Managing the new risks in procurement

As part of the legal sign off, an authority should assess the journey of the contract from the Official Journal of the European Union (OJEU) notice through to the final version approved for signature, writes Bill Hull. It is also possible to scope out the key points that will need to be addressed in contractual provisions dealing with a declaration of ineffectiveness.

The most significant substantive change introduced by the Public Contracts Regulations 2009 (the Amendment Regulations) is the extension to the scope of remedies that may be imposed for breaching the procurement rules. Putting aside the procedural changes that accompanied the new remedies, this article reviews the circumstances under which the new remedies arise and looks at a couple of the less publicised measures that can be taken to limit an authority's potential liability.

When the remedies arise

As discussed in more detail in a previous article, a claim for contract ineffectiveness may be brought under three possible grounds. When the remedy of ineffectiveness is imposed, a court must also impose a civil financial penalty. In addition, a court may also award damages to an economic operator which has suffered loss, due to the breach, and it may make a supplemental order addressing issues between the contracting parties.

If there are grounds for ineffectiveness, but the court is satisfied that there are overriding general interest reasons for not declaring the contract ineffective, the court must instead order that the duration of the contract is shortened and/or impose a financial penalty. Similarly, if there is a breach of rules relating to standstill or suspension, which does not amount to grounds for ineffectiveness, a court may opt to shorten the contract and/or impose a financial penalty. If a court elects to shorten the contract, it may also make any supplemental order addressing issues between the contracting parties.

Measures to reduce the risk

There are two kinds of measures that contracting authorities should be taking to minimise the risks arising under the Amendment Regulations. The first is to prevent any of the grounds for a new remedy arising, the second is to minimise the extent of the risk to the authority, should such a remedy be imposed.

Reducing the chance of any of the grounds for ineffectiveness arising

It is perhaps trite to say, but the most obvious means of avoiding the serious new penalties is strict adherence with the procurement rules. It will now, however, be especially important that authorities comply with the requirements of advertising, standstill and suspension periods.

Depending on the circumstances, in looking to reduce the risk of a claim for the new remedies, tactical decisions will need to be made in relation to issuing voluntary notices and complying with standstill periods, as well as reducing ineffectiveness time limits by issuing contract award notifications. For instance, a tactical decision to be considered by authorities in the case of a direct award is whether to publish a voluntary transparency notice (and observe the associated standstill period). Whilst this will have the effect of alerting the market's attention to the contract opportunity, it will also mitigate the risk of subsequent claims for ineffectiveness. As a further example, in the case of above threshold contracts called off a new framework agreement via a mini tender procedure, other than in exceptional circumstances where expediency dictates, issuing a notice (and compliance with the associated standstill period) will be advisable. Part 3 of the recent Office of Government Commerce (OGC) Guidance on the Amendment Regulations provides extensive commentary on these measures.

Less immediately obvious is the increased importance of ensuring that an authority is not treated as having entered directly into a "new" contract as a result of the rules relating to material variations. For example, this might arise:

• where extensive negotiations with a preferred bidder, as part of a tender process, result in the award of an above-threshold contract that is materially different in scope to the contract originally advertised; or
• where an existing contract is extended for a significant period not contemplated in the original OJEU notice, especially where this is accompanied by some renegotiation of prices or other key terms.

In circumstances such as these, it could well be held that a new contract had been entered into without any prior advertisement (for instance, one of the award scenarios in which, if challenged, a court may be required to make a declaration of ineffectiveness).

In these more subtle situations, issuing notices is not an appropriate safeguard, and what authorities need is adequate procedures that ensure effective legal scrutiny. Authorities should review their guidance on what is permitted during contract negotiations and as part of the legal sign off, assess the journey of the contract from OJEU notice to final version approved for signature. Contract management procedures for dealing with variations, particularly in the case of extensions should also be reviewed.

Provisions dealing with ineffectiveness and limiting the authority's liability

In relation to a declaration of ineffectiveness or contract shortening, other than by strict compliance with the procurement rules, an authority can do little to avoid the direct effects of the remedy. Any contractual terms which sought to preclude these would not be effective. An authority is, however, at liberty to limit its exposure to the effect of supplemental orders that may accompany such remedies.

Where there is a declaration of ineffectiveness or the court elects to shorten a contract, a court may make any supplemental order it considers appropriate to deal with the effects. In particular, this includes orders addressing restitution and compensation between the parties to the contract so as to achieve “an outcome which the Court considers to be just in all the circumstances", as stated in Regulations 47M(4) and 47N(11). Under Regulations 47 M (6) and 47 N (13), however, the court must not exercise this power to override contractual provisions agreed between the parties which set out their rights and obligations in the event of such declarations. This is the case unless these contractual provisions are inconsistent with the primary order (for example, seek to undermine the fundamental effects of declaring a contract ineffective or shortened).

As such, it is permitted, and indeed highly advisable, that authorities deal expressly with the effects of a declaration of ineffectiveness or contract shortening, as between the parties to the contract.

Whilst the OGC advocates pre-agreeing contractual provisions dealing with a declaration of ineffectiveness, such as in a collateral agreement, the OGC has so far declined from offering model clauses on the basis that they will need to be highly case specific. It is possible, however, to scope out the key points that such terms will need to address. To ensure that contractual terms clearly allocate risk in the event that remedies under the Amendment Regulations are imposed, an authority should:

• establish which of the consequences of termination (detailed in the contract) apply in the event of a declaration of ineffectiveness, including those relating to the transfer of assets;
• without giving any warranty of compliance with the procurement rules, limit by value (or calculation) the authority's liability to pay compensation or restitution to the contractor;
• deal with the types of loss that the authority wishes to exclude liability for, including future earnings that the contractor may otherwise have generated under the contract;
• establish dispute resolution procedures, acceptable to the authority, that are to be followed in the event of disagreement relating to the pre-agreed terms;
• establish that the provisions apply where the contract is shortened in addition to a declaration of ineffectiveness;
• stipulate that these pre-agreed terms are in full and final settlement of the matter; and
• ensure that the above contractual provisions are not incompatible with the primary order of ineffectiveness or contract shortening.

Comment

It will be interesting to see how the courts will interpret the Amendment Regulations. There are some relatively simple steps authorities can take to ensure adequate advertising and to avoid incorrectly entering into new contracts through variation and extension. We can expect contractual provisions dealing with ineffectiveness or shortening of contracts to become quite standard.

Bill Hull is a partner and head of TLT’s Commercial Services group with particular expertise in procurement. He can be contacted on 0117 917 7808 or via www.TLTsolicitors.com.