For a long time suppliers have had a right to go to court when a public body breaches the tendering rules in the Public Contracts Regulations – and most of those involved in public sector procurement will be aware that recent UK legislation (required by the EU) has now given even stronger remedies to suppliers.

What are the main changes – and what are the practical implications?

Greater risks for purchasers in the public sector?

Compared with almost all other EU countries there is actually very little litigation on procurement in the UK – still only a handful of cases each year. This compares with an annual total of hundreds or thousands of cases in most other EU countries.

It is interesting to consider why this is the case.

A three-year study by Pachnou at the University of Nottingham in the late 1990s found that one main reason for this lack of litigation in the UK was, not surprisingly, the cost – which is high compared with some other countries.

More unexpectedly, however, an equally important reason was suppliers’ own dislike of litigation and their perception that the domestic procurement process is generally fair. In particular, it seems that suppliers prefer not to pursue complaints over technical legal violations – often difficult to avoid because of the complexity and uncertainty of the law – when they consider the process has been run in good faith. One reason is the fact that a supplier trying to hold up the process in one case might be the supplier whose own contract is being held up in the next: there was a general feeling that the system works better for everyone if disruptive litigation can be avoided.

A third consideration for the limited number of legal actions, namely the fear of “biting the hand that feeds”, was found by Pachnou to be relevant – but much less important than the other two factors.

Many people, including the writer, had expected the number of cases in the UK to increase substantially after the introduction a few years back of the “standstill” obligation, which requires a public authority to give notification of its award decision to the losing tenderers and to allow time for a legal challenge before the contract is concluded. Even if suppliers are generally reluctant to sue, it might be expected that when presented with a real opportunity to overturn an award decision that goes against them many supplies might find it hard to resist. In fact, however, the volume of reported cases increased only marginally after this standstill requirement was introduced.

However, the number of completed cases tells only a small part of the story. Many cases that are started are settled before the trial, and many complaints are resolved before they even get near a court. Anecdotal evidence from lawyers and public authorities does in fact suggest that the number of complaints made about the process has increased significantly since the standstill obligation came into force. The new legislation that is the subject of this blog now improves even further a supplier’s chances of overturning the actual award decision, as well as providing for serious new sanctions for some violations, that can be used to put pressure on public authorities to settle out of court. Thus, even if the number of completed legal actions remains limited, we can probably expect the new legislation to lead to an increase in the number of complaints made to public authorities. These in themselves may consume the authority’s resources and lead to the need to re-open the tendering process, with the disruption that that entails. Further, when cases do get to court the potential consequences for purchasers are, of course, much more serious than before, given the new sanctions in the legislation.

Thus, even in the UK, the new remedies rules will make it more important than ever to be fully familiar with the legal requirements that govern the public procurement process and of the risks involved – and to develop a suitable strategy to deal with those risks.

Key points of the new legislation

The new, stronger remedies are provided for in the Public Contracts (Amendment) Regulations 2009 and apply to all award procedures processes beginning on or after 20 December 2009. (Other award procedures remain subject to the old remedies system). The main changes that have been made in favour of suppliers deal with the following:

• Standstill obligation i.e. the obligation to notify suppliers of the award decision and allow a period before concluding the contract for suppliers to bring a challenge. This standstill obligation existed even before the new regulations but is now dealt with in further detail in the legislation.

More importantly, the new legislation now also includes serious sanctions for not complying with the standstill rules, when it turns out that by doing so the public body has stymied what might have been a successful legal challenge. These sanctions generally involve the court declaring the contract ineffective (with the result that it must be re-tendered if the authority wishes to continue to receive the goods or services etc) along with the possibility of financial penalties (fines) on the authority.

The point of these sanctions is to make sure that public bodies take great care to comply with the standstill rules so that if the law has been broken suppliers can always obtain an effective remedy.

The serious consequences that may follow from violating the standstill rules mean that it is important to comply carefully. However, this is not easy as there is some uncertainty in the legislation itself over exactly what information must be given to suppliers in the notice informing them of the award decision. The Office of Government Commerce has advised that authorities should provide

o Full breakdown of scores against each criterion and sub-criterion and

o A narrative explanation of why the winner scored more heavily than the particular recipient (rather than tenderers in general) in the relevant areas. For example, in a contract to supply computers the guidance suggests it would be appropriate to indicate, along with scores, that the winner offered greater memory capacity at a given pricing point. Note that the guidance here seems to indicate that the narrative on the criteria is required only in respect of criteria in which the winner was better than the recipient.

In view of the potentially serious consequences of not complying with the standstill rules authorities are probably best advised to follow a cautious approach and to disclose all this information. The view that narrative information must be disclosed and not merely scores of the different tenderers is also now supported by some recent decisions of the EU’s General Court. In particular, in case T-387/08 Evropaïki Dynamiki v Commission, judgment of 9 September 2010, the court held that simply providing scores without any comment on the winning bid was inadequate.

• Automatic suspension of the award procedure. Before the new rules came in suppliers could get the court to suspend an award procedure in certain cases, including to stop the public body awarding the contract before the case was tried – but the supplier had to go to the court specifically to ask for the suspension. Now, however, a suspension is automatic when a supplier brings a legal challenge –and if the public authority does not agree that the process should be suspended it is the authority that will have to go to the court, to ask it to lift the suspension.

Further, the sanctions that apply for violating the standstill rules (including ineffectiveness of the contract and financial penalties) also apply when the authority awards the contract in violation of an automatic suspension.

The court has always had a discretion over whether to allow a suspension – for example, it has always been able to refuse a suspension for public interest reasons (such as where the procedure is for urgently- needed services). This still applies – a court can lift the suspension on such grounds (and others). Unfortunately, however, it is quite hard to predict when the court will allow the process to be suspended and when not – and this uncertainty remains the same under the new legislation.

• Sanctions for awarding contracts without a contract notice. One of the main problems with the old remedies system was that it was too easy to award a contract directly to a supplier without any publicity and get away with it – given the secretive nature of the whole process interested suppliers often did not spot the problem until it was effectively too late to bring a challenge. The new rules deal with this by providing for the apparently draconian consequence that contracts are generally to be considered ineffective if awarded without a contract notice when such a notice was required. Further, financial penalties also exist in such a case.

However, this is not as bad as it sounds since purchasers acting in good faith using one of the exemptions from competition that apply (e.g. that there was only one possible contractor for technical reasons) can safeguard themselves against the contract being ineffective, even if it turns out they were wrong in thinking that an exemption applied. This is done by publishing a notice in the EU’s Official Journal advising the market that the authority intends to award the contract without a competition using one of the exemptions, and giving a period for suppliers to challenge this prior to the contract being concluded. Even if it turns out that the exemption did not in fact validly apply, the contract will not then be ineffective later – the idea is that suppliers have been given sufficient opportunity to challenge it at the time of award and should do so at that point in order to ensure legal certainty.

One issue here that may provide a trap for the unwary is contract amendments. The EU’s Court of Justice has recently made it very clear that amending a contract is sometimes considered as amounting to the award of a “new” contract that must be re-advertised under the rules. (The main case is the “pressetext” case). For example, a price increase in favour of the contractor without any new obligations, or a significant increase in the size of the contract, will generally mean that the contract must be considered as a new one. If this were not the case the basis on which the supplier won the contract could be undermined simply by making amendments once it has been concluded.

Under the new remedies rules, an amendment that falls foul of these rules must be treated as ineffective by the courts. Lawyers are divided over whether this means the whole contract is ineffective or just the amendment i.e. whether the contracting parties could go back to the old contract. Even if going back to the old contract is possible in principle, however, it may involve many practical difficulties.

Thus contracting parties need to be more careful than ever before when making significant amendments to public contracts.