Summary and implications

The new rules which are due to come into force on 20 December 2009 give the courts the power to set aside contracts as a result of public procurement infringements. This raises the stakes of getting public tendering processes right but also passes some of the risk of non-compliance from the authority to the successful contractor.

The European Commission has become increasingly concerned about abuses in public procurement compliance including: illegal direct awards and the race to contract signature to close out contract award challenges. The New Remedies Directive* is designed to close such loopholes and by the introduction of the new remedy of ‘ineffectiveness’ provide a serious deterrent to would-be infringers.

* Directive 2007/66 (the “New Remedies Directive”)

The key reforms include:

  • the introduction of contractual ‘ineffectiveness’ as a remedy for certain serious breaches of the procurement rules;
  • the operation of a harmonised standstill period between contract award decision and contract award.

Ineffectiveness

The draft regulations provide that the court must declare a contract ineffective if satisfied of any of the following grounds:

  • The contracting authority has failed to publish a contract notice in the Official Journal of the European Union (OJEU Notice) when it was required to do so (unless the contracting authority considers that an OJEU Notice is not required, publishes its intention to enter into the contract and holds a ten day stand still period).
  • The contract has been entered into without complying with the rules on review procedures (such as standstill obligations and the requirement to suspend the tender process pending a court decision) and so deprived the bidder of the opportunity to pursue pre-contractual remedies for a breach of the procurement rules and that has affected the bidder’s chances of winning the contract.
  • In the case of a dynamic purchasing system or framework agreement, the authority has breached the rules on mini-competition or award of contracts under dynamic purchasing systems and the call-off exceeds the relevant threshold.

The ineffectiveness sanction is subject to an exception where the court considers there to be an overriding general interest reason to maintain the effects of the contract.

Where a contract is declared ineffective by the court, the ineffectiveness will be prospective. This means that the parties will be discharged from any obligations arising under the contract after the date of the declaration. Previously the only remedy for the aggrieved tenderer was damages. The potential consequences of a ruling of ineffectiveness will be severe including:

  • the cost and delay of refinancing a procurement procedure;
  • the damage caused to the contracting authority’s reputation.

The court must also impose a financial penalty on the procuring authority. The level of penalties are left to the discretion of the court provided they are ‘effective, proportionate and dissuasive’.

The Remedy of Ineffectiveness

Where a contract is declared ineffective by a court, the ineffectiveness will be prospective. This means that the parties will be discharged from any obligations arising under the contract after the date of the declaration. Previously the only remedy for the aggrieved tenderer was damages.

Time Limits

Claims for ineffectiveness will need to be brought within either 30 days of the day of the contract award notice (where an OJEU Notice was not published and the Contract Award Notice sets out the justification for not doing so) or otherwise six months from the day of contract signature.

All claims other than for ineffectiveness (e.g. pre-contract remedies) must be brought promptly and within three months from when the cause of action arises.

Stand Still Provisions

The new regulations retain a standstill period of 14 calendar days if the notice is sent by fax or electronic means and provide for a period of 16 days where the notice is sent by other means of communication. The standstill period runs from the beginning of the day following the day that a notice is sent.Very few changes to these provisions are required as a result of the new Directive.

No stand still period is to be required where:

  • a contract does not require the publication of an OJEU Notice;
  • there is only one bidder;
  • where the contract is called-off from a framework agreement or a dynamic purchasing system is being established.

Conclusion

The key reform under the new rules is the remedy of ineffectiveness. It is a new concept under English law and it is unclear how this will work in practice. How will the court unravel the contractual relationship between the successful contractor and the procuring authority? How will the contractor be compensated for the work carried out up to the date of termination? Will any contractual clauses such as warranties or early termination provisions survive? Should the contracting parties continue to perform the contract pending an appeal of the court’s ruling on ineffectiveness?

I n practice, on most contracts involving significant capital spend, an OJEU procedure and a standstill period will have been implemented. In these circumstances, the ineffectiveness remedy will not be available and aggrieved unsuccessful contractors will need to pursue a pre-contract remedy or seek damages after contract signature. The real impact of the New Remedy will be in cases where the contracting authority has elected not to use an OJEU Notice when it should have done. This is likely to affect a limited part of the market, but will nevertheless be a major deterrent to any contracting authorities who negotiate contracts with favoured suppliers without advertising the opportunity. It will also mean that successful contractors will no longer enjoy protection when the contract has been signed and will share the risks of a non-compliant tendering process.

Currently there is no suggestion that the legislation will have retrospective effect, but authorities and tendering contractors will need to be ready for the changes by the turn of the year.