PLC Public Sector reports:
It is a standard part of many public procurement processes to instruct a credit reference agency (CRA) to undertake financial checks on potential tenderers at the pre-qualification stage and often again prior to any contract being entered into. This appears to be a sensible step to take for obvious practical reasons. However, could it place the authorities doing so at risk of breaching the public procurement rules? Some commentators are suggesting that it could.
Following queries on this subject from several PLC subscribers, in this post we set out our views on the potential problems, how the risk of challenge can be mitigated and also invite you to share your experiences.
Firstly, we are not aware of any decided case law involving using a CRA for this purpose. However, we have certainly seen reports of challenges asserting that the use of a CRA was unlawful and also warnings from commentators confirming that this is the case.
The potential issues
While the UK procurement regime does not explicitly state that a CRA can be used as part of the selection process, it would surely be difficult to mount a successful challenge simply on the basis that one was used, especially if this was disclosed to tenderers. The warnings as to the lawfulness of adopting this approach are based on the way that a CRA will go about its work, specifically in relation to two potential issues:
- There is a strong argument that the formula (that is the criteria and weightings applied) used by the CRA will be selection criteria for the purposes of Regulation 24 of the Public Contracts Regulations 2006 and as such should be disclosed to bidders, however this is likely to be seen as confidential information by the CRA who will be unwilling to disclose it.
- The CRA could possibly use information that is not provided for in Regulation 24 (for example, movements in its share price, or knowledge of the activities of the company since the publication of its latest audited accounts, such as knowledge that it has taken out a large loan or announced a profits warning). If the CRA does this, the risk of challenge is at its highest, especially if a tenderer can show that it is as a result of the CRA taking account of matters not covered by Regulation 24 that they were excluded.
Can any risk be mitigated?
The second of these issues is the easier to overcome, the contracting authority can simply require the CRA to only use information that is provided for by Regulation 24. The first issue is less straightforward. A CRA is unlikely to persuaded to disclose such propriety information and, in the light of case law on the disclosure of award criteria, government guidance is clear that selection criteria should also be disclosed to tenderers. However, a resolution to this problem can be found in asking the following question.
What would the remedy be anyway?
If a contracting authority ensures that only information allowed by Regulation 24 is taken into account, even if a challenge is made out that the formula was not disclosed, it is difficult to see what substantive remedy a bidder would be entitled to. This is because even if the bidder had known the weightings and full details of the financial checks being made, they would not have been able to put together a different submission. That is, the tenderer would generally not be in a position to alter its financial standing in order to comply with the applicable criteria. This is where the position differs from the disclosure of award criteria and the associated weightings later in the procurement process as knowledge of these would allow a different bid to be submitted.
Is it OK then?
As stated above, we are not aware of any case law on the use of CRAs and therefore a different interpretation could be taken if it was (it would not be the first time that a court decision relating to the public procurement regime produced a surprising and unexpected outcome!). There is a good chance that a case on this issue will be decided at some point in the future, but until one is, any public authority using a CRA should be aware that doing so does carry an element of risk (albeit one that can be mitigated by ensuring that only the information set out in Regulation 24 is taken into account by the CRA).
Your views
Do you agree with our interpretation of the situation? Have you experience of these arguments being put before a court? If so, please do get in touch either by submitting a comment below or e-mailing us at: feedback@practicallaw.com.
One of our readers has highlighted that there is more flexibility for complying with selection criteria than may first appear to be the case. It may be that a consortium could structure itself differently, for example, by having the lead contractor and sub-contractor swap places. Doing so may allow them to meet the authority’s selection criteria (if they are provided with full details of them).
This is a valid point (although not one you would expect to arise in the majority of procurements) and highlights that authorities do need to be aware that using CRAs does involve some risk.
With regard to the section on available remedies and the position that a bidders response is unlikely to change, wouldn’t it be the case that if the court ruled that the use of credit referencing was not compliant then surely the information that precluded the bidder from progressing would be struck out and the contracting authority would then either have to allow the bidder (and any other based on credit scores) through or start again with a new set of financial questions. Fundamentally the credit referencing section is a black-box to both bidder and buyer, no-one really knows what has determined the score and, more importantly if the buyer doesn’t fully understand what is being evaluated within it then it cannot meaningfully communicate what it’s own minimum standard is.
Thanks Alexander.
I guess the issue depends on whether it can be shown that non-compliant criteria were used or if there was a use of valid criteria that were not disclosed. If it is the former then I agree with what you say above, if it is the latter then the point is as above – would there actually be any remedy? I also appreciate that this may be a hypothetical distinction as you are faced with the question of having to show that criteria comply with the regime when you are unwilling to disclose them.