David Gollancz, barrister, 11KBW:
The 2007 Remedies Directive was intended to address “weaknesses” in the system of remedies available to economic operators. Recitals (3) and (4) say that its provisions are intended to “ensure compliance with Community law, especially at a time when infringements can still be corrected” (emphasis supplied).
One of the principal weapons put into the hands of economic operators by the Directive is the suspension of contract-making, which (in the UK’s transposition) follows automatically and immediately upon the service of proceedings. In every reported case to date the courts have removed the automatic suspension. In this blog I consider the most significant cases: Indigo, Exel, Halo and Metropolitan Resources.
A new approach: automatic suspension of contract
In the UK, the 2009 amending regulations implemented the new remedies directive and introduced the remedy of automatic suspension by way of regulation 47(G) in the Public Contracts Regulations, with regulation 47(H) giving the court wide powers to make interim orders. These include terminating the suspension, and a range of ways of intervening in the procurement process (regulations 45(G) and (H) in the Utilities Contracts Regulations.
Regulation 47(H) gives the court wide powers to intervene. It requires the court, when determining an application to disapply the automatic suspension, to consider whether, if there were no automatic suspension, it would be appropriate to grant an injunction prohibiting the contracting authority from proceeding to contract. Only if it considers that, under those circumstances, it would notbe appropriate to grant such an injunction may it make an order disapplying the suspension:
“When deciding whether to make an order under paragraph (1)(a) –
(a) the Court must consider whether, if regulation 47G(1) were not applicable, it would be appropriate to make an interim order requiring the contracting authority to refrain from entering into the contract; and
(b) only if the Court considers that it would not be appropriate to make such an interim order may it make an order under paragraph (1)(a)“
The regulation also provides, in paragraph (3), for the court to make the continuation of the suspension conditional upon “undertakings or conditions”: in practice, to require a cross-undertaking to compensate the defendant in damages if the claim is unsuccessful.
The first case: Indigo – American Cyanamid still relevant
The courts have consistently treated reg.47(H) as meaning that the court should treat the application to disapply the suspension as though it were an application by the claimant for an injunction. This approach was made explicit in the first reported case, Indigo Services, where the court said that:
“...though the application is made by the contracting authority, the position is the same as if the unsuccessful tenderer were seeking an interim injunction (and for ease of presentation I will below proceed as if [the Claimant] was the party applying for interim relief).” (per Mr David Donaldson QC, paragraph 4.)
Accordingly, the American Cyanamid principles apply (here stated as summarised by Vos J in ALSTOM at paragraph 76):
- Is there a serious question to be tried?
- If so, would damages be an adequate remedy for a party injured by the court’s grant, or its failure to grant, an injunction?
- If not, where does the balance of convenience lie?
The balance of convenience being the balance of potential injustice: which of the claimant and the defendant will suffer the greater irremediable harm from the grant or refusal of an injunction?
Is this correct?
With respect to the court, it would perhaps have been better, in the first case following the amending legislation, to pause and reflect on the question whether regulation 47(H) does simply apply what one might call the injunction test. That certainly is not what the legislation says. If the draftsman had wished to say that, nothing would have been simpler. Such a version of regulation 47(H) might have read:
“When deciding whether to make an order under paragraph (1)(a) [disapplying the suspension] –
(a) the Court must consider whether, if regulation 47G(1) were not applicable, it would make an interim order requiring the contracting authority to refrain from entering into the contract; and
(b) if the Court considers that it would not be appropriate to make such an interim order it must make an order under paragraph (1)(a)“
That appears to be the rule the court applied in Indigo, and the one which has been followed in the subsequent cases. But it is not what the Regulations say.
Is this a distinction without a difference? The claimants in Indigo did not think so. They submitted that the framing of the Regulations amounted to a “steer”, albeit falling short of a presumption, in favour of the maintenance of the suspension (or, as the judge put it, “in favour of an injunction”). The court observed that it could detect no such steer, but that even if there were any such, it would not change its conclusion (paragraph 6 , ibid).
The “reference” case: Exel
In the next reported case, Exel, the court (Akenhead J) reviewed the position at paragraphs 26-30 and came to some important conclusions:
- The legislation does indeed import the injunction test and the Cyanamid principles.
- In assessing the balance of convenience, potential harm to the public interest, as well as the interests of the parties, are to be taken into account.
- There is no “steer” in favour of the maintenance of the suspension.
- Regulation 47(G) and (H) adequately transpose the Directive’s provisions and implement its policy.
The paragraphs in which Akenhead J discusses the question of whether regulations 47(G) and (H) adequately implement the Directive merits careful consideration. Having recited Articles 2(1) and 5 (which expressly allows for consideration of the relative harm which might ensue to relevant interests, including the public interest), for he concludes:
“I see nothing in Regulation 47H or in the application of the Cyanamid principles which offends or is not consistent with the Remedies Directive. These principles are positively consistent with it. Even if the suspension is not maintained, the claimant is not without a remedy. Obviously, if damages were not an effective remedy, and there was clearly an arguable and serious issue on liability raised, it may well be that the suspension or other directive orders should be continued or made.“
That may be right, but the way in the courts are applying those principles calls into question whether the “new” remedies regime has had any reforming effect at all in the English context. The courts have consistently found that the balance of convenience, taking into account the public interest, militates strongly against the maintenance of the suspension. They have also found that the claimant’s probable inability to offer a satisfactory cross-undertaking counted against it (see MRNW below), and in Exel, and subsequently Halo(see below), that the risk that the contracting authority would have to illegally procure or extend a contract to cover the period until final trial, meant that the suspension should be disapplied.
It looks as though the mountain which claimants seeking injunctions have always had to climb is as steep as ever. For SMEs which lack the financial strength to back, or take the risk of, a cross-undertaking, the possibility of maintaining the suspension seems remote, regardless of the merits.
It seems that Exelis likely to be treated as the reference case for these applications and, given the relatively extended consideration given by Akenhead J to the issues, it is worth considering in some detail.
In Exel, the defendant NHS Trust was seeking Foundation Trust status. In order to achieve this it would have to make £25 million savings in the financial year 2010/11. In pursuit of this target it decided to divest itself of the procurement business it operated on behalf of itself and other Trusts. It advertised a single-vendor framework agreement; the successful bidder would, in effect, be required to take over the existing procurement business, and would be awarded a 5 year “framework agreement” with a potential 5 year renewal. Exel, a disappointed bidder, challenged the outcome of the procurement, serving its proceedings in October 2010 and thus preventing the award of the framework agreement.
The court found that the claimant’s case was for the most part weak on its merits, raising no serious issue to be tried. However, there had been extensive contact at various stages between the authority and the company which eventually won the contract (the other bidders, Exel and Buying Solutions, both dropped out, leaving only one economic operator in the running). Exel said that this amounted to unlawful negotiation. Akenhead J found that this did amount to a serious triable issue; he then turned to the question of the balance of convenience.
Addressing the relevance of the public, as opposed to the parties’, interests he said,
“In my judgement, one important area of the public interest is the efficient and economic running of the National Health Service. In these times of economic difficulties and constraints, there is massive pressure on the different arms and parts of the NHS to make savings.“
The defendant Trust had established that it was urgent that the procurement proceed to its conclusion: the existing supplier was underperforming and the Trust was on track to miss the financial target required for it to achieve Foundation status. There was a risk that both customers and staff of the existing supplier would abandon it in the face of prolonged uncertainty. It was desirable that the Trust achieve Foundation status; a year’s delay in concluding the contract, which would ensue if it were suspended pending full trial, would be damaging to that aspiration.
Moreover, the judge said, an award of damages would be an adequate remedy for the one head of claim which he regarded as being both in time and raising a serious issue.
On these grounds, the automatic suspension was disapplied.
The adequacy of damages: Halo
In Halo, again tried by Akenhead J, the court concluded that the claimant – a charity which had failed to win a contract from the Department for International Development to carry out de-mining operations in Cambodia [sic] – had not passed the “serious triable issue” threshold. A number of its complaints were in effect administrative law issues and should have been raised in the Administrative Court; others were simply weak. But Akenhead J went on to consider what his judgment would have been if there had been a serious triable issue.
He gave the following reasons (not in order of importance) why he would in any event have disapplied the automatic suspension on balance of convenience grounds:
- There is a public interest in DFID being able to continue de-mining operations;
- It would be undesirable to perpetuate the position where de-mining is funded by grant rather than by competed contracts;
- Waiting for trial would introduce uncertainty and potentially harm the de-mining programme;
- Redundancies of staff (one of the consequences of losing the work) would apply to either bidder, and that it was to be hoped that redundant staff would transfer to the successful bidder;
- Halo had access to other funding from donations;
- It would be disproportionate to introduce a delay of 5-7 months before contract on the basis of a weak prima facie case;
- Damages would be an adequate remedy for Halo.
The balance of convenience: MRNW
In Metropolitan Resources North West Ltd v Secretary of State for Home Department [2011] EWHC 1186 (Ch)(MRNW), the court found that the claimant had raised a serious triable issue, while observing that this was a low threshold. Furthermore, it found that damages would not be an adequate remedy for the claimant. However an award of damages might not be an adequate remedy for the defendant either, because it was unlikely that the claimant had sufficient resources to pay damages. The defendant authority would suffer greater irremediable harm if the suspension were maintained, and it succeeded at trial, than would be suffered by the claimant on the opposite case. If the Home Secretary was unable to enter into the contract, he would have to continue to procure the services from an existing local authority, which itself might amount to an unlawful procurement.
On the basis of these findings the court found that the balance of convenience favoured disapplying the suspension.
Have the courts missed the point?
The case law suggests that contracting authorities will find it very easy to obtain the disapplication of the automatic suspension. Whether or not claimants continue to pursue a damages claim or not, the prime purpose of the new remedies directive – to provide recourse at a point before a contract has been awarded appears to have been defeated.
The reasons adduced by the judges in these three cases will frequently, if not always, apply. The public interest will always favour continuing the provision of public services (or the supply of goods or provision of works) to public authorities. When the time required to prepare for trial is taken into account, as it was in Exel and Halo, it will almost inevitably be the case that in order to maintain the service (or obtain the goods or progress the works), the authority has to take the risk of unlawfully extending an existing contract or procuring a new one to cover the gap (although it is notable that the judges do not appear to have considered whether such short-term extensions or procurements would exceed the financial thresholds, nor considered how likely such potentially unlawful agreements would be, in practice, to attract challenges). Given the time that a complex procurement takes, the answer may often be that thresholds would be exceeded and decisions open to challenge but this is not an excuse to not even consider these issues.
The introduction of automatic suspension was supposed to improve the position of aggrieved economic operators. The imposition of a freeze on contract-making was supposed to support and promote effective and rapid review by the courts – and, where appropriate, the provision of a remedy – in the words of the Directive, “to ensure compliance with Community law, especially at a time when infringements can still be corrected” (emphasis supplied). The introduction of automatic suspension was seen as making it easier for challengers to bring their complaint to the courts because they no longer had to apply for an injunction – and no longer had to consider whether to apply under pressure of time. In light of the case law it must be questioned whether these expectations have been met. Economic operators will still have to determine whether they should commence proceedings, and take the risk of proceedings, under the same pressure of time. Once contracts have been concluded, it is much less likely that economic operators will think it worthwhile taking the risk of proceedings in pursuit of damages for the loss of a chance. It is difficult to resist the conclusion that the case law thus far does little if anything to promote compliance with public procurement law, or to provide effective remedies to aggrieved economic operators.
The task for claimants
In practical terms, it seems unlikely that the courts will give much weight to the proposition that there is a public interest in the maintenance of the integrity of public procurement law. Claimants resisting the disapplication of suspension should ensure that their case is carefully prepared, with both legal argument and factual evidence, to counter arguments by the contracting authority concerning the public interest and the risk of their being forced to enter or extend contracts unlawfully to cover the period pending trial. They should argue that the whole thrust of the legislation is to ensure that the risks arising from unlawful procurement are more fully transferred to contracting authorities. Even accepting that the balance of convenience is an appropriate test, the court should take the intention of the legislation into account in assessing that balance and should give more weight than has so far been given to the interests of economic operators. On the factual level challengers might, for example, seek to show that the value of any interim contracts would be below-threshold, or to demonstrate that there is little or no commercial incentive for economic operators to challenge such interim arrangements.
Where should public authorities focus their attention?
Meanwhile, public authorities may be starting to wonder if the commotion that accompanied the introduction of the new remedies directive (that is, it was a contractors’ charter and would cause chaos) was all a little bit of a fuss about nothing. Whether this is true may depend on the approach taken by the courts to using the ineffectiveness remedy (something we are yet to see). If the courts take a similarly pro-authority approach to this remedy it may be that authorities will consider that they would have been better off worrying about the equality obligations and the requirement to consult that they are subject to rather than the remedies directive. The courts seem to be taking a harder line on these issues, but I’ll leave that for a future post.