The new Public Contracts (Amendment) Regulations 2009 came into force on 20 December 2009. They introduce important new remedies for breach of the EU procurement rules including the power for the courts to declare contracts awarded in contravention of the rules as “ineffective” in certain circumstances.
In this article we take a look at this new concept of “ineffectiveness” - that is, a court declaration that a public contract already entered into by a contracting authority is of no effect - and the impact it is likely to have on the rights of disappointed tenderers and defaulting procuring authorities. For more details on other changes introduced by the new rules please see www.birkettlong.co.uk/services-for-businesses/public-procurement.
The regulations apply to public contracts awarded under procurement procedures commenced after 20 December 2009, and which fall above the current threshold values. From 1 January 2010 these range from around £156,000 for essentially local Government supplies and services contracts (£101,000 for central Government) to around £3,927,000 for works contracts. Similar regulations apply to utilities companies. Below that level, public bodies are likely to still have formal procurement requirements which if breached may provide some recourse for bidders. Use of Freedom of Information Act requests and reference to the Local Government Ombudsman in appropriate cases may be useful tools for dissatisfied bidders in this area.
Not all contracts awarded in breach of the regulations can be declared ineffective. They must also satisfy at least one of three other requirements:
- that the contract was awarded without the public authority publishing the necessary contract award notice (commonly called an Alcatel letter — see our Procurement Law Jargon Buster on our website) or
- that the contract was, subject to certain technical qualifications, entered into during the Standstill Period (again see our Jargon Buster) or
- that the contract was based on a framework agreement or dynamic purchasing system and various detailed conditions for the award of such contracts were not met.
If the authority publicises the contract award or notifies unsuccessful bidders, court proceedings for the new remedy of ineffectiveness have to be commenced within 30 days of award/ notice. If the award is not published then claimants have 6 months from award to begin proceedings.
Under the new regulations, if proceedings are started before the contract is awarded, the contracting authority is prohibited from entering into the contract pending the outcome of the proceedings or court order. This is potentially a powerful tactical weapon for dissatisfied bidders. The court can refuse to declare a contract ineffective if it considers that "overriding reasons relating to a general interest" require that the effects of the contract be maintained. However, the regulations expressly state that economic interests directly linked to the contract is not an overriding reason for this purpose.
The impact of an order of ineffectiveness is that any obligations still to be performed under the contract must not be performed, but what has already happened stands. This could raise difficult issues in some cases, not only for defaulting authorities but also contractors and their funders, for instance where repayment of funds drawn down for initial construction work is dependant on income generated by a completed project. In future, properly advised funders may well require authorities to provide protection for senior debt in these circumstances, potentially on the lines of the “relevant discharge terms” mechanism introduced by the Local Government (Contracts) Act 1997 in the context of privately financed public projects (“PPPs”).
Defaulting authorities can also be ordered to pay a civil financial penalty of a specified amount (which goes to the Treasury) and the court can make other orders to deal with, for example, compensation between the parties, to ensure a fair outcome. Even if a contract is not declared ineffective, the court must, under the new regulations, impose a civil financial penalty if the contract was entered into during the standstill period.
All in all, the new regulations provide some useful new remedies for dissatisfied bidders, provided they act quickly. They also create potentially serious problems for public authorities who disregard or misunderstand their obligations to operate fair and transparent procurement processes.
