Department for Transport knew in advance of signing freight contracts that procurement challenge was likely to succeed

The accounting officer at the Department for Transport concluded that a procurement challenge was likely to be successful if it was raised over the signing of contracts for additional freight capacity on ferry services between Britain and mainland Europe, it has emerged.

The Department used an exemption under the Public Contracts Regulations 2015, which allow for the award of a contract through a “negotiated procedure without prior publication” to hand deals to Brittany Ferries, DFDS and Seaborne Freight, as it considered that a typical procurement process, even if accelerated, would not be quick enough.

The DfT justified use of the exemption on “for reasons of extreme urgency brought about by events unforeseen by the contracting authority”.

A report prepared by the National Audit Office at the request of the Public Accounts Committee, Memorandum on the Department for Transport’s out-of-court settlement with Eurotunnel, said the DfT's accounting officer drew upon relevant professional advice to inform her assessment, which established that a negotiated process without prior publication “carried much greater legal risk than a more typical, but accelerated, procurement process”.

The assessment was carried out after the accounting officer recognised that the DfT was taking forward a “novel and exceptional proposition”.

The NAO revealed that prior to signing the contracts, the accounting officer had completed a formal review of the project against the standards of regularity, propriety, value for money and feasibility expected by Parliament.

The Department estimated that any legal remedies would most likely be based on the loss of profit had other ferry operators bid for and won a contract, and that these would not exceed £20m. The DfT also identified other potential legal remedies, but these were not quantified.

The NAO said that the accounting officer was aware that there were organisations in the market which could raise a challenge and the business case noted there was a high likelihood of a challenge being brought.

In October 2018, prior to initiating the procurement, the Department had recognised that there would be a high risk of legal challenge to government intervention, including a risk that Eurotunnel might challenge its approach.

“The accounting officer was aware that a successful challenge to the procurement could lead to delay or cancellation in the implementation of contracts, and that an alternative remedy to an injunction would be damages,” the NAO report said.

The Department told the spending watchdog that the accounting officer discussed the timing of a potential challenge with her advisers prior to the procurement decision, and was advised that a trial was unlikely to occur before 29 March 2019 [the original deadline for Brexit].

“In completing her assessment, the accounting officer needed to decide how to balance the need to act quickly to complete the procurement, so services could be ready by 29 March 2019, against the greater legal risks associated with that course of action. The accounting officer concluded that there were high levels of risk, but that failure to act would lead to government losing the ability to secure freight capacity that would help protect the movement of critical goods including medical supplies.”

As a result the accounting officer judged that the Department’s approach met the standards of regularity, propriety, value for money and feasibility set out in Managing Public Money.

The contract with Seaborne Freight was terminated in February after the company’s backers pulled out. The DfT also went on to cancel the contracts with Brittany Ferries and DFDS.

However, Eurotunnel did bring a claim against the Government and this was eventually settled for £33m, a settlement that has itself becoming the subject of legal proceedings brought by P&O Ferries against the DfT.

Examining how the Eurotunnel settlement was reached, the NAO revealed that the DfT had assessed that it was unlikely to successfully defend a challenge to its procurement of freight capacity. “While the Department had judged that it could argue its reason for proceeding was ‘extreme urgency’ it thought a court was unlikely to accept that this complied with regulation rules.”

At the time the DfT was principally guarding against potential financial loss, as it did not believe that a ruling that the contracts were ineffective would take place before 29 March. It was also confident that it would be able to argue successfully in court against the granting of an injunction.

But the NAO report said that the setting of a trial date before 29 March 2019 significantly altered the Department’s assessment of the risks it faced.

Having been expecting to deal primarily with a financial risk in any litigation, the timing of the trial meant the government also now faced a risk to the delivery of capacity that would allow it to move critical goods.

“The early trial date made it possible that the court could impose a cancellation of the ferry contracts in early March 2019. The Department would then need to run a new procurement exercise for the freight capacity,” the NAO said.

The legal action also impacted on the Department’s ability to secure additional freight capacity. The Department judged that it was not viable to secure additional capacity while legal action was in progress as this also carried a risk of being challenged. It jhad also provided an undertaking to Eurotunnel that it would not enter into any contracts to secure additional freight capacity without providing three days’ written notice of its intention to do so to Eurotunnel.

The DfT went on to negotiate a settlement figure that was acceptable to Eurotunnel and below the maximum amount (£35m) it was prepared to pay. Its decision to settle out-of-court was driven by the desire to avoid any risk that the ferry contracts were cancelled ahead of 29 March 2019, the NAO said.

The Department’s accounting officer carried out a formal assessment of the settlement. The NAO said she “judged that the risk of a court issuing a declaration of ineffectiveness was too great given the potential consequences for the ability of government to move critical goods in the event of a no deal exit, given the approach agreed by ministers including ensuring the unhindered supply of ‘category one’ goods including medical supplies into the UK”.

In reaching her judgment the accounting officer consulted the permanent secretary at the Department of Health and Social Care.

“The accounting officer also noted that developing a settlement value based on the potential costs to the department had respectable arguments to support it but, as this approach has not been formally tested in litigation before, there was a risk that some part of the settlement figure might be deemed unlawful state aid if challenged,” the NAO said.

The settlement agreement includes a clause requiring Eurotunnel to repay the Department should any amounts be found to be unlawful state aid in the event the agreement is challenged by third parties.

Overall the accounting officer concluded that the requirements of Managing Public Money were met and noted that under other circumstances the most appropriate outcome would have been to continue to trial.