The European Council and Parliament today adopted an important new Directive which amends the existing "Remedies Directives" in the field of public procurement. The most significant change is the introduction of an "ineffectiveness penalty" for contracts that are awarded by a public authority or utility without prior publicity or competition, in breach of the EU procurement rules. To date, the general rule has been that, once a contract has been entered into, a court cannot set it aside. Under the new amendments, which will enter into force in two years' time, a contract awarded unlawfully may be deemed ineffective and thus have to be re-tendered.

The current system of procurement remedies

Remedies Directives 89/665 and 92/13, applicable to public bodies and utilities respectively, require EU Member States to make available effective means of redress for aggrieved tenderers who have been prejudiced by a breach of the EU rules on public procurement. In the UK, the remedies have been incorporated into the Public Contracts Regulations 2006 and the Utilities Contracts Regulations 2006.

Under both sets of Regulations, before a contract is concluded, interested third parties who allege a breach may apply to the High Court for an order to set aside or suspend the contract award procedure in question. However, if the contract has already been entered into, the Regulations provide that the contract cannot be disturbed and the complainant's potential remedy is confined to financial damages (which are generally hard to establish).

The current legislation therefore makes it difficult for interested parties to challenge a contract once it has been signed, even if its award by the public authority or utility was blatantly in breach of the procurement Regulations. That problem was only partly addressed by the introduction of a so-called "standstill period" in 2006. The 2006 Regulations stipulate that, after taking its award decision (i.e. selecting the successful bidder), the awarding authority or utility must inform all of the unsuccessful bidders in writing of that decision and the underlying reasons, and then wait at least 10 calendar days (the standstill period) before concluding the contract in question with the successful bidder. That standstill period gives losing bidders the chance to challenge a procedure before the contract award becomes a fait accompli. However, it is of no help where an authority or utility simply enters into a contract directly to its preferred supplier without any prior publicity or advertising.

The new penalty of contract ineffectiveness

Under the amending Directive, EU Member States (including the UK) must ensure that a contract is considered ineffective where the awarding authority or utility:

  • awards a contract directly to its preferred supplier, without prior publication of a contract notice in the OJEU, in circumstances where this omission was not permitted by a derogation; or
  • enters into the contract after an action to suspend the award procedure has been lodged, or before expiry of the above-mentioned 10-day standstill period, in circumstances where the authority or utility has also committed a breach of the substantive rules (such as a failure to advertise) which affected the complainant's chancesof applying for a review to obtain the contract; or
  • has breached the rules regarding call-offs under a framework agreement or dynamic purchasing system and has not allowed for the 10-day standstill period before concluding the called-off contract

The amending Directive specifies that Member States may provide that a challenge to the effectiveness of the contract, under one of the three grounds above, must be brought within six months of the day following the conclusion of the contract. Where the awarding entity has published a contract award notice, or sent a "standstill notice" to the losing bidders, the deadline for any challenge may be reduced to 30 calendar days from the notice in question.

The amending Directive also states that the consequences of a contract being considered ineffective are to be provided for by national legal systems. National law may provide for either the retroactive cancellation of all contractual obligations under the ineffective contract or the cancellation only of those obligations which still have to be performed under the contract. It remains to be decided which option the UK will take (see below).

Furthermore, the amending Directive permits Member States to allow for a derogation from the ineffectiveness sanction if the national review body finds, after examining all relevant aspects, that "overriding reasons relating to the general interest require that the effects of the contract should be maintained". An example of such a reason might be where any delay to a contract for hospital works would jeopardise the health or safety of patients. The Directive adds that economic interests, such as extra costs for the authority, generally may not constitute such "overriding reasons".

Where overriding general interests do justify leaving the (unlawfully awarded) contract in place, Member States must instead provide for the alternative penalties of fines or shortening the duration of the contract. These alternative penalties must be effective, proportionate and dissuasive.

UK implementation and future consequences

The new Directive will be published shortly in the EU Official Journal. The UK, like other Member States, will then have two years to implement the changes. When laying down new implementing regulations, HM Government will have to make a key choice between two alternative types of ineffectiveness: a retroactive cancellation of all effects of the contract or only a forward-looking cancellation of the contractual obligations that have not yet been performed. The retroactive option could be very disruptive and would give rise to difficult issues surrounding contracts that have already been partly performed. Consequently, HMG may prefer the less drastic option of forward-looking ineffectiveness.

Whichever option is chosen, the newly-adoptd amending Directive will make public authorities and utilities, as well as their private sector contractors and financiers, much more wary of breaches of the procurement reules. To date, a common perception has been that relatively little risk attaches to procurement infringements, because it is very unlikely that any third party complaint would jeopardise the validity of the contract itself. Even if a court determined that the contract was awarded unlawfully, the only potential remedy would usually be financial damages, which are notoriously difficult for third party bidders to establish.

The real possibility of the contract being deemed ineffective is a much more serious sanction, particularly as the risk of a third party raising such a claim will hang over the contract for a period of six months following its signature. Moreover, the existence of the new penalty is likely to encourage more court actions against unlawful direct awards, because the complainant will have a greater prospect of disturbing the existing contract and thus of having a new chance to win the contract when it is ultimately put out to tender. Clearly, the parties to a signed public contract will no longer be able to assume that it will be treated as a "sacred cow" which cannot be attacked under EU procurement law.