At the end of last month a Scottish court made UK legal history by becoming the first Court to grant a claimant the remedy of contractual ineffectiveness under the Scottish public procurement legislation (which is in most respects is the same as that which applies in the rest of the country). The remedy first became available in 2009.

Council services framework

The case concerned a contract award made by Inverclyde Council for street-lighting service, ostensibly made under a framework agreement. An economic operator challenged the award decision on the basis that the contract award had been made to a corporate entity, Amey Public Services LLP, which was not on the framework.  The Amey entity that was party to the framework agreement was Amey OW Limited.  The LLP was a joint venture owned by Amey (66.6%) and North Lanarkshire Council (33.3%).  The Court was not persuaded that this was a mere administrative error that could be rectified through a novation to the correct Amey entity.  Instead it considered that the appropriate response to the claim was to declare the contract award ineffective.

Step up to the big league

The facts of the case are relatively unremarkable, but the decision to grant the remedy of ineffectiveness is significant, particularly if it foreshadows more judgments where the remedy is granted. Contractual ineffectiveness is applied prospectively, so all future performance obligations fall away, theoretically (in the context of a services contract) all services rendered prior to the date of ineffectiveness would still need to be paid for.

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Property risk

In the context of a property transaction, for example an agreement for lease, it would be very much more difficult to predict how a court would handle the consequences of a declaration of ineffectiveness – potentially leaving investments made on the basis of the agreement vulnerable to loss.

Prudent counter-parties entering into transactions with public sector bodies where procurement is an issue have been aware of the risk of ineffectiveness since the rules relating to remedies changed in 2009 (and the threat has always been considered real – no procurement lawyer would ever truly describe ineffectiveness as a “paper tiger”). However, various measures can be employed to protect parties to mitigate the risk of ineffectiveness and its consequences – but only if the issue has been thought about in advance.

A footnote to this case is the obligation in the rules to impose a fine on the public authority (Inverclyde Council in this case), which must be levied in all cases where the remedy has been granted.  It will be interesting to see at what level the fine is actually set at, having regard to the fact that a substantial fine could have an impact on the provision of public services in the locality.