UK: Mitigating The Risk Of Ineffectiveness

Last Updated: 28 May 2012
Article by Farah Al-Hassani

Public bodies putting contracts out to tender should do more to prepare for and mitigate against the potentially devastating risk of an ineffectiveness order following a legal challenge in Court, writes Farah Al-Hassani, a solicitor in Biggart Baillie's Infrastructure, Environment & Transport Department.

The changes implemented by the Remedies Directive have been viewed by many as something of a mixed blessing. The remedies undoubtedly favour bidders by extending and strengthening existing remedies, enabling bidders to pursue contracting authorities via the Courts if they decide the contracting authority has not followed the Procurement Rules correctly.

However, the "ineffectiveness" remedy potentially carries with it heavy consequences for contracting authorities. It is therefore sensible for contracting authorities to plan for what will happen to a contract that is declared ineffective. That means taking steps to mitigate the consequences of that ineffectiveness in advance i.e. when preparing the contract and the tender documentation.

Ineffectiveness

The Courts are now empowered to make a "declaration of ineffectiveness", or in Scotland an "ineffectiveness order", which allows an awarded contract to be overturned in certain circumstances.

By its very definition, an ineffectiveness order can only be ordered where the contract has already been entered into. An aggrieved bidder may have up to 6 months after the date the contract is signed in which to bring a claim (subject to certain limitations). By this point, relationships are likely to have been well-established between the contracting authority and the successful bidder. Various other associated contractual relationships (including sub-contracts) may also be in place to implement the contract. In most cases, the winning bidder is likely to have commenced performance of the contract and may have already invested substantial sums. An order of ineffectiveness is likely to have a disruptive, or even devastating, impact on contractual relationships that have been built up over time.

An ineffectiveness order is also likely to expose the contracting authority to delays and disruption as well as additional costs due to the inevitable requirement for a new procurement process to be held. Further still, a contracting authority may be liable for compensation to the successful bidder it wrongfully entered into a contract with. The Court is also obliged to impose fines on the contracting authority when it issues an ineffectiveness order. Finally, the contracting authority may also find itself liable in damages to aggrieved bidders.

Avoiding a Challenge

To avoid the risk of challenge in today's particularly litigious climate, contracting authorities must be savvy and ensure they do all that can be done to mitigate this risk. It almost goes without saying that the best way to avoid a challenge is for contracting authorities to understand and fully comply with the rules.

Simply observing the standstill period requirements can be sufficient to avoid the risk of an ineffectiveness order. If unsuccessful bidders are given the opportunity to raise complaints about the way the process was conducted or about the way the evaluation criteria was applied prior to the winning bidder being selected, and provided there has been no material change to the contracting authority's requirement during the procurement process, a contracting authority should be in a position where this risk can be avoided. The recent shortening of the time bar rule in the 2012 consolidated version of the Procurement Rules to (generally) 30 days will no doubt make it more difficult for aggrieved bidders to mount successful challenges.

Even if a contracting authority finds itself in a position where it has had to make substantial changes to the requirement throughout the procurement process, the risk of becoming subject to an ineffectiveness order can be reduced by the publication of a voluntary ex ante transparency notice after the contract is signed or writing to all bidders concerned of its decision in relation to the award of the contract. By doing this, the contracting authority shortens the time limit for claims of ineffectiveness to 30 days.

Another potential "life line" for contracting authorities within the Procurement Rules is that, in some instances, the Courts have the power to not declare a contract ineffective if there are good reasons for maintaining the contract. In recognition of the potentially damaging consequences of an ineffectiveness order, the Courts are empowered to decline to make an ineffectiveness order if there are "overriding reasons relating to a general interest" that require the effects of the contract to be maintained.

Pre-Agreed Contractual Positions

Knowing the ropes in the Procurement Rules is one thing, but the "gold standard" for contracting authorities is effectively a "pre-nuptial" agreement in which the contracting authority and the bidder make provision for the practical consequences of a finding of ineffectiveness. The Procurement Rules recognise that parties are entitled to regulate the mutual rights and obligations of those parties to the ineffective contract in the event of a declaration and the Court, subject to limited exceptions, is prohibited from using its power to render the "pre-nup" ineffective.

Any such agreement should deal with the subject matter of the main contract but should be provided for in a collateral contract rather than in the main contract that may be the subject of a declaration of ineffectiveness. This avoids any argument that the "pre-nup" provisions are rendered ineffective too because they form part of the ineffective contract. Whilst an agreement of this sort does not need to be entered into at the time the contract award was made, it is important that it is concluded by the point that the potential risk of there being a declaration of ineffectiveness is identified.

It is probably best practice for the contracting authority to consider the "pre-nup" issues at the same time it prepares its tender in order to give the parties the best chance of negotiating the "pre-nup" in time. Whilst the precise content of a "pre-nup" agreement will very much depend on the particular contract in question, issues such as the disposal of assets, indemnities and the provision of TUPE information may be dealt with, as well as the practicalities of exit management.

Through the "pre-nup", contracting authorities and contractors can put themselves in a relatively strong position by attempting to mitigate against the otherwise potentially devastating consequences of a declaration of ineffectiveness.

Parties in Scotland should note however that the entering into of a "pre-nup" is only specifically contemplated by the English procurement regulations and is not expressly provided for in the Scottish equivalent. Parties in Scotland should nevertheless consider entering into a "pre-nuptial" agreement to regulate their respective rights and obligations should the Court grant an ineffectiveness order.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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