contacted at jeremy.sharman@twobirds.com and Russell can be contacted at russell.williamson@twobirds.com