On 30 April 2009, the Office of Government Commerce (OGC) launched its 12-week long second-stage consultation on the implementation in UK law of the new Remedies Directive (Council Directive 2007/66/EC).

These new rules, due to come into force on 20 December 2009, will open up the possibility of contracts being set aside by the High Court on public procurement grounds. This raises the public procurement stakes and effectively passes on some of the risk of non-compliance to successful contractors.

Following conclusion of the OGC's consultation on the new Remedies Directive, the draft Regulations will be finalised, made and laid before Parliament in readiness for their implementation on 20 December 2009. The new Regulations will amend the Public Contracts Regulations 2006 and the Utilities Contracts Regulations 2006. The OGC is inviting comments on the draft regulations as well as on some specific further issues.

The purpose of the new Remedies Directive is to increase the sanctions available for breach of the public procurement rules. There are three key areas of reform:

a. the introduction of 'ineffectiveness' as a remedy for certain serious breaches of the procurement rules;

b. new time limits; and

c. the harmonisation of the standstill provisions (allowing time for a challenge to be brought between the contract award decision and signature).

Ineffectiveness

Under the draft regulations, a court must declare a contract ineffective if satisfied of any of the following grounds (unless it considers there to be overriding general interest reasons to maintain the effects of the contract):

a. the contracting authority has failed to publish, when required to do so, a contract notice in the Official Journal of the European Union (OJEU Notice) (unless the authority considers that an OJEU Notice is not required, publishes its intention to enter into the contract and holds a 10-day standstill period); or

b. the contract has been entered into without respecting the contract award suspension provisions (applicable to standstill and challenges) and thus deprived the bidder of the opportunity to pursue pre-contractual remedies for a breach of the procurement rules that has affected its chances of winning the contract; or

c. for contracts based on a framework agreement, where the contracting authority has infringed the procurement rules on mini-competitions for above-threshold call-off contracts, unless the authority believes the rules to have been followed and observes a standstill period (similar rules apply to dynamic purchasing systems).

Where a contract is declared ineffective by a court, the ineffectiveness will be prospective. In other words, the parties to it will be discharged from any obligations arising under the contract after the date of the declaration.

Where overriding general interest grounds, or the fact that there is a procedural breach of the rules (e.g. standstill provisions) but no substantive breach, prevent the court from making the order, the court must either order the contract to be shortened or impose a civil financial penalty (or both).

The court must also impose a financial penalty on the procuring body in addition to the order of ineffectiveness.

Time limits  

Claims for ineffectiveness will need to be brought within either 30 days of the (day after) 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 after) contract signature.

All claims other than for ineffectiveness (e.g. pre-contract remedies) must still be brought promptly and within three months from when the cause of action arises. Under the new provisions, promptness does not require actions to be brought earlier than 10 days after the day the decision being challenged was sent by email or fax, published or received (or 15 days from when sent by other means). The court may extend the time limits where it considers there to be good reason.

Standstill provisions

The UK implemented the standstill period in 2006 by the Public Contracts Regulations 2006 and the Utilities Contracts Regulations 2006. Very few changes to these provisions are required in the UK as a result of the new Directive.

Where electronic means of communication are used, the standstill period is to be 10 days. An extra five days will be allowed where non-electronic means are used. The standstill letter must provide a precise statement of the standstill period.

No standstill period is to be required where:

a. a contract does not require the publication of an OJEU Notice (e.g. Part B services); or

b. there is only one bidder; or

c. where the contract is called-off from a framework agreement or a dynamic purchasing system is being established.

Further consultation

As part of the second-stage consultation, the OGC is seeking views and comments on a number of specific issues, including:

a. Transitional arrangements – OGC's preference is to apply the new rules only to new procurements commencing after 20 December 2009, subject to certain exceptions. In particular, call-off contracts where the framework agreement was concluded before 20 December 2009 should be subject to the original rules. This will avoid one set of rules applying to the framework and another to the call-off contract;

b. The implications for call-off contracts when a framework is declared 'ineffective' – OGC proposes various options for the status of call-off contracts that have already been awarded ('live' call-offs) in the event of the related framework agreement being declared ineffective.

Comment

It is unclear how the new ineffectiveness remedy will work in practice. Will it give successful contractors a claim in loss of opportunity damages against the procuring body for causing early termination? Or will the courts seek to unravel the relationship and ensure equitable compensation for costs incurred by the contractor up to the date of termination? Will any warranties or early termination provisions in the contract survive the ineffectiveness remedy? What are the overriding reasons relating to the general interest which remove the ineffectiveness remedy?

There are many unanswered questions. But a few points are clear. First, the new remedies will not apply to Part B service or below threshold contracts or contracts for which relevant exclusions or exemptions apply as these do not require the publication of an OJEU Notice or the use of a standstill period under UK regulations.

Second, most complex, large-scale contracts involving significant investment will generally have been tendered with an OJEU procedure and a standstill period following contract award. While, therefore, actionable procedural breaches will no doubt continue to occur these will not generally give rise to an ineffectiveness remedy. Unsuccessful contractors will need, as before, to bring an action during the standstill period (or earlier if appropriate) and pursue a pre-contract remedy or (provided their claim is brought promptly and within three months of the cause of action arising) seek damages after contract signature.

However, the major impact of the new remedy will be in cases where the contracting authority has chosen not to procure using an OJEU Notice when it should have done so. The procuring body may remove the risk of ineffectiveness by announcing the intention to enter into the contract and holding a standstill period. If this option is unattractive, it can still, following contract award, publish a contract award notice setting out its justification for not publishing an OJEU Notice. If it does so, any ineffectiveness claim would need to be brought within three months of the notice. To anticipate this, the parties could choose to make contract financial close conditional on the expiry of three months without a challenge being brought.

If no contract award notice is published, the longer six month challenge period (from when the other bidders are informed of the contract being entered into) will apply. This is likely to put the procuring body in a weaker position and any contract standstill or conditionality will necessarily create a longer delay and period of uncertainty.

There will, of course, be situations in which commercial or public interest considerations do not allow for a three to six-month suspension of financial close and the procuring body feels sufficiently confident of its position that it will risk an ineffectiveness action being brought.

If an action were to be brought successfully at a stage when the contract has been partially implemented then the ensuing divorce between the parties may well be messy, possibly with separate actions for restitution and damages being brought. Neither the procuring body nor the successful contractor will wish to be in this position and this may create a greater – and shared - incentive to ensure that due process is followed.

In effect, the practice of contracting authorities negotiating deals with incumbent or favoured contractors without advertising the opportunity will be dealt a further blow by this development. Contractors will no longer enjoy protection from the law once the ink is on the paper and both sides are likely to show a more active interest in the esoteric technicalities, broad EU principles and dynamic case law of public procurement.

This development may add to compliance costs and legal bills. But it is consistent with the UK Government's drive to improve procurement practice and achieve value for money in public spending, which represents a large and increasing share of UK GDP.