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Public procurement - the importance of getting it right

9 February 2009

Considering the impact of two recent cases in which the courts decided they could (and did) set aside framework agreements that had already been entered into.

Following a trend over the past 10 years, public authorities are procuring an increasing amount of construction services and products under framework agreements. There is good reason for this as it allows authorities to develop strategic relationships with their supply chain, promoting consistency of approach, better value and sustained ongoing improvement. A practical advantage is that the authority is able to award contracts under framework agreements without the need to re-advertise and re-apply the selection and award criteria, saving the time and cost of repeat bidding.

The Public Contracts Regulations 2006 (the Regulations) regulate public procurement in England, Wales and Northern Ireland. Regulation 2 defines a framework agreement as an agreement between one or more contracting authorities and one or more economic operators, which establishes the terms (in particular in relation to price and, as appropriate; quantity) under which the economic operator will enter into one or more contracts with the contracting authority in the period during which the framework agreement applies. Specific purchases can be made throughout the term of the framework agreement: the call-off contracts. This is distinct from a contract which sets out the framework for, and commits the contracting authority to, the regular award or purchase of works, goods or services.

Under Regulation 47, a contracting authority owes a duty to an economic operator to award contracts based on objective criteria, ensuring compliance with the principles of transparency, non discrimination and equal treatment in conditions of effective competition. A breach of that duty is actionable by an economic operator which suffers, or risks suffering, loss or damage (Regulation 47(6)). Under Regulation 47(9), the court does not have power to order any remedy other than an award of damages in respect of a breach of a duty, if the contract in relation to which the breach occurred has been entered into.

The traditional view was that authorities who breached procurement law and had their awards challenged, risked facing a claim for damages by an aggrieved tenderer (such damages being based on that challenger having lost the chance of successfully tendering, had the rules been followed, and later making a profit, plus its abortive tender costs) or, if the framework agreement had not already been signed, the risk that the court would grant an injunction preventing the award going ahead.

Two recent Irish cases have redefined that position:

The first case is that of Mclaughin and Harvey Limited v The Department of Finance and Personnel (No. 3) [October 2008] in which a company unsuccessfully tendered for a framework agreement relating to a number of construction projects at an estimated cost of £500m - £800m over a four year period. The second case, Henry Bros (Magherafelt) Limited and others v Department of Education of Northern Ireland 153 [December 2008] involved a claim brought by a consortium of building contractors who unsuccessfully tendered for a framework agreement to be delivered over a two year period, with an estimated value of £550m - £600m, to be put through the framework agreement.

In both cases, the courts took the view that the relevant authority had breached the Regulations. The issue was therefore, what was the appropriate remedy to award? In deciding, the courts took the view that each framework agreement in question was not a contract for the purposes of Regulation 47(9) because it was a call off framework agreement, with no commitment to purchase. Therefore, the court was not restricted to award only damages, but it could (and did) set aside the framework agreement that the relevant authority had already entered into with the successful tenderers. In the latter case, the court did so despite the fact that specific call-off contracts had been issued under the framework agreement. The effect being that only those call-off contracts that had already been awarded under the framework agreement could not be set aside. This was because the restriction on the remedies available to the courts set out in Regulation 47(9) still applied to the call-off contracts issued under the framework agreement (these being self contained and complete contracts and therefore covered by Regulation 47(9)), if not the framework agreement itself. Damages were the only remedy available in relation to the award of the call-off contracts.

In the Mclaughlin case, as an alternative remedy, the aggrieved tenderer asked the court to order the Department to add them to the framework list; on this occasion the court declined as it would unfairly dilute the work for the other appointed parties. The court was influenced by the difficulty of otherwise assessing damages and the public interest of having the best contractors on the framework agreement. The court concluded that if the framework agreement had been allowed to continue, the consequence would be the continuation of a framework agreement based upon a manifest error, generating specific contracts awarded in breach of the principles of EU competition law and, at least potentially, breaches of Articles 87 and 88 of the EC Treaty. Further, any damages claim would be impossible to quantify until all of the call-off contracts had been awarded.

In essence, these cases highlight the importance for authorities of adhering to (and being able to demonstrate that they have adhered to) public procurement legislation and building in as much transparency into the tendering process as is feasible, in order to minimise the risk of challenges to any procurement procedure. The practical options available to an authority who fails to comply with the procurement procedure and is challenged as a result, is to either re-tender the works by re-running the entire procurement process, (ensuring that this time, they meet the criteria set down by the Regulations) or to resort to traditional tendering methods to deliver the project. Either way, and aside from the potential damage to public relations, there is a significant time and cost implication for the authorities, not just dealing with claims for damages from disgruntled tenderers (be those unsuccessful tenderers or tenderers who have been selected, but then have framework agreements set aside), but also from the cost of going through the tendering process again. Depending on the particular circumstances, it may therefore be more pragmatic for an authority facing a challenge to allow the disgruntled tenderer onto the framework list, rather than run the risk of having the entire framework agreement set aside.

Finally, whilst this summarises the position at present, it is worth noting that it may be changed by Directive 2007/66 (due to be implemented into national law by 20 December 2009). This will bring framework agreements within the Regulations. It will be interesting to see if the Office of Government Commerce takes the opportunity to clarify the issues raised in these two cases in relation to how framework agreements are to be treated, when they draft the implementing Regulations, or whether they leave such clarification to the courts.

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