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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 Appeals 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 employers 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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