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Common law obligations on public and now private bodies when tendering
18 July 2007
It is generally well known that if a public
authority does not adhere to applicable public procurement law
(colloquially the "OJEU Procedure") when tendering for work then it
is susceptible to a claim by an aggrieved tenderer. The whole
thrust of the public procurement law is to ensure that those
tendering are able to compete on an equal basis and that public
contracts are awarded fairly. It is perhaps less well known
that in addition to the OJEU Procedure, there is common law
authority to the effect that public authorities engaged in
tendering processes may in fact create collateral contracts with
the tendering parties. The nature of those contracts is likely to
be that if the public authority in question has stated that it will
evaluate tenders in accordance with a given procedure, then that
public authority is obliged to the tendering parties to do just
that.
A recent court decision has now made it clear
that private entities as well as public bodies, may also become
subject to such binding contractual obligations to tendering
parties if it is stated in the invitation to tender that a given
procedure will be followed. If there is then a breach of that
obligation the private employer may well be liable to disadvantaged
tendering parties.
This new twist, and indeed the nature of the
common law obligations to which public bodies may become subject in
a tender procedure, was examined in a decision of the High Court of
Northern Ireland, J & A Developments Limited v Edina
Manufacturing Limited and ors. While this is a decision
of the High Court of Northern Ireland, not of England and Wales,
English courts are likely to have regard to it because of the
relative paucity of decisions on this subject, and also the court
considered relevant English High Court decisions. The cost of
tendering is an area of current interest and a developing area,
particularly given the significant sums incurred by those tendering
for large public contracts, such as BSF or PFI projects. This
decision also provides a useful guide as to the measure of damages
which might be awarded, an area where guidance from the salient
English decision, the Blackpool and Fylde Aero Club case, was
lacking.
Also, it is a decision of relevance to
professionals (and their insurers) advising clients on tendering
procedures.
The Court of Appeal's decision in
Blackpool and Fylde Aero Club v Blackpool B.C. [1990] made
it clear that a contractual relationship may come into existence
between a prospective employer and a tenderer. Namely, where
competitive tenders are sought and responses received, a
contractual term was implied such that the prospective employer was
obliged to consider all tenders in accordance with the requirements
set out in the invitation to tender. That decision, and a
subsequent one, concerned public bodies rather than private
entities but as the Judge in J & A stated:
"…while there may be a statutory
distinction in the position of a public body and a private employer
the common law recognises no such
distinction."
In the J & A case, Edina invited J & A
and a number of other contractors to tender for the erection of
workshop offices and other associated works. The invitation to
tender expressly incorporated the Code of Procedure for Single
Stage Selective Tendering 1996 published by the National Joint
Consultative Committee for Building ("the code"). The tender
thereby included a clause stating that tenders should not be
altered without justification and this clause specifically
deplored:
"any practice which seeks to reduce the
tender arbitrarily where the tender has been submitted in free
competition and no modification to the specification, quantity or
conditions under which the work is to be executed or to be made, or
to reduce tenders other than the lowest to a figure below the
lowest tender."
J & A submitted the lowest tender. The
employer then held meetings with each of the three lowest tenderers
with the aim of getting them to reduce their prices, as the Judge
found arbitrarily, as a "horse trade" for getting the job. J &
A refused to budge without a reduction to the specification which
was not to occur, but the second lowest tenderer, Kyle Construction
reduced its tender by £25,000. Edina seized the opportunity to make
the saving and awarded the contract to Kyle Construction.
However, the financial gain was short
lived. J & A challenged the validity of the award on the
basis that Edina had acted unfairly and in breach of the code by
inviting tenderers to reduce their prices. The Court found Edina to
be in breach of contract. The incorporation of the code had made it
a term of the declared tendering procedure that Edina would comply
with the code. Any failure to follow the procedure would be a
breach of the employer's obligations to the tenderers. Inviting the
tenderers to reduce their prices arbitrarily was a clear breach of
the code. Moreover, the court was satisfied that had the code been
followed correctly, J & A would have been awarded the
contract.
The Court determined the correct measure of
damages was the cost of tendering - calculated at £6,530 - plus
loss of profit - c.£129,000 - (net of 20% reduction to allow for
obtaining other work). Or, to put it another way, failing to adhere
to the code cost Edina £135,528.
It is also relevant to note that the defendant
employer sought an indemnity in respect of its liability to the
claimant from its professional adviser in the process, in this case
its architect. The architect here was not liable because the Judge
found, broadly, that a competent architect could not have been
expected to have advised the employer that a contractual obligation
had been created and that in taking the course of action the
employer had taken, trying to "horse trade" down the price, would
render it liable to the tenderers. Also, the Judge found in this
case that the employer would have disregarded such advice even if
it had been given.
There is common law authority that when tendering a public body
can create a collateral contract with the tendering parties if the
invitation to tender states that the tender process will be
conducted in a certain way
Private entities may also be subject to such common law
obligations
A breach could lead to liability to pay a disadvantaged tenderer
its tender cost and perhaps a proportion of lost anticipated
profit
Professionals should be aware that private clients as well as
public bodies may be subject to such obligations to tenderers and
advise their clients accordingly
The common law is separate from and in addition to the
obligations imposed on public Bodies by the OJEU Procedure
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