If the Australian Government adopts the UK's declaration of ineffectiveness, the dynamics of the Commonwealth procurement could be changed fundamentally.
There has, to paraphrase bush poet AB "Banjo" Paterson, been movement within Commonwealth procurement circles in recent months, for the word has passed around that the Government Procurement (Judicial Review) Bill is to be introduced into a house of, and passed by, the Australia Parliament during the current Spring sittings.
The text of the Bill has not been subject to any consultation process. As a consequence, questions as to which entities will have standing to bring a claim, the powers exercisable by the Federal Court (which was granted an additional $2.9 million in the 2016-2017 Budget to provide a mechanism to deal with disputes about procurement decisions) in considering claims, the manner in which those powers will be exercised by the Federal Court, and the remedies available those bringing claims, remain the subject of speculation.
The judicial review process available under the Public Contracts Regulations 2015 (UK) may provide Australian Government agencies with some insight into the future once the Bill becomes law.
Facilitating legal challenge to Commonwealth procurement
The Bill has been prepared:
- in response to a 2014 recommendation by the Senate Finance and Public Administration Committee that an independent and effective complaints mechanism for resolution of disputes about Commonwealth procurement processes be established; and
- to comply with the Australian Government's internal trade obligations, including those under Chapter 15 of the recent Trans-Pacific Partnership Agreement (TPPA).
Article 15.19 (Domestic Review) of the TPPA requires that parties to the TPPA, including Australia, in addition to encouraging resolution of challenges or complaints in relation to "covered procurements" by alternative dispute resolution, "maintain, establish or designate at least one impartial administrative or judicial authority (review authority) that is independent of its procuring entities to review, in a non-discriminatory, timely, transparent and effective manner". Chapter 15 has broad application; "covered procurements" are those that fulfilling the monetary value threshold and the other criteria set out at Article 15.12.
Who has a right to judicial review under the Public Contracts Regulations?
Under Chapter 6 of the Public Contracts Regulations, a contracting authority such as a government agency has, under regulation 89, a duty to comply with:
- Part 2 of the Public Contracts Regulations, which establishes procedures for certain procurements by contracting authorities for public contracts; or
- ·other enforceable EU public procurement obligation in respect of a contest or design contest falling within Part 2.
That duty is owed to "economic operators" from the UK or European Economic Area, and is extended to certain "economic operators" outside this geographical limit under regulation 90 (for example, where there is an international bilateral agreement requiring that the UK accord economic operators from the relevant state remedies that are no less favourable that those owed to UK economic operators under regulation 89).
"Economic operator" is defined very broadly and means "any person or public entity or group of such persons and entities, including any temporary association of undertakings, which offers the execution of works or a work, the supply of products or the provision of services on the market". This definition would encompass not only tenderers, successful and unsuccessful but also potential tenderers.
A breach of the duty owed under regulations 89 or 90 is actionable by "any economic operator which, in consequence, suffers, or risks suffering, loss or damage". These proceedings must be brought in the High Court and their conduct is also regulated.
How judicial review under the Public Contracts Regulations is conducted
Regulations 92 to 104 regulate the conduct of proceedings commenced under Chapter 6.
Broadly, the time limit for bringing proceedings depends on whether they relate to a contract which has been executed and in respect of which a "declaration of ineffectiveness".
The timeframe in which the economic operator starting proceedings must serve the claim form on the contracting authority is also prescribed. Depending on the breach of action alleged, a copy of that claim must be sent to the other parties to the contract in question.
Once a contracting authority is aware that a claim form has been issued in respect of its decision to award a contract, it must refrain from entering into that contract if not yet executed ie. suspend contract-making.
This suspension of contract-making can be ended, restored or modified by an interim order.
Other purposes for which the court can make an interim order include suspending:
- the procedure leading to the award of the contract or determination of the design contest in relation to which the breach of duty that is the subject of the proceedings is alleged; and/or
- the implementation of any decision or action taken by the contracting authority in the course of following such a procedure.
The regulations also prescribe the remedies available to an economic operator; those remedies depend on whether the relevant contract has been entered into or not. Injunctive relief against the Crown is also available.
Power to make a declaration of ineffectiveness and impose penalties if the contract has been executed
If the court is satisfied that there has been a breach of duty by a contracting authority and the relevant contract has been executed, it has a power (albeit with little discretion) to make a declaration of effectiveness if it is satisfied that any of the grounds for ineffectiveness applies, unless there are general interest grounds for not making a declaration of ineffectiveness. It can also impose penalties.
If a declaration of ineffectiveness is made, the court must order the contracting authority to pay a civil financial penalty of the amount specified in the order.
The court may also award damages to an economic operator which has suffered loss or damage as a consequence of the breach, regardless of whether the court has make a declaration of effectiveness or has imposed penalties instead or in addition to this.
Consequences of a declaration of ineffectiveness
A declaration of ineffectiveness has significant consequences, not only in terms of its impact on the parties' rights and obligations but also from a commercial and contracting agency perspective. The effect of making that declaration, according to the Regulations, is that the contract will be considered to be "prospectively, but not retrospectively, ineffective as from the time when the declaration is made and, accordingly, those obligations under the contract which at that time have yet to be performed are not to be performed".
The Public Contracts Regulations acknowledge that the making of any such declaration does not occur in a vacuum and has practical consequences; the court still has the power to stay the order. If it is, the contract is then to be considered to have been ineffective as from the time when the declaration had been made.
The court may also, in tandem with its declaration of ineffectiveness or at any time after making that declaration, make "any order that it thinks appropriate" for addressing:
- the implications of the ineffectiveness or any stay for the particular circumstances of the case; and
- consequential matters arising from the ineffectiveness.
This can include addressing issues of restitution and compensation as between those parties to the contract who are also parties to the proceedings so as to achieve an outcome which the court considers to be just in all the circumstances.
The court cannot exercise its power to make order which are inconsistent with any provisions that have been agreed by parties to the contract, prior a declaration of ineffectiveness being made, to regulate their mutual rights and obligations in the event of such a declaration. This exception which, once again, reflects the court's reluctance to interfere with the arrangements between parties, is itself subject to an exception - where the provisions agreed between the parties are incompatible with regulations 101(1) or (2).
For completeness. we note that if a claim for a declaration of ineffectiveness is not made despite the court being satisfied that any of the grounds for this apply, because of the operation of regulation 100 or alternatively where the court is satisfied that there is a breach of a procedural requirement and does not make a declaration of ineffectiveness, the court must order:
- the duration of the contract be shortened to the extent specified in the order; and/or
- the contracting authority pay a civil financial penalty of the amount specified in the order.
Consequences of a declaration of ineffectiveness on a framework agreement
What is the effect of a declaration of ineffectiveness on a contract issued before the declaration under a framework agreement (a framework arrangement is similar to a head agreement establishing a panel arrangement)?
Regulation 103(2) expressly provides that a specific contract is not considered to be ineffective merely because a declaration of ineffectiveness in respect of the framework agreement. Instead, the court must (if appropriate) make a separate declaration of ineffectiveness for each contract under the relevant framework agreement.
Other aspects of the Public Contracts Regulations that might influence the Australian reforms
Apart from the breadth of the powers the court has to make a declaration of ineffectiveness in respect of an executed contract, there are some aspects of the Regulations that may have been of particular interest to the Australian Government in drafting the Bill.
First, the UK Regulations distinguish between executed and still to be executed contracts. As described above, both the time limits for commencement of proceedings and the remedies available to economic operators commencing such proceedings are governed by this distinction. The distinction, in addition to reflecting the practical difficulties of undoing a contract which has commenced, may also reflect the historic hesitation of the courts, under common law, to permit a third party to interfere in the validly executed arrangements of contracting parties.
Secondly, regulation 87 imposes a "standstill period", that is, a temporary moratorium on execution of a contract following notification to tenderers of the decision to award it. This allows an economic operator who is an unsuccessful tenderer to bring proceedings prior to execution by commencing those proceedings in the standstill period. (As noted above, the issue of a claim will result in the suspension of contract-making, preventing execution prior to hearing of the claim). The length of the standstill period varies, depending on the method of communication of notification to tenderers and whether all tenderers have been notified on a single date or different dates. If notification is sent by facsimile or electronic means and to all tenderers simultaneously, the standstill period ends at midnight at the end of the 10th day after the date of sending.
Finally, the UK Regulations make specific provision is made for panel-like arrangements established under a head agreement.
A vision of the future?
Chapter 6 of the UK's Public Contracts Regulations may offer Australian Government agencies one vision of the future. If the Bill simply grants the Federal Court the power to hear claims and to impose civil penalties or to award damages for breach of Division 2 of the Commonwealth Procurement Rules this would, although novel, be relatively uncontroversial.
The inclusion of a power to make an order akin to order to a declaration of ineffectiveness under the Public Contracts Regulations could, on the other hand, change the dynamics of the Commonwealth procurement fundamentally. It would place the Federal Court in a position of significant power with respect to the fulfilment of agencies' commercial imperatives and would necessitate the development of contractual clauses - or amendment of existing clauses - to address the impact of any such declaration on the parties' rights and obligations.
To some agencies, this may represent a dystopian vision of the future. To tenderers, it may represent a long sought, hard fought opportunity to challenge the robustness of Australian Government agency procurement practices. For all in the procurement space however, the countdown has begun. It's now a matter of watching this space and awaiting introduction of the Bill.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.