European directives set down strict rules for public procurement. To date, the risks for public bodies in breach of these rules have been limited – but a new EU directive, set to come into force in December, will put a big stick into legislative hands that have to date been confined largely to disapproving finger-wagging.

Currently, once contracts have been signed they cannot be set aside, and the only remedy for aggrieved bidders is damages. However, the new directive allows rejected bidders to challenge signed contracts even after the end of the cooling-off period introduced in 2006; and where rules have not been properly followed, judges will have the power to rule the contract invalid.

As the directive’s enactment approaches, the courts’ attitudes on procurement are already hardening – and this further tightening of the rules could have significant implications for all government departments.

New remedies
Public procurement “remedies” directives offer review procedures for unsuccessful bidders who believe that a contract has been awarded unfairly. The current remedies regime, in force since 2006 (see box), introduced a “standstill period” that requires contracting authorities to wait 10 days between selecting a bidder and signing the contract. This allows unsuccessful bidders to challenge a decision before the contract has been concluded.

However, to date authorities that have skipped the standstill period are only vulnerable to a damages claim – and winning damages is tough, since bidders must prove that they stood a chance of winning the contract. In the UK, such damages have been awarded only three times.

Under the enhanced remedies directive, however, bidders will be able to challenge a contract even after the standstill period has ended; and if the public body has not respected the standstill period or failed to follow the correct processes, courts will be at liberty to render the contract ineffective. In such cases, the contract will have to go out to tender again.

“This is a major, major change for any contractor, giving them much more scope to challenge a contract,” says Cyrus Mehta, head of the EU and competition group at law firm Nabarro. No longer will public authorities be in the clear as soon as a contract has been awarded.

Consultation
EU member states were given until December 2009 to introduce the EU directive in national laws, and to decide how to implement its optional elements. In the UK, the Office of Government Commerce (OGC) consulted on implementation of the directives last autumn, with a second consultation due shortly.

One issue under consultation is whether the cancellation of a contract will be prospective or retrospective – meaning whether it will apply only to elements of the contract not yet fulfilled, or require the undoing of work already completed.

The outcome could have major implications for construction or service contracts, says Mehta: if the contract for construction of a hospital is overturned with the building half-finished, for example, retrospective cancellation could introduce a requirement to tear down the half-built hospital. This, in turn, would raise questions over whether companies should be paid for work they have undertaken before the contract was cancelled, says Mehta, who “hopes that the UK will be sensible about this and go for prospective cancellation”.

Another optional element offers the courts the ability to uphold even illegal contracts if there are “good reasons” for maintaining them – and the OGC expects to introduce this option. Yet its meaning is not clear: “This is a piece of woolly drafting in the directive, and there will be a lot of arguments about how wide that goes and how much discretion that gives the courts,” says Mehta.

Finally, for contracts that are based on framework agreements, EU member states have the option to waive the standstill period. Given that framework agreements are designed to improve the speed and efficiency of procurement, the OGC is expected to allow public bodies to go ahead and ditch standstills if they wish to do so; frustrated bidders will not be disadvantaged, as they’ll be able to challenge contracts once they are awarded.

Hardening of rules
The introduction of the standstill period in 2006 has already increased the willingness of bidders to challenge contract awards, say lawyers. “We have seen a growing appetite among bidders to consider the possibility of going to court and challenging processes, whereas in the past they would not have thought it appropriate,” says Dr Totis Kotsonis, senior associate at law firm Norton Rose.
 
Meanwhile, the courts’ attitudes to breaches of procurement law are hardening. In 2008, the High Court in Northern Ireland set aside two framework agreements for government department construction projects, while the England and Wales High Court struck down a Newham Borough Council framework agreement for the management of private sector-leased properties. “With the new remedies directive in place, this will happen more and more,” says Kotsonis. “It is a real danger.”

Who is exposed?
There are still “many local authorities, regional development agencies, and even some government departments that don’t go out to tender or advertise a contract,” says Mehta; such agencies are committing the most serious breach of the rules, an illegal direct award.

But Kotsonis believes that compliance is growing: “With courts and the European Commission getting stricter, and bidders more willing to challenge awards, there has been a conscious effort to be seen to apply the letter of the rules.” For most public bodies, he adds, it’s a question of “ticking the boxes”: ensuring that procurers understand the rules, and complying carefully.

That done, the major risk occurs where staff fail to procure goods and services through their procurement functions, says Philip Oliver, of the commercial policy and process team at the Department for Work and Pensions (DWP). “Within commercial communities, the rules are known and respected,” he says. “But where you have customers who don’t always want to involve procurement [professionals], there is going to be a real problem.” These “maverick spenders” must be aware that if they award a contract to a supplier without proper competition, says Oliver, the contract could be taken away.

Public sector buyers can also expect to see new pressures from suppliers – and not only unsuccessful ones, says OGC spokesperson Michael Dunning: “Those that have won contracts will want to ensure that they are not at risk of having their contract made ineffective by a successful legal challenge from a competitor.” Forthcoming OGC guidance will cover the main steps that can be taken by procurers and suppliers to protect themselves.

“Welcome to the brave new world of public procurement,” says Kotsonis, “where it will be essential for authorities to comply with the procurement rules in all respects if they wish to avoid potentially severe penalties.”European directives set down strict rules for public procurement. To date, the risks for public bodies in breach of these rules have been limited – but a new EU directive, set to come into force in December, will put a big stick into legislative hands that have to date been confined largely to disapproving finger-wagging.

Currently, once contracts have been signed they cannot be set aside, and the only remedy for aggrieved bidders is damages. However, the new directive allows rejected bidders to challenge signed contracts even after the end of the cooling-off period introduced in 2006; and where rules have not been properly followed, judges will have the power to rule the contract invalid.

As the directive’s enactment approaches, the courts’ attitudes on procurement are already hardening – and this further tightening of the rules could have significant implications for all government departments.

New remedies
Public procurement “remedies” directives offer review procedures for unsuccessful bidders who believe that a contract has been awarded unfairly. The current remedies regime, in force since 2006 (see box), introduced a “standstill period” that requires contracting authorities to wait 10 days between selecting a bidder and signing the contract. This allows unsuccessful bidders to challenge a decision before the contract has been concluded.

However, to date authorities that have skipped the standstill period are only vulnerable to a damages claim – and winning damages is tough, since bidders must prove that they stood a chance of winning the contract. In the UK, such damages have been awarded only three times.

Under the enhanced remedies directive, however, bidders will be able to challenge a contract even after the standstill period has ended; and if the public body has not respected the standstill period or failed to follow the correct processes, courts will be at liberty to render the contract ineffective. In such cases, the contract will have to go out to tender again.

“This is a major, major change for any contractor, giving them much more scope to challenge a contract,” says Cyrus Mehta, head of the EU and competition group at law firm Nabarro. No longer will public authorities be in the clear as soon as a contract has been awarded.

Consultation
EU member states were given until December 2009 to introduce the EU directive in national laws, and to decide how to implement its optional elements. In the UK, the Office of Government Commerce (OGC) consulted on implementation of the directives last autumn, with a second consultation due shortly.

One issue under consultation is whether the cancellation of a contract will be prospective or retrospective – meaning whether it will apply only to elements of the contract not yet fulfilled, or require the undoing of work already completed.

The outcome could have major implications for construction or service contracts, says Mehta: if the contract for construction of a hospital is overturned with the building half-finished, for example, retrospective cancellation could introduce a requirement to tear down the half-built hospital. This, in turn, would raise questions over whether companies should be paid for work they have undertaken before the contract was cancelled, says Mehta, who “hopes that the UK will be sensible about this and go for prospective cancellation”.

Another optional element offers the courts the ability to uphold even illegal contracts if there are “good reasons” for maintaining them – and the OGC expects to introduce this option. Yet its meaning is not clear: “This is a piece of woolly drafting in the directive, and there will be a lot of arguments about how wide that goes and how much discretion that gives the courts,” says Mehta.

Finally, for contracts that are based on framework agreements, EU member states have the option to waive the standstill period. Given that framework agreements are designed to improve the speed and efficiency of procurement, the OGC is expected to allow public bodies to go ahead and ditch standstills if they wish to do so; frustrated bidders will not be disadvantaged, as they’ll be able to challenge contracts once they are awarded.

Hardening of rules
The introduction of the standstill period in 2006 has already increased the willingness of bidders to challenge contract awards, say lawyers. “We have seen a growing appetite among bidders to consider the possibility of going to court and challenging processes, whereas in the past they would not have thought it appropriate,” says Dr Totis Kotsonis, senior associate at law firm Norton Rose.

Meanwhile, the courts’ attitudes to breaches of procurement law are hardening. In 2008, the High Court in Northern Ireland set aside two framework agreements for government department construction projects, while the England and Wales High Court struck down a Newham Borough Council framework agreement for the management of private sector-leased properties. “With the new remedies directive in place, this will happen more and more,” says Kotsonis. “It is a real danger.”

Who is exposed?
There are still “many local authorities, regional development agencies, and even some government departments that don’t go out to tender or advertise a contract,” says Mehta; such agencies are committing the most serious breach of the rules, an illegal direct award.

But Kotsonis believes that compliance is growing: “With courts and the European Commission getting stricter, and bidders more willing to challenge awards, there has been a conscious effort to be seen to apply the letter of the rules.” For most public bodies, he adds, it’s a question of “ticking the boxes”: ensuring that procurers understand the rules, and complying carefully.

That done, the major risk occurs where staff fail to procure goods and services through their procurement functions, says Philip Oliver, of the commercial policy and process team at the Department for Work and Pensions (DWP). “Within commercial communities, the rules are known and respected,” he says. “But where you have customers who don’t always want to involve procurement [professionals], there is going to be a real problem.” These “maverick spenders” must be aware that if they award a contract to a supplier without proper competition, says Oliver, the contract could be taken away.

Public sector buyers can also expect to see new pressures from suppliers – and not only unsuccessful ones, says OGC spokesperson Michael Dunning: “Those that have won contracts will want to ensure that they are not at risk of having their contract made ineffective by a successful legal challenge from a competitor.” Forthcoming OGC guidance will cover the main steps that can be taken by procurers and suppliers to protect themselves.

“Welcome to the brave new world of public procurement,” says Kotsonis, “where it will be essential for authorities to comply with the procurement rules in all respects if they wish to avoid potentially severe penalties.”

Toughening over time: EU procurement rules

2004: Overhaul of the EU procurement rules with Directive 2004/17/EC (for utilities) and Directive 2004/18/EC (for public contracts)

2006: EU directives transposed into UK law with the Public Contracts Regulations 2006 and the Utilities Contracts Regulations 2006

2006: Introduction of the procurement remedies regime with the Public Sector Remedies Directive (89/665/EEC) and the Utilities Sector Remedies Directive
(92/13/EEC)

2007: Overhaul of the remedies regime with publication of EU Remedies Directive (Council Directive 2007/66/EC)

2008: OGC consults on new Remedies Directive

2009: OGC plans to transpose the Remedies Directive into existing regulations in December