UK: The Damages Remedy In Public Procurement Claims: Still Alive And Well?

In Nuclear Decommissioning Authority v ATK Energy EU Ltd (formerly Energy Solutions EU Ltd) [2017 UKSC 34], the Supreme Court ruled that claimants seeking damages for breaches of the Public Contracts Regulations 2006 are only able to do so if the breach is "sufficiently serious".

In the decision, the Court applied the second principle of liability for breaches of Community law from the judgment of the Court of Justice in Francovich v the Italian Republic [1995] ICR 772. This was on the basis that Parliament did not intend to go beyond the right to claim damages under Community law when amending regulations to implement the Remedies Directive in 2009.

What is meant by "sufficiently serious" and will this deter claims for damages in the future? And what will happen to the Francovich principles after the UK leaves the EU?

Background

The Supreme Court judgment reversed a Court of Appeal decision on 15 December 2015 on a preliminary point of law arising from a claim for damages under the Public Procurement Directive 2004/18/EC and the Public Contracts Regulations 2006 in respect of the award of a contract by the Nuclear Decommissioning Authority (NDA) for the decommissioning of 12 Magnox power stations.

On the trial on liability ([2016] EWHC 1988), Mr Justice Fraser held that the NDA failed to award the contract to the tenderer submitting the most economically advantageous tender in accordance with the criteria it had established, which was therefore in breach of the Directive and the Regulations. The NDA's failure arose because the winning consortium, the Cavendish Fluor Partnership (CFP), should have been disqualified for failing two "threshold" requirements and the NDA's tender evaluation included many "manifest errors" wrongly resulting in CFP scoring higher than ATK.

In a further judgment in December last year ([2016] EWHC 3326), Mr Justice Fraser considered if the identified breaches were "sufficiently serious" to give rise to liability in case the Supreme Court decided as it did, reversing a the Court of Appeal on this point. The Supreme Court upheld the Court of Appeal decision on a separate point of law: namely that a claimant is not prevented from making a damages claim if they did not start proceedings and tell the contracting authority before it entered into the contract. In doing so, the Supreme Court rejected the NDA's argument that ATK failed unreasonably to mitigate its loss. Although commencing proceedings automatically prevents a contracting authority entering into the contract, authorities will normally seek to lift the suspension. The claimant is then faced with giving an undertaking to meet the damages that the authority will suffer if the claim fails as the price for continuing the suspension. The Court considered that a duty to mitigate did not extend to assuming that risk.

The damages claim was compromised before the Supreme Court gave judgment.

Context

The principles in the Supreme Court judgment apply equally to claims for damages under the Public Contracts Regulations 2015, the Concession Contracts Regulations 2016 and the Utilities Contracts Regulations 2016, which all gave effect to the 2014 Directives concerning public procurement concessions and utilities.

Although the decision does not affect or alter the law in relation to proceedings for a declaration of ineffectiveness, any uncertainty about the right to claim damages is likely to encourage a disappointed tenderer with a legitimate grievance to pursue a claim for a declaration of ineffectiveness if the grounds exist to do so. The window for such claims however is short. Proceedings must be started within 30 days from the day after the claimant is informed of the contact's conclusion, the reasons for rejection of its tender and the award to the winning bidder.

Proceedings for damages, where there is no claim for a declaration of ineffectiveness, must normally be started within 30 days beginning with the date "when the economic operator first knew or ought to have known that grounds for starting the proceedings had arisen". The Court has the power to extend this time limit where there is good reason. However this is restricted to three months beginning with the date of actual or presumed knowledge. The decision of the Supreme Court, that claims for damages are not precluded where the claimant delays bringing proceedings until after the contract is concluded, is not surprising.

What is meant by "sufficiently serious"?

Mr Justice Fraser found the breaches of duty were "sufficiently serious" after applying the multi-factorial approach described by Lord Clyde in the House of Lords judgement in R v Secretary of State for Transport, Ex p Factortame Ltd (No 5) [2000] 1 AC 524, 554-556. Lord Clyde identified the following factors, though in his view the list was not exhaustive:

  1. the importance of the principle which has been breached;
  2. the clarity and precision of the rule breached;
  3. the degree of excusability of an error of law;
  4. the existence of any relevant judgment on the point;
  5. the state of the mind of the infringer, and in particular whether the infringer was acting intentionally or involuntarily (ie whether there was a deliberate intention to infringe as opposed to an inadvertent breach);
  6. the behaviour of the infringer after it has become evident that an infringement has occurred;
  7. the persons affected by the breach, including whether there has been a complete failure to take account of the specific situation of a defined economic group; and
  8. the position taken by one of the Community institutions in the matter.

Applying these factors, the judge found that the duty to award the contract to the most economically advantageous tender is an important principle which is clear and precise, both in the Regulations and in the Directive itself. It is underpinned by the fact that the criteria used in the competition, and the weighting given to them, must also be clear and precise. Factors (1) and (2) therefore point to the breach being "sufficiently serious" in terms of the second Francovich principle.

In the judge's opinion, factor (3) did not really apply as it's more applicable to liability for legislative or policy acts. In any event he didn't find the errors of the evaluation teams to be excusable. On factor (4), all the case law that exists, and might be considered relevant, points to the same principles, "namely the importance of fair competition and the award of the contract in question to the winner of that competition".

On factors (5) and (6), Mr Justice Fraser had not found bad faith on the part of the NDA nor any deliberate intention to infringe in the earlier proceedings but he was not prepared to use those findings as weighing against the breaches being "sufficiently serious". He did not read Lord Clyde's analysis as meaning that intention was directly relevant in every case. He pointed out the difficulty of assessing the state of mind of individual evaluators where relevant. We might expect this view to be challenged in later cases.

In considering factor (7), the judge focused on the other tenderers, especially ATK. That's because the company should have won the procurement competition but didn't, resulting in:

  • the loss of a Ł4.2 billion value 14-year contract;
  • significant redundancies; and
  • the sale of its UK business.

He found that factor (8) does not arise at all in this case. Even if it did, it did not help the NDA because the case law of the European Court of Justice demonstrates that Community institutions are bound by the same principles.

Mr Justice Fraser also concluded that the failure of the NDA to disqualify CFP for failure to meet the threshold requirements was "sufficiently serious" to satisfy the second Francovich principle because their individual effect was the same as that of the overall breach. If a contracting authority fails to disqualify a tenderer in accordance with the evaluation criteria and then awards the contract to that tenderer, the award is not made to the most economically advantageous tenderer. Similarly, if one or more evaluation scores are unlawfully made and the correct scores, individually or together, would alter the outcome of the competition, then those breaches are "sufficiently serious" to satisfy the second Francovich principle.

Application to other infringements of the Directives and the Regulations

It is unlikely that Mr Justice Fraser's conclusions on the "sufficiently serious" principle would be overturned on appeal in a similar case in the future. This is a case where the infringement(s) of the relevant Directive and regulations mean that the contract is not awarded to the most economically advantageous tenderer in accordance with the evaluation criteria. Such cases are always more likely to attract claims where the disappointed tenderer can show that it would have been awarded the contract and can include the costs of tendering, as well as the loss of profit from the contract it would have won, in its claim.

The assessment of other infringements must wait for other cases. We do not think that all infringements can be put into the "sufficiently serious" box as to find otherwise will neuter the second Francovich principle in procurement cases.   At some point the Technology and Construction Court will have to decide that a particular breach is not "sufficiently serious" to enable a damages claim to be brought. How might it assess the following examples of claims for the costs of tendering by unsuccessful bidders?

  • Changes to the evaluation criteria after the issue of the tender documents in a restricted procedure competition where the tenders received are properly evaluated in accordance with the altered criteria;
  • Unequal treatment of bidders in a competitive dialogue through a combination of unequal access to the contracting authority in terms of meetings and the timing of the provision of information but the tenders received are properly evaluated;

One outcome may be that a breach will not be "sufficiently serious" unless it can be shown to have altered the result of the competition. If that is right, bidders will be left without a damages remedy in the illustrated cases.

Francovich principles after Brexit

The White Paper on "Legislating for the United Kingdom's Withdrawal from the European Union" by means of the Great Repeal Bill specifically addresses the future of the case law of the Court of Justice:

"To maximise certainty, therefore, the Bill will provide that any question as to the meaning of EU-derived law will be determined in the UK courts by reference to the CJEU's case law as it exists on the day we leave the EU."
[para 2.14].

Therefore, the Supreme Court decision will not be vulnerable to future attack on the basis it relies on the Francovich decision.

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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