On 12 November, the Government adopted the Public Contracts (Amendment) Regulations 2009, which introduce important new remedies for breach of the EU public procurement rules. The most significant change is the introduction of a new remedy of "contract ineffectiveness". To date, the general rule has been that, once a contract has been entered into, it cannot be set aside pursuant to a challenge under the procurement regulations. Under the new Regulations, which will enter into force on 20 December 2009, the High Court may declare ineffective a contract awarded without prior competition and, if it does so, must also impose a civil fine on the authority.

The new Regulations amend the Public Contracts Regulations 2006, applicable to public authorities. They will be of interest to local authorities and private developers who engage in urban regeneration schemes, given the potential application of the Regulations to such development agreements (see e-bulletin dated 23 October 2009), as well as contractors and professionals appointed directly by local authorities.

The existing system of procurement remedies

The EC 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 were 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 can be hard to establish).

The existing legislation therefore makes it difficult for interested parties to challenge a contract once it has been signed, even if that contract was awarded without any prior publicity or competition, in flagrant 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 opportunity 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 with its preferred supplier without any prior advertising or competition.

The new penalties of contract ineffectiveness and fines

The new Regulations implement an EC directive which amends the old Remedies Directives. They will maintain in force all of the existing remedies provisions described above. However, alongside the existing provisions, they add a new remedy under which a claimant may ask the High Court to declare a contract to be ineffective. A claim for contract ineffectiveness may be brought where a public authority:

  • awards a contract directly to its preferred supplier, without prior publication of a contract notice in the Official Journal of the European Union ("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 has also committed a breach of the substantive rules which affected the complainant's chances of obtaining 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.

Under the first circumstance above (direct award without publicity), an authority can avoid the risk of contract ineffectiveness by publishing a voluntary transparency notice in the OJEU, announcing its intention to award the contract directly to an identified party and explaining why the authority believes that a lack of prior publicity was justified. Provided the authority waits at least 10 calendar days from the publication of that voluntary notice before concluding the contract (effectively, a voluntary standstill period), a third party will not be able to claim contract ineffectiveness.

The new Regulations provide that any claim for a declaration of contract ineffectiveness must be brought within six months of the day following the conclusion of the contract. Where the awarding authority has published a contract award notice in the OJEU (after contract signature), or sent a "standstill notice" to the losing bidders, the deadline for any challenge is reduced to 30 calendar days from the notice in question, instead of the usual six months.

Any declaration of ineffectiveness is prospective rather than retroactive in nature. That is, the ineffectiveness requires cancellation only of those obligations which still have to be performed under the contract.

Where a declaration of ineffectiveness is made, the High Court must also order the contracting authority to pay a civil financial penalty (fine) in an amount to be decided by the Court in the case. The Regulations do not give any guidance figures or ranges for the amount of the fine. They simply state that the penalty must be "effective, proportionate and dissuasive", taking into account the seriousness of the breach and the authority's conduct.

By way of derogation, the amending Regulations specify that the ineffectiveness sanction shall not be imposed if the High Court considers 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 Regulations add that economic interests, such as extra cost for the authority of running a procurement procedure, generally may not constitute such "overriding reasons". Where overriding general interests do justify leaving the (unlawfully awarded) contract in place, the High Court will instead impose a fine and/or shorten the duration of the contract in question. Again, these alternative penalties must be effective, proportionate and dissuasive.

New requirement for suspension of the authority's entry into a contract

Another innovation introduced by the amending Regulations is that, where proceedings are launched in order to challenge an authority's award decision and the contract has not yet been entered into, the contracting authority is required to refrain from entering into the contract. This suspension of the authority's right to enter into the contract continues either until the Court makes an interim order lifting the suspension or until the proceedings at first instance are determined or discontinued.

Entry into force and transitional provisions

The new Regulations will enter into force on 20 December 2009. The Regulations will not have any retroactive effect: they explicitly provide that they will not affect any award procedure commenced before 20 December 2009. For this purpose, an award procedure shall be deemed to have commenced before 20 December 2009 if, prior to that date, the authority submitted a contract notice to the OJEU, published any other form of advertisement seeking offers or expressions or interest, or simply contacted any economic operator in order to seek expressions of interest or to respond to an unsolicited offer received from that operator.

Comments

These amending Regulations greatly raise the stakes regarding any breach of the procurement rules. They are bound to make public authorities and utilities, as well as their private sector developers, contractors, subcontractors and financiers, even more cautious regarding compliance with the procurement rules.

Where a contract has been awarded without prior publicity and competition, the risk of the concluded contract being deemed ineffective, together with imposition of a civil fine, will hang over the parties for a period of up to six months following its signature. Furthermore, this risk may arise where material changes are made to an existing contract, even if that contract was originally awarded in compliance with the Regulations. The European Court of Justice ruled in the Pressetext case in 2008 that such material changes give rise to the award of a new contract, which in principle has to be re-tendered under the procurement rules. Since that the revised contract is effectively "new", a third party may claim that it has been awarded without competition and so may be the target of a claim for ineffectiveness.

The existence of the new remedies is likely to encourage more court actions against unlawful direct awards, because complainants will have a greater prospect of disturbing the existing contract and thus of having a new opportunity to win the contract when it is ultimately put out to tender. Clearly, the parties to any public contract awarded without prior publicity, as well as any subcontractors, must take into account the serious risk that it may be challenged and rendered ineffective.