Breach of public procurement rules – damages and timing of challenge

Background

The appellant (the Contracting Authority) is a public body tasked with making the sites of former nuclear power plants in the UK suitable for other uses. For the purpose of this appeal it was to be assumed that it had breached the Public Contracts Regulations 2006¹ (the Public Contracts Regulations), which give effect to the Public Procurement Directive² (the Public Procurement Directive). It was alleged to have misapplied its own criteria to conclude erroneously that a consortium of which the respondent (the Economic Operator) was a member should not be awarded a tender for decommissioning nuclear power plants. The Economic Operator brought a claim against the Contracting Authority for damages for breach of the Public Contracts Regulations and the Public Procurement Directive.

Three preliminary issues came before the Supreme Court.

Breach must be ‘sufficiently serious’ under the Public Procurement Directive

The first issue was whether the Public Procurement Directive, as amended by the Remedies Directive³ (the Remedies Directive), requires an award of damages only where the applicable breach by the contracting authority is ‘sufficiently serious’. In other words, whether liability arises only if the so-called Francovich conditions, which determine (and limit) state liability under EU law, are met.

Following the ECJ decision in Spijker⁴, which concerned the scope of application of the Francovich conditions, the Supreme Court decided that there was clear authority that the liability of a contracting authority under the Public Procurement Directive is assimilated to that of the state; and that such state liability exists only where the Francovich conditions are satisfied. The second of the Francovitch conditions is that any breach must be ‘sufficiently serious’, so that was therefore a requirement to claim damages for breach of the Public Procurement Directive.

Breach must also be ‘sufficiently serious’ under the Public Contracts Regulations

The second, closely-related issue was whether the Public Contracts Regulations confer on a contracting authority the liability to compensate any breach of the Public Contracts Regulations (not merely one which is ‘sufficiently serious’). Since the answer to the first issue was ‘yes’, this was in effect a question as to whether domestic law is less restrictive than EU law for an economic operator who seeks to claim damages.

The Court of Appeal had decided this issue in favour of the Economic Operator by finding that there is a right to damages for any breach of the Public Contracts Regulations. This was based on its analysis that any claim was a private law action for breach of statutory duty and accordingly subject to ordinary English rules as to the availability of damages.

The Supreme Court held that this was wrong. The claim could not be treated as a private law claim for breach of a domestic statutory duty; the correct analysis was that the duty arises under EU law.

The Francovich conditions represent the ECJ’s determination as to the minimum protection that an economic operator can expect under the Remedies Directive. While a domestic legislature was entitled to provide wider protection, it could be assumed that the legislator would have made this clear had it intended to do so. With respect to the Public Contracts Regulations, Parliament had not done so.

The explanatory material relating to the Public Contracts Regulations referred to the ‘need’ to ‘implement’ and to ‘transpose’ the directives and to doing so with a ‘minimalist approach’. It therefore demonstrated that the legislative intention was to implement the directives without ‘gold plating’. That interpretation was consistent with the use of the word ‘may’ in the Public Contracts Regulations (‘the Court may… awarded damages’), which seemed to the Supreme Court to otherwise have no significance or persuasive explanation.

Accordingly, the Public Contracts Regulations could not be construed as less restrictive than EU law. An economic operator bringing a claim under the Public Contracts Regulations must establish that the Francovich conditions are met and therefore that the contracting authority’s breach is ‘sufficiently serious’.

Failure to mitigate because claim not brought before entry into contract

The final issue was whether, despite the Economic Operator having issued a claim within the time limit prescribed under the Public Contracts Regulations, it should nonetheless be denied an award of damages on the basis that it was open to it to bring a claim earlier, before the Contracting Authority had wrongfully awarded the contract to a third party. This would automatically have had the effect of preventing the Contracting Authority from entering into the contract. In essence this was an argument that the alleged harm suffered by the Economic Operator could have been mitigated by it issuing the claim earlier (as this would have preserved its ability to overturn the decision and be awarded the contract itself in a re-run of the process); that it had been unreasonable in not doing so; and that accordingly it was not entitled to recover its loss.

Under the Public Contracts Regulations, after giving notice of the outcome of the tender process, a contracting authority is subject to a 10-day standstill during which it must not enter into the contract. If an economic operator issues proceedings before the contract is signed the prohibition on entering into the contract will automatically continue. Meanwhile an economic operator has 30 days from the date of notice to commence a claim, which may potentially be after the contract has been entered into. Had the Economic Operator brought a claim before the contract had been agreed it was recognised that the likely sequence of events (reflecting procedures under the Public Contracts Regulations) would have led to a cross-undertaking and/or security being required of the Economic Operator as a condition of preventing the Contracting Authority obtaining a court order lifting the continuing prohibition on it entering into the contract.

The Supreme Court recognised that in practice therefore the Economic Operator had two probable options:

• bring a claim within 10 days and subsequently provide a cross-undertaking and/or security to prevent the contract being entered into; or
• bring a claim after the contract has been entered into and claim only damages.

The former option involved a risk that the Economic Operator’s challenge would fail and that it would then have to pay the Contracting Authority for loss or damage suffered as a result of the delay in entering the contract.

These options were for the Economic Operator to choose between on the basis of its own best interests. The Economic Operator could not be said to have acted unreasonably in failing to take the steps that would have prevented entry into the contract but have adverse consequences for it were its challenge unsuccessful (ie the first option). No authority had been cited suggesting that a party acts unreasonably by not taking steps to prevent a perpetrator from giving effect to its own breach. It was for the Contracting Authority to take the risk of entering into the contract before the end of the period during which a claim could be started.

Comment

The decision whether to bring a challenge to a public procurement award is often vexed. Not only must the decision be made quickly, but when it relates to a costly and time-critical project it might also carry substantial risk (for the disappointed economic operator as well as the contracting authority).

In that context this decision is welcome for businesses that tender for UK public contracts, foremost for offering practical assistance by establishing that an economic operator is under no obligation to rush to take steps to prevent a contracting authority from entering into the contract (with potentially severe financial repercussions if its challenge fails) if it is content to limit its relief to a claim for damages. Instead the economic operator is entitled to simply allow the contracting authority to proceed to give effect to its own breach and then sue it for damages. In those circumstances the only financial downside would be the possible liability for costs of the litigation.

However the decision also offers comfort for contracting authorities by confirming that a successful damages claim will require an economic operator to establish that the authority’s breach was ‘sufficiently serious’ within the meaning of the Francovich conditions.

Footnotes:

^{1 (SI 2006/5).
2 (Parliament and Council Directive 2004/18/EC).
3 (Council Directive 89/665/EEC, itself amended by Council Directive 2007/66/EC).
4  Jozef Maria Antonius Spijkers v Gebroeders Benedik Abattoir CV and Alfred Benedik en Zonen BV: ECLI:EU:C:1986:127.}

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Amy Edwards at amy.edwards@allenovery.com. ​