On Wednesday 3 October 2012, the Department for Transport ("DfT") released a statement that it was scrapping the award of the West Coast Main Line franchise to First Group and was therefore no longer contesting the judicial review sought by Virgin Trains Limited ("Virgin") into the decision (made on 15 August) to grant the award. Since this announcement, the resulting turmoil has been described as the biggest crisis for the privatised rail industry since the collapse of Railtrack eleven years ago.  The 2-month drama saw 150,000 members of the public sign a public petition calling for reconsideration of the decision, Labour urging the delay of the award to allow a debate in the House of Commons and the convening of a Commons transport select committee.

Virgin boss Sir Richard Branson publicly criticised the DfT after the announcement of its decision, calling the tender process "flawed and insane". Virgin reportedly sought clarification from the DfT over a period of three weeks following the award to First Group but did not get sufficient communication in response to address its concerns.  It subsequently submitted an application for judicial review at the High Court in London on 28 August, which was listed for an urgent hearing on 17 October and which was vacated as it was no longer required.

Since the DfT's statement, the Transport Secretary has undertaken to reimburse the wasted bid costs of all four original bidders.  Given that the tender process lasted some 15 months, and according to Sir Richard Branson cost Virgin alone in the region of £14m, this particularly costly mistake is likely to cause further public outrage, as it is clearly one which the Government cannot afford.

So, what went wrong?

During the DfT's review of evidence in connection with the judicial review proceedings, it came across evidence of "significant technical flaws" in the way the process was conducted.  This led to the DfT's statement on 3 October 2012, which caused the abandonment of the contract award, meaning that there will need to be a new tender process at some stage to determine the fate of the West Coast Main Line. 

The DfT was initially steadfast in its declarations that it had carried out a robust process, essentially dismissing Virgin's claims as 'sour grapes'.  However, it was forced to retrench this position following a more thorough analysis.  The "significant technical flaws" uncovered by the DfT related to the way in which the procurement process was conducted by DfT officials and more specifically the way that the level of risk in the bids was evaluated. A team of accountants from PwC was called in on 24 September to assist government officials with a review of the bid process. Their conclusions devastated any effective defence the DfT may have hoped to mount against Virgin's application for judicial review. A complex economic model used in the process, known as the GDP resilience model, was rife with errors and double-counting. This model was designed by the DfT to assess the riskiness of the bids and how much capital tenderers should put up by way of deposit.  In the wake of the discovery of the flaws, three civil servants in the DfT have been suspended.

The error in the GDP resilience model affected the way in which inflation and passengers numbers were taken into account. Virgin contended that because First Group adopted a riskier approach in its bid, based on revenue growth of 10.4%/year and an ambitious projected increase in passenger numbers jumping to 66 million/year (based on a current flow of 30 million/year), it should have been required to put more capital at risk than the £190m by way of securitised loan fund it proposed.  Virgin argued that the figure should have been closer to £600m. Virgin stated that this approach to the procurement process therefore ignored substantial risks to taxpayers and customers over the course of the franchise period, which was due to run from 9 December 2012 to December 2026.

Two reviews have been initiated to (a) analyse what specifically went wrong with this bid process; and (b) review the wider franchising programme.  All current and future DfT tender processes have been put on hold pending the outcome of these reviews.  The specific review is to be conducted by Centrica chief executive Sam Laidlaw and former PwC strategy chairman Ed Smith, and the wider review by Eurostar chairman Richard Brown CBE.  The Government initially said that the report of the outcome of the specific review would be published at the end of October, however it has already conceded that this deadline is unlikely to be met.   It could therefore be a significant amount of time before the contract is re-tendered.  In the meantime, the DfT has stressed that passengers will continue to be served by the same trains and front-line staff, but the question now is how?  The fact remains that Virgin's current contract expires in December 2012.   There are apparently two options being considered: the first is to extend the current Virgin West Coast contract on a management basis, the second is for the Government to temporarily run the service using the state-backed Directly Operated Railways, as was the case in 2009 when National Express incurred significant financial problems.  Whichever decision is made, it will need to be made soon.

Choosing the right challenge

This dramatic turn of events has grabbed headlines and continues to do so, however the method by which Virgin sought to challenge the DfT, as well as the challenge itself, is also of note.  Virgin sought to challenge the award not through the Public Contracts Regulations 2006 (the "Regulations") - which contains the rules which govern the statutory framework within which the DfT ran its (flawed) process - but by means of judicial review. 

The Regulations make a distinction between types of services: they will either be 'Part A' or 'Part B'.  Contracts relating to transport by rail are classed as 'Part B', which means that a majority of the rules in the Regulations do not apply.  Crucially, the available remedy for Part B contracts is limited to damages only.  Judicial review has traditionally been considered unavailable as a method of challenging procurement decisions (particularly since the decision of the court in R (Cookson & Clegg Ltd) v Ministry of Defence [2005] EWCA Civ 577).  However in 2011, the Court of Appeal held (in R (on the application of Yvonne Hossack) v Legal Services Commission [2011] EWCA Civ 788) that judicial review was available in respect of Part B contracts where damages would not afford an appropriate alternative remedy.  Judicial review is often considered by disgruntled bidders as a more attractive route than using the Regulations, because of the remedies it offers (such as quashing orders which require the decision-maker to make the decision again), as well as the longer limitation period (promptly or 3 months after the grounds to make the claim first arose) than that available under the Regulations (30 days from when the breach was known or ought to have been known, or 3 months but only with the permission of the Court, which is available only in very limited circumstances).

Virgin might also have been able to sue for damages, which are available where a bidder can show that but for the failure of the contracting authority, the bidder would have been awarded the contract, or would at least have had a chance of winning.  The measure of damages varies depending on which finding the court makes, however it is clear that Virgin did not want damages, but a review of the process the DfT followed, therefore it chose to seek judicial review.  Likewise, it is clear that Virgin will also have argued that damages under the Regulations would have been an inadequate and inappropriate remedy in these circumstances.

Conclusion

In light of the DfT's climb-down, the judicial review will not now be contested.  However, the fact that Virgin sought judicial review is nevertheless interesting, as it highlights that this may be a viable option to disappointed tenderers for certain contracts. It must be remembered that judicial review is not always going to be a viable option for potential litigants (particularly in relation to Part A services which have a number of remedies available under the Regulations) and indeed there is a vast body of case law demonstrating the circumstances in which the Court will refuse permission to bring an application for judicial review.  However, in the right circumstances, it might potentially be a powerful tool to challenge a procurement decision.

How long this will be the case is uncertain however, as the European Parliament is currently reviewing proposals made by the European Commission for a reform of the current procurement rules (which are implemented in the UK by the Regulations as well as other industry-specific rules).  One of the Commission's proposals is to eliminate the distinction between Part A and Part B services, which would mean that the Regulations would apply equally to both types of contracts.  This would mean a wider range of remedies would be available to Part B contracts, however this might lead the English Court to therefore once again limit the availability of judicial review as a means of obtaining a remedy. 

As noted above, the DfT is in the process of reviewing what went wrong with the West Coast franchise process and we will report in a future alert about the outcome of this review.  In addition, First Group - which has reportedly had £240m wiped off its value due to a sharp decline in its share price following these events - is also considering whether to take legal action following the DfT's decision.  Whether or not it chooses to do so, and by which means it brings any action, will also be an interesting development in this tumultuous story which we will follow keenly.