Dispensing with American Cyanamid

Procurement iStock 000002542569XSmall 146x219Is a fresh approach being developed in relation to interim relief in procurement challenges? Calum Lamont analyses the latest case law and the continued role of the American Cyanamid principles.

Background

Over the past four or five years, the Technology & Construction Court (TCC) has heard a growing number of cases in relation to public procurement challenges, with the result that it can now genuinely hold itself out as a pre-eminent tribunal for the consideration of both final and interlocutory matters in relation to the Public Contracts Regulations 2006 (SI 2006/5) (PCR 2006).

It is no coincidence, therefore, that the court has been at the forefront of the task of grappling with many important procedural issues concerning procurement competitions under the PCR 2006, including disclosure, handling of confidential information, and, in particular, the granting of injunctive relief. 

The "old" regime

Before the coming into force of the Public Contracts (Amendment) Regulations 2009 (SI 2009/2992) (Amendment Regulations), which implemented the new Remedies Directive (2007/66/EC) (Remedies Directive), an aggrieved economic operator who wished to stop a procurement process (and thereby prevent contract award) needed to apply for an interim injunction. Under the "old" regime, the courts traditionally approached the question of whether or not to grant an order restraining a contracting authority from entering into a contract by applying the American Cyanamid Principles (www.practicallaw.com/4-107-6394), by considering:

  • If there is a serious issue to be tried.
  • If damages are an adequate remedy.
  • Where the balance of convenience lies.

Broadly speaking, to obtain an interim injunction, a claimant needed to surmount all three "hurdles", although some jurisprudence suggests that the test is in fact more fluid, as the second "hurdle" is merely part and parcel of the overall balance of convenience test.

The "old" regime potentially led to injustice for economic operators, as contracting authorities, having got wind of an injunction application, could (in theory at least) take steps to ensure that the contract was let prior to the hearing of that application, thus leaving the aggrieved challenger with a remedy in damages only. This became known in some circles as the "race to signature". This practice plainly concerned the Commission, leading it to outline its unease that:

  1. Contracts were being awarded before tribunals had the chance to consider applications for injunctive relief (see the May 2006 impact assessment report (COM(2006)195)).
  2. Contracts were being awarded illegally, and that the existing regime did not make it possible to prevent or correct effectively the consequences of such illegal action (see the June 2006 proposal for the Remedies Directive (COM(2006) final/2)).

 The Remedies Directive and the "new" regime

In the light of the Commission's concern that effective remedies be made available, a raft of new provisions was introduced in the Remedies Directive including, importantly, an "automatic suspension" of the procurement process on the commencement of proceedings, and procedures for interim orders for the lifting of the automatic suspension. Of particular relevance are the following provisions of the Remedies Directive: 

Article 1(1)

"Member States shall take the measures necessary to ensure that, as regards contracts falling within the scope of the Directive 2004/18/EC, decisions taken by the contracting authorities may be reviewed effectively and, in particular, as rapidly as possible…on the grounds that such decisions have infringed Community law in the field of public procurement or national rules transposing that law."

Article 2(1)(a)

"Member States shall ensure that the measures taken concerning the review procedures specified in Article 1 include provision for powers to take, at the earliest opportunity and by way of interlocutory procedures, interim measures with the aim of correcting the alleged infringement or preventing further damage to the interests concerned, including measures to suspend or to ensure the suspension of the procedure for the award of a public contract or the implementation of any decision taken by the contracting authority."

Article 2(3)

"When a body of first instance, which is independent of the contracting authority, reviews a contract award decision, Member States shall ensure that the contracting authority cannot conclude the contract before the review body has made a decision on the application either for interim measures or for review. The suspension shall end no earlier than the expiry of the standstill period referred to in Article 2a(2) and Article 2d (4) and (5)."

Article 2(5)

"Member states may provide that the body responsible for review procedures may take into account the probable consequences of interim measures for all interests likely to be harmed, as well as the public interest, and may decide not to grant such measures when their negative consequences could exceed their benefits."

[Extract from Remedies Directive (2007/66/EC)]

Following the consultation period in the UK between 2008 and 2009, the Office of Government Commerce (OGC) (as it then was) produced an explanatory memorandum to the Amendment Regulations in which it identified the introduction of the automatic suspension as a "significant change". The automatic suspension found its way into English legislation by way of regulation 47G of the PCR 2006 (as amended), which provides as follows:

"(1) Where-

(a) proceedings are started in respect of a contracting authority’s decision to award the contract; and

(b) the contract has not been entered into,

the starting of proceedings requires the contracting authority to refrain from entering into the contract.

(2) The requirement continues until any of the following occurs-

(a) the Court brings the requirement to an end by interim order under regulation 47H(1)(a);

(b) the proceedings at first instance are determined, discontinued or otherwise disposed of and no order has been made continuing the requirement (for example in connection with an appeal or the possibility of an appeal)."

There is no doubt that procedurally, at least, there has been a sea change. Under regulation 47G, when a disappointed tenderer challenges the contract award decision by issuing and serving a claim form, the procurement process is automatically suspended. Procurements can be stopped in their tracks by the issue of a claim form in the appropriate timescale, and there is no doubt that this has the potential to place serious practical and commercial pressures on both contracting authorities and the winning bidder. What regulation 47G has successfully achieved is an end to the unfairness caused by the "race to signature" under the "old" regime.

The "new" regime

The court has the power to make interim orders (regulation 47H(1), PCR 2006). One of those powers is the power to bring to an end the requirement imposed by regulation 47G(1) of the PCR 2006, which has become known among practitioners as an order to "lift the automatic suspension".

The court may make an interim order bringing an end to the automatic suspension imposed by regulation 47G(1) if it considers that it would "not be appropriate" to make an order requiring a contracting authority to refrain from entering into the contract (see regulation 47H(2)(b) of the PCR 2006).

The PCR 2006 do not consider any specific guidance on the approach to be followed. Indeed, the OGC Response to the Second Public Consultation (at paragraphs 46–48) in relation to the UK implementation of the Remedies Directive expressly concluded that it would be wrong for the PCR 2006 to require the court to adopt any particular approach (such as the American Cyanamid test), as this would be out of line with the general approach taken by legislation (including rules of court) in relation to other proceedings.

It does seem, however, that the Commission had in fact suggested its own guidance at Article 2(5) of the Remedies Directive, in the form of what might loosely be labelled a balance of interests test, pursuant to which the review tribunal (in this case the court) should "take into account the probable consequences of interim measures for all interests likely to be harmed, as well as the public interest, and may decide not to grant such measures when their negative consequences could exceed their benefits".

Article 2(5) of the Remedies Directive did not expressly find its way into the Amendment Regulations. That may be because it is not worded in mandatory terms, but that did not deter the Scottish and Irish lawmakers from including balance of interests tests in the relevant legislation, as set out below.

Scotland

Regulation 47A(2) of the Public Contracts and Utilities Contract (Scotland) Amendment Regulations 2009 (SSI 2009/428):

"(2) In any interim proceedings under this Part the Court may decide not to grant an interim order when the negative consequences of such an order are likely to outweigh the benefits, having regard to the following considerations-

(a) that decisions taken by a contracting authority shall be reviewed effectively and, in particular, as rapidly as possible;

(b) the probable consequences of an interim order for all interests likely to be harmed; and

(c) the public interest."

Republic of Ireland

Regulation 9(4) of the European Communities (Public Authorities' Contracts) (Review Procedures) Regulations 2010 (SI 130/2010) (Review Procedures Regulations):

"(4) When considering whether to make an interim or interlocutory order, the Court may take into account the probable consequences of interim measures for all interests likely to be harmed, as well as the public interest, and may decide not to make such an order when its negative consequences could exceed its benefits."

The omission of the balance of interests tests from English legislation is all the more curious since it has been expressly included in the equivalent legislation for procurements in the defence sector, namely the Defence and Security Public Contracts Regulations 2011 (SI 2011/1848) (the Defence Regulations). The Defence Regulations seek to implement into UK law European Directive 2009/81 on the co-ordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security (the Defence Directive).

Article 56(5) of the Defence Directive suggests a similar balance of interests test, again expressed to be in non-mandatory terms, that member states may provide that the body responsible for review procedures:

"may take into account the probable consequences of interim measures for all interests likely to be harmed as well as the public interest, in particular defence and/or security interests, and may decide not to grant such measures when their negative consequences could exceed their benefits."

In contrast to the stance adopted under the Amendment Regulations, the UK chose to implement this test in regulation 57(2) of the Defence Regulations, which states, in mandatory terms:

"When deciding to make an order under paragraph (1), the Court must take into account the probable consequences of interim measures for all interests likely to be harmed, as well as the public interest, and in particular defence and security interests."

The reasons behind the differing approach of the legislature between the Amendment Regulations and the Defence Regulations is not clear.

Application of the test for lifting the automatic suspension

There are now several first instance judgments in relation to the position under the PCR 2006 (as amended), all of which have applied the American Cyanamid test. Whether or not American Cyanamid was an appropriate test was first argued in Exel Europe v University Hospitals Coventry & Warwickshire NHS Trust [2010] EWHC 3332 (TCC), in which the judge concluded that Cyanamid did apply (see Legal update, High Court lifts suspension to allow contracting authority to enter into contract (www.practicallaw.com/2-504-3197)).

Since Exel, there appears to have been little appetite among litigators to argue against the application of Cyanamid, and the point has not yet been directly considered by the Court of Appeal, although in DWF LLP v Secretary of State for Business Innovation and Skills [2014] EWCA Civ 900, Jacob J stated that Counsel for the appellant "had an argument that somewhat modified principles should apply but it is not necessary to go into that" (at paragraph 47), and the Court of Appeal professed itself "content to apply American Cyanamid principles" (see Legal update, Court of Appeal ruling on amendment of claim and lifting of suspension in procurement action (www.practicallaw.com/6-573-6907)Legal update, Court of Appeal ruling on amendment of claim and lifting of suspension in procurement action (www.practicallaw.com/6-573-6907)). It would seem, therefore, that some persuasion would be required at appellate level to change what has become the accepted status quo among judges at first instance.

Notwithstanding what may seem on the face of it to be somewhat gloomy prospects, it is submitted that it remains properly arguable in English law that the application of Cyanamid is unlawful in that it impedes the content and purpose of the Remedies Directive, namely, the need for an effective review, and the apparent need to place the balance of interests at the centre of the decision making process.

As to the content and purpose of the Remedies Directive, one might call on the following:

  • The Commission's stated objective to improve the effectiveness of review procedures in relation to the award of public contracts and to ensure the effective application of the directives on the co-ordination of public procurement procedures (as per the title and preamble to the Remedies Directive).
  • The fact that the consultation for the Remedies Directive revealed that mechanisms established by member states did not always make it possible to ensure compliance with Community law, especially at a time when infringements could still be corrected (see recital (3) to the Remedies Directive). Although the remedies available include both setting aside the decisions of contracting authorities and damages, except in the case of a claim for ineffectiveness, once the contract has been concluded, the only remedy is damages. It was recognised by the Commission in its Impact Assessment Report in relation to the proposed new Remedies Directive that there were inherent limits in damages actions.
  • Article 1(2) of the Remedies Directive, which emphasises the overarching requirement to ensure that "decisions taken by the contracting authorities may be reviewed effectively".
  • Article 2(5) anticipates that the reviewing body (in this case the court) will, when considering whether the continuation of the suspension is appropriate, take into account "the probable consequences of interim measures for all interests likely to be harmed, as well as the public interest, and may decide not to grant such measures when their negative consequences could exceed their benefits".

The argument is that the imposition of the three-stage Cyanamid test, including the need to persuade the court that damages are inadequate and the (almost) inevitable requirement for the party seeking the continuation of the suspension to provide an undertaking in damages to the contracting authority (and possibly also the winning bidder), impose additional hurdles to the challenging economic operator which have no express basis in the Remedies Directive. The court is obliged to interpret national legislation in the light of the wording and purpose of the directive concerned to achieve the result sought by that directive (see, for example, Case 14/83 Von Colson and Kamann [1984] ECR 1891, at paragraph 26 and Alstom v Eurostar [2012] EWHC 28 (Ch), at paragraph 35 (see Legal update, High Court rules that Eurostar is not a contracting authority or entity for the purposes of the procurement rules (www.practicallaw.com/0-517-3420)Legal update, High Court rules that Eurostar is not a contracting authority or entity for the purposes of the procurement rules (www.practicallaw.com/0-517-3420)).

Thus, the imposition of those additional two "hurdles" at common law in Cyanamid, together with the apparent overlooking of the balance of interests test, can be said to be unlawful. If this analysis is correct, then regulation 47H(3) of the PCR 2006 (as amended) and regulation 57(4) of the Defence Regulations (which purport to codify and legitimise an undertaking in damages) would also be unlawful.

While the argument did not find favour with Akenhead J in Exel, it has gained some support elsewhere.

In the Irish High Court case of OCS One Complete Solution Ltd v The Dublin Airport Authority PLC [2014] IEHC 306, Barrett J considered that the application of Cyanamid (as adopted in the Irish case of Campus Oil v Minister for Energy (No 2) [1983] IR 88) was contrary to European Law, on the grounds that:

  • The Review Procedures Regulations provided clear, discrete and self-contained guidance on the factors to be considered in any application.
  • The application of Cyanamid-type guidelines would superimpose requirements and conditions that are not envisaged by the Remedies Directive, in particular the requirement to demonstrate the impossibility of calculating damages and the requirement to provide an undertaking in damages, with the effect that it would make it "more difficult for an application to obtain relief" (at paragraph 34).

Interestingly, Barrett J also offered veiled criticism to the effect that the Irish legislation was a "more faithful transposition of the applicable European Union provisions" than that adopted in England and Wales.

On appeal, the Supreme Court held that the Review Procedures Regulations do not even confer on the courts a jurisdiction to entertain an application by the contracting entity concerned to be permitted to conclude the relevant contract before the determination of the application for review. That would seem to be a somewhat extreme result, and it will be interesting to review the reasoned judgment when it is handed down.

In Scotland, the guidance note by the Scottish Procurement Directorate (SPD) confirms that the common law balance of convenience test is "expressly overridden". In the cases where the application of regulation 47A(2) have been considered, it appears that the courts are less bullish than the SPD (or Barrett J), but nevertheless have arguably applied a more holistic test than Cyanamid. Thus, in Eletka v Common Services Agency [2011] CSOH 107 (OH), Lord Glennie considered that in deciding "when the negative consequence of such an order are likely to outweigh the benefits", the court should consider the strength of the parties' cases, the balance of convenience having some regard to whether damages would be an adequate remedy, and the public interest. That formulation has been adopted by the Outer House in subsequent cases.

In summary, given the absence of any firm appellate decision on the matter, it does seem that the point is still undecided, and it is submitted that it remains an important point for consideration. Indeed, in the case of the Defence Regulations, the argument would certainly appear to be stronger, given that the (unfettered) balance of interests test is expressly mandated by Regulation 57(2) of the Defence Regulations.

A departure from Cyanamid

Some cynical practitioners might query whether a move away from Cyanamid and towards a “balance of interests” test would in fact make any practical difference.

There may be some force in this: for example, it is easy to see how the question of adequacy of damages could work its way into the balancing exercise when considering competing interests (for example, a contracting authority may well argue that an economic operator's interest is not affected by lifting the suspension because its only real loss is monetary).

By contrast, the removal of any statutory or common law requirement to provide an undertaking in damages will, it is suggested, have a very real effect. Frequently (and especially in high value procurements) the provision of an undertaking in damages often poses either an insurmountable obstacle (in that the challenging contractor simply cannot satisfy the court that it would be able to meet an order for damages if required to do so) or a strong commercial deterrent to a challenger who might otherwise want to uphold the automatic suspension. The effect of this, of course, is that under Cyanamid principles, the automatic suspension is almost guaranteed to be lifted, and one might query whether this is what the Commission had in mind when it stressed the need for "effective review".

There is clearly a strong public interest in procurement competitions being properly constituted and run in a fair, transparent and non-discriminatory manner, and the preservation of the suspension until after trial is the only route that allows:

  • The award decision to be properly reviewed by the court.
  • If so ordered, the procurement to be rerun on that fair, transparent and non-discriminatory basis.

An award in damages may financially compensate a disgruntled tenderer if it transpires that the procurement was unlawful, but money alone will not compensate for other consequences stemming from the contract being awarded to another party (such as redundancies, loss of human capital, loss of market share, or loss of reputation). One can see how being deprived of this remedy on the basis of either an impossibility to give an undertaking in damages, or a fear of commercial ruin if one is offered, might seem somewhat unjust.

In the meantime, however, Cyanamid very much rules, and practitioners will have to wait for a challenger brave enough to persuade the High Court to dispense with Cyanamid principles in applications to lift the automatic suspension. If successful, it would certainly send out a statement of intent from the TCC.

Calum Lamont is a barrister at Keating Chambers. He can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it..

This article was first published by Practical Law Public Sector.