UK: Too Good To Be True? Abnormally Low Tenders In Public Procurement

Last Updated: 14 August 2013
Article by David Gollancz

Abnormally low tenders ("ALTs") create serious risks – as was demonstrated by the collapse of Connaught plc in September 2010 – but the law about them is ambiguous. This article sets out the headline issues and arguments1.

What does the legislation say?

Article 55(2) of Directive 2004/18/EC and Regulation 30(6) – (9) of the Public Contracts Regulations 2006 provide that a contracting authority ('CA') may (not must) reject an ALT, but only after the CA has given the tenderer an opportunity to explain its tender2.

The Directive refers to tenders which 'appear to be' abnormally low; the Regulations to a tender which 'is' abnormally low. Otherwise the two provisions are, despite some differences in wording, the same in effect. 'Abnormally low' is not defined.

It has been argued (see for example Morrison Facilities Services Ltd. v Norwich City Council [2010] EWHC 487) that, whatever the legislation says on its face, it means that CAs are required to identify and investigate ALTs, regardless of whether they intend to reject them.

That position appears to be supported by the judgment in joined cases Lombardini and Mantovani Case C-285/99 [2001] ECR I-9233, in which the European Court said:

"...the contracting authority is under a duty, first, to identify suspect tenders, secondly to allow the undertakings concerned to demonstrate their genuineness by asking them to provide the details which it considers appropriate, thirdly to assess the merits of the explanations provided by the persons concerned, and, fourthly, to take a decision as to whether to admit or reject those tenders."

However, it is apparent from the context that the Court was not in that case considering whether there is a primary duty to identify and examine ALTs, but expanding on its previous observation that:

"It is essential that each tenderer suspected of submitting an abnormally low tender should have the opportunity effectively to state his point of view in that respect."

Certainly the legislation does not expressly impose such an obligation on the CA. Nor – as appears to be acknowledged by the judgment in Lombardini and Mantovani – does it require the CA to reject an ALT even if the tenderer cannot show that it is economically viable3.

That construction is supported by the fact that the European Commission, when drafting the Directive, had before it the Opinion of the Economic and Social Committee of the European Council4, which proposed that:

"In the case of abnormally low tenders...it should be stipulated that contracting authorities are to examine tenders which seem to be abnormally low...It should be clearly stated that the tenders in question are to be rejected if adequate justification is not forthcoming."

The Commission did not implement that recommendation and it must be supposed that it did not wish to impose those obligations.

What is the provision for? It appears that originally it was intended – like procurement law generally – to prevent national preference, by protecting tenderers from having their tenders unfairly rejected. If (for example) a German company could undercut a Dutch one, on the basis of lower costs or more efficient processes, its tender should not be rejected merely because its price was surprisingly low.

However, the provision has come to be seen as protecting CAs from tenderers winning contracts with unsustainable prices; the risk being that the tenderer will re-negotiate prices after award, oppress their workforce or subcontractors, or cut corners in performance. The European Commission has stated that this is a particular problem in the construction industry5. It has been suggested too that it prevents 'predatory pricing', where a dominant undertaking drives efficient competitors out of the market by absorbing losses.

Who can enforce the obligations? A tenderer who submits an ALT can enforce the CA's obligation to investigate before rejecting it.

Can a competitor which has submitted a realistic tender enforce any obligation against the CA, for example either to investigate, or, having investigated, to reject the ALT?

That will depend on the purpose of the legislation: if it is there only to protect low tenderers from unfair exclusion and CAs from being forced to accept non-viable tenders, there is no reason why other tenderers should be able to enforce the provision.

But if it is intended also to protect fair competition, arguably other tenderers should be able to enforce6 – particularly if it can be argued that an economically unreliable tender cannot, by definition, be the most economically advantageous ('MEAT').

What have the cases said?

The cases in the European Court assist very little: essentially they have all re-emphasised that an ALT cannot be rejected unless the tenderer has been afforded a genuine chance to justify its tender7.

They do make it tolerably clear that an ALT is one which raises the suspicion that the tenderer will not be able to deliver the contract on the terms tendered, and they say explicitly that there is no universal rule to determine whether a tender is abnormally low. In all the cases, the court has treated the baseline for comparison as the average of other compliant tenders. That may be because, in those cases, such a definition was set out in domestic legislation. It seems clear though that comparison with other tenders cannot be the only criterion for identifying an ALT.

If the definition of 'abnormally low' is 'too low to be economically sustainable', the majority of tenders might be abnormally low and a sole higher tender might be the only reliable offer.

One domestic case does tackle two of the thornier issues arising from the legislation. In J Varney & Sons Waste Management Limited v Hertfordshire County Council [2010] EWHC 1404 (QB), Flaux J first concluded (expressly disagreeing with Arnold J in Morrison) that "neither the Directive nor the Regulation imposes a duty to investigate so-called suspect tenders".

Secondly, Flaux J noted that the Directive applies where a tender 'appears' abnormally low, where the Regulations refer to a tender which 'is' abnormally low. Applying the principle that, EU legislation prevails over inconsistent domestic law, he concluded that such duty as does exist could only arise where the contracting authority "actually knows or suspects" that the tender is abnormally low. Varney was appealed but not on these issues, so Flaux J's robust findings stand, but as first instance decisions only.

In the author's view it makes no practical sense to say that the obligation to investigate (if such a duty exists) arises only after the CA has formed the intention to exclude the EO. Until the CA has investigated the tender it is not in a position to form such an intention.

The rational sequence of events – at least where the basis of award is the MEAT– is that the CA identifies a tender as abnormally low; investigates it; then forms the intention to exclude it.

However, the CA is entitled to accept an ALT if it wishes – for example, in a short contract for a non-essential service, the CA might decide that the benefit of a low price outweighed the risk that the contractor would not be able to deliver.

When considering an ALT, CAs should take into account all the factors suggested above: is the reliability of the contractor a critical issue, or is a low price (or other element) sufficiently attractive to outweigh any risks to delivery? Is there the potential for damage to fair competition?

If so, how does that potential damage balance against the possible benefits to the authority of a low tender?

Provided that CAs do not reject ALTs without affording the tenderer the opportunity to justify their offer, and provided that their decisions are reasoned (and the reasons recorded), they are likely to be able to defend their decisions.

Economic operators wishing to challenge a CA's award to an ALT should prepare to demonstrate its non-viability, the risk of harm to the workforce or supply chain and the potential damage to fair competition.

Footnotes

1 Readers interested in reading a longer article on this subject should contact the author's clerk at rbryant@keatingchambers.com

2 The legislation does not say so in terms but makes it clear by illustration that the explanation will be aimed at showing that the low tender is based on low inputs while meeting legal standards concerning employment

3 Where the basis of award is the most economically advantageous tender, it may be questionable whether a tender that remains suspect after it has been explained can be the most economically advantageous

4 CES 515/2001

5 Prevention, Detection and Elimination of Abnormally Low Tenders in the European Construction Industry DG III 5 June 1999

6 There is a case for saying that taxpayers too should be able to enforce this provision. If they fear that their money is to be spent on, or their services provided by, an unreliable contractor, they should be able to resort to judicial review to require the contracting authority to investigate

7 Note that in Belfass Case T-494/04 the Court confirmed that it is not only prices which may be abnormally low: other elements such as the number of hours or personnel required to carry out the contract might also be considered abnormally low

The articles and papers published by Keating Chambers are for the purpose of raising general awareness of issues and stimulating discussion. The contents must not be relied upon or applied in any given situation. There is no substitute for taking appropriate professional advice.

This material is prepared for Chambers by our Director of Research and Professional Development, Professor Anthony Lavers (LL.B. M.Phil Ph.D. D.Litt MCI.Arb FRICS Barrister) Visiting Professor of Law, Oxford Brookes University.

www.keatingchambers.com

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