Summary

Draft Regulations to implement the EU Remedies Directive provide for cancellation of public sector and utilities contracts awarded in breach of fundamental EU public procurement rules. briefing summary

The UK Office of Government Commerce (OGC) has recently published its second consultation document on the implementation of the EU Directive 2007/66/EC (the Remedies Directive). As part of the consultation, the OGC has published draft amendments to the Public Contracts Regulations 2006, which should be applied analogously to the Utilities Contracts Regulations 2006 (together, the Regulations).  

As required by the Remedies Directive, the draft legislation will, for the first time, require the courts to make a declaration of ineffectiveness for any public sector and utility contracts awarded in breach of certain fundamental EU public procurement rules. Contracting authorities or utilities that have acted in breach of those rules will also be liable to financial penalties. This marks a major departure from the current position under the Regulations, where aggrieved bidders are restricted to damages once a contract has been awarded in breach of the rules.  

Proposed remedies where the contract has not been entered into  

In circumstances where the contract has not been entered into and the court is satisfied that a decision taken by the contracting authority was in breach of one of the duties owed by the contracting authority, the draft legislation anticipates that the court may:  

  • order the setting aside of the decision concerned;
  • order the contracting authority to amend any document; and/or
  • make an award of damages

The position in respect of contracts not entered into is therefore, in effect, the same as currently applies under the Regulations.  

Proposed remedies where the contract has been entered into  

In circumstances where the contract has been entered into, the draft legislation anticipates a new remedies regime as follows:  

  • the court must make a declaration of ineffectiveness (subject only to there being overriding reasons in the general interest to maintain the contract), if it is satisfied that:  
    • the contract has been awarded without prior publication of a contract notice where required; or  
    • the contract has been awarded in breach of the mandatory 10-day standstill period, or has been awarded following the start of proceedings in respect of a contracting authority’s decision, and all of the following apply:  
      • the breach has deprived the contractor of the possibility of pursuing pre-contractual remedies;  
      • a breach of one of the substantive (as opposed to remedies-related) duties owed by the contracting authority has occurred; and  
      • the breach has affected the chances of the contractor obtaining the contract;  
    • the contract is based on a framework agreement or was awarded under a dynamic purchasing system and was awarded in breach of such arrangements (assuming the estimated value of the contract exceeds the relevant threshold);  
    • the court must, where it makes a declaration of ineffectiveness, also order the contracting authority to pay a fine;  
    • the court may award damages to an economic operator that has suffered loss or damage as a consequence of the breach; and  
    • where a declaration of ineffectiveness is not made because of overriding reasons in the general interest to maintain the contract, or where the court is satisfied the contract has been entered into in breach of the mandatory 10-day standstill period/suspension pending determination of proceedings, the court must order:  
      • that the length of the contract is shortened; and/or  
      • that the contracting authority pays a fine.  

When deciding what order to make in respect of contract shortening and/or a fine, the overriding consideration is that penalties must be ‘effective, proportionate and dissuasive’.  

Declarations of ineffectiveness  

Currently, there are only limited circumstances when a public contract may be set aside by the courts. As a matter of public law, the court has a discretion to set aside a contract where, on a successful judicial review application, it is established that the public authority has acted outside the scope of its powers (ie ultra vires) or has acted unlawfully. As a matter of private law, a contract will generally only be set aside in successful cases for rescission based upon mistake, misrepresentation, duress or undue influence. A contract entered into ultra vires will not, however, be enforceable in private law as it is held to be void and restitutionary remedies for the counterparty are limited.  

Further, following the Court of Appeal’s decision in R.(on the application of Cookson & Clegg) v Ministry of Defence1, where a rival provider has both a private law cause of action under the Regulations and a public law cause of action, the rival provider may generally only bring an action under the Regulations. As a result,

the only remedy that a rival provider currently has after entry into the contract is damages. The proposed legislation changes this position for the most serious breaches of the rules.  

The Remedies Directive gave member states the option to apply ineffectiveness retrospectively or prospectively. The draft legislation proposes that contracts will only be declared ineffective prospectively (ie going forward from the time when the declaration of ineffectiveness is made). Nevertheless, where cancellation is ordered this will still have a significant impact upon third parties, such as funders, subcontractors and suppliers. Where the contract concerns infrastructure works, authorities may also face difficulties finding a replacement contractor willing to assume the liability for the partially completed work.  

The court is not required to make a declaration of ineffectiveness where ‘overriding reasons relating to a general interest’ require that the contract should be maintained. Economic interests in the effectiveness of the contract may only be considered if, in exceptional circumstances, ineffectiveness would lead to disproportionate consequences. However, economic interests directly linked to the contract (such as costs resulting from the delay in the execution of the contract or costs of commencing a new procurement procedure) cannot constitute overriding reasons relating to a general interest. A key issue will therefore be how the courts interpret the concept of ‘general interest’ in this context.  

Call-off contracts when a framework agreement is ineffective

The draft legislation does not currently address the position of call-offs made under a framework agreement that is later declared ineffective and the OGC continues to seek views on this issue as part of the consultation. It is therefore currently unclear whether a declaration of ineffectiveness in respect of a framework will trigger the automatic (prospective) ineffectiveness of any live call-off contracts under the framework agreement. The OGC should publish further draft amendments to the Regulations on this issue in due course.

Mitigation measures  

How can contracting authorities and utilities that consider they are entitled to rely on one of the exemptions to prior publication of a contract notice (eg for technical or artistic reasons, or in the case of extreme urgency) protect themselves from potential challenge? The draft legislation provides the following opportunities for managing the risk of challenge.  

  • Ineffectiveness will not be available where:
    • the authority considers that the award of a contract without prior publication of a contract notice is permitted by the Regulations;  
    • the authority has published a voluntary transparency notice expressing its intention to enter into the contract; and  
    • the contract has not been entered into before the end of a period of 10 days from the date of the voluntary transparency notice.  
  • Where the authority either publishes a contract award notice within 48 hours of contract award or informs all candidates/tenderers of the contract award, the time limit for bringing proceedings for a declaration of ineffectiveness will be reduced from 6 months to 30 days.
  • The consequences of any declaration of ineffectiveness can be expressly addressed ‘up front’ as part of the terms of the contract. The draft legislation provides the ability for the court – at the time of making a declaration of ineffectiveness or at any time after doing so – to make an order as to consequential matters arising from the ineffectiveness (eg compensation between the parties). And it is proposed that where a declaration of ineffectiveness is made, the court must make any such order consistent with any prior agreement made by the parties in respect of their mutual rights and obligations. If this concept is retained in the final legislation, it is therefore likely that many parties may consider adding such provisions alongside the regime for early termination of the contract.  

Limitation periods for seeking remedies  

The flow chart that appears at the end of this briefing sets out the proposed limitation periods for each of the proposed remedies. As this shows, the risk of a declaration of ineffectiveness will apply up to 6 months after entering into the contract (save where the contract award is published or candidates/tenderers are informed of the award as noted above). However, in light of the fact that ineffectiveness is proposed to apply only prospectively rather than retrospectively, the concern originally voiced by some commentators (that successful tenderers may reduce their exposure by not starting work until after the 6-month maximum review period has expired) should not arise, provided that adequate protection in the event of cancellation has been included in the contract.  

Transitional arrangements  

The Remedies Directive requires the new rules to be implemented by 20 December 2009, but does not explicitly address transitional issues. The OGC’s preference at this time is to apply the new rules only to new procurement processes beginning after 20 December 2009 and the European Commission has informally confirmed that this is an acceptable approach. The legislation is therefore not anticipated to have retrospective effect in the sense of applying to procurements currently underway.  

Next steps  

Following publication of the draft legislation, the OGC is now undertaking a further period of consultation until 24 July 2009. Thereafter, final proposals for implementing the Remedies Directive will be laid before parliament.

Proposed limitation periods for bringing proceedings  

Remedies for breach of procurement rules

Flow chart representing time period for challenge following OGC 2nd consultation