09 November 2017

If public authorities make an error in evaluating a tender, what should the remedy be? As a matter of practice the UK courts have, in most cases, allowed the authority to proceed with the contract on the basis that financial compensation will be available to any wronged tenderer.

But in April 2017 the UK Supreme Court stated that such compensation should, under European law, only be paid if the authority’s breach was sufficiently serious to merit such compensation. Now the EFTA Court has interpreted the same European law in the opposite way, concluding that compensation should be paid for losses in all cases.

Where does this leave authorities and bidders when things go wrong?

The nature of public procurement

Public money should be spent fairly and effectively. The underlying logic for regulation of public procurement is therefore to make sure that public bodies act appropriately with public money (and public powers) to obtain the best available result when purchasing on behalf of the public. The rules require transparency to underpin confidence in public spending decisions and also fairness of treatment for tenderers – who may commit considerable amounts of time and cost bidding for public contracts.

Is public procurement therefore predominantly the exercise of public authority (such as policy making and delivery of public services) or is it a commercial exercise between a public body and the private sector (like the delivery of outsourced services)?

The distinction matters because it underlies the respective rights and risks of all public bodies and bidders at law.

Public procurement regulation and remedies – injunction vs damages

Public procurement regulation has developed as a set of rules which guide, and to a degree limit, the actions which public bodies can take. They require clarity in what the authority wishes to purchase, how it will assess proposals and how it will award contracts.

Regulation also sets out what remedies are available when/if a public authority breaches its obligations.

Those remedies include powers to prevent a contract (which may have been improperly procured) from being awarded or in some cases the cancellation of a contract which has been placed (ineffectiveness). On one logic, this is the best remedy – preventing the public body from making the wrong award. On another, it is detrimental to the business of government if a public body is prevented from proceeding with its objectives or policy because it is prevented from signing up to contracts.

Alternatively, in the event that a contract is entered with the ‘wrong’ bidder, compensation may be available for the unsuccessful tenderer. This allows the public authority to proceed with its contract however may result in the public having to ‘pay twice’ for the supply – or at least the profit on the supply.

Should the public always have to pay?

After a contract has been signed, the main remedy for any mistakes in its award will necessarily become the payment of compensation. At this point a matter of principle arises – should the public purse always have to pay when mistakes are made? 

What if the mistake is objectively understandable or the result of (well meaning) human error? Is the objective of ensuring public money is spent fairly met by requiring payments in such circumstances? Does the need to protect the (innocent) bidder require payment in any event?

Put another way – is it right that the taxpayer must pay a private entity (which will undertake no supply) the profit it would have made if it had won the contract where an error was not particularly serious? If not, what is meant by ‘serious’?

If public procurement is an exercise of public authority then arguably the question arises about when it is right to require the public to pay twice. 

But if public procurement is a commercial exercise, then the focus may properly be on the wronged bidder who has unfairly been deprived of profit it would have earnt. 

It becomes critical to know what the nature of public procurement is.

The English courts and Supreme Court

English case law has largely developed (until 2017) on the basis that obligations owed under procurement regulation are akin to contractual (or statutory tort) obligations. Breach resulting in loss leads to compensation. The loss is widely seen as loss of the benefit of having the contract rather than loss of the wasted sums spent bidding for it.

However, on 11 April 2017 in NDA v EnergySolutions, the Supreme Court took a different view. It concluded that breach of procurement regulations should result in damages only upon satisfaction of the Francovich/Factortame conditions. Those conditions include the requirement that any breach be shown to be sufficiently serious to justify an award of compensation, and in particular that there was a manifest and grave disregard by the public body of its discretion. 

In doing so the Supreme Court considered that a court must ultimately determine whether a breach was excusable or inexcusable before damages should be paid. The analysis focussed on the EU case of Spijker and the proper liability of the awarding authority. The Supreme Court considered EU law to be sufficiently clear that no reference to the Court of Justice of the EU court was necessary.

This analysis appears to suggest that as a matter of English law, at least, the predominant function of procurement law is to police the behaviour of the public body rather than ensure protection of the private bidder. Where a public body makes an excusable mistake the law does not require the taxpayer to pay twice.

Prior to the Supreme Court’s judgment, however, the same case at High Court level had determined that any error by a public authority which resulted in a different bidder ‘winning’ a procurement process must as a matter of fact be ‘sufficiently serious’ to justify compensation. This finding (which was under attempted appeal at the time the case settled) would mean that the Supreme Court’s subsequent judgment could not limit compensation claims as a matter of practice. Due to the order of the judgments, it remains uncertain how they will be reconciled in future proceedings.

EFTA Court

On 31 October 2017 a judgment on a similar point was given by the EFTA court. The EFTA court is binding upon EFTA members which are members of the European Economic Area but not of the EU (Norway, Iceland and Liechtenstein). The UK is not a member of EFTA.

These countries have applied aspects of EU law (including procurement law) domestically as part of their access to the EEA. The EFTA Court in Fosen-Linjen v AtB addressed Norwegian law which limited compensation to circumstances where the authority had committed a material error. It concluded that such a law was not compatible with EU procurement law for a number of reasons including:

  • An effective remedy is required and no effective remedy may be possible if damages are not always available
  • As damages are supposed to be an alternative to other remedies (e.g. injunctions) they must be a complete alternative
  • Damages not only compensate they also deter authorities from breaching the rules and maintain confidence in the effectiveness of the framework. Implicitly they would not do so if they were not always awarded.
  • If there is a test of gravity then the same breach in different Member States might give rise to different outcomes

The EFTA Court considered the same key cases as the UK Supreme Court however its decision directly conflicts with the Supreme Court’s interpretation of EU law. 

Conflicting decisions

Consequently two courts which do not have the authority to declare EU law (only the CJEU has that) have reached conflicting decisions on what it means.

The CJEU might agree with either or neither of them. However, if the CJEU were now to confirm the EFTA Court decision then UK law would again be put into doubt. 

Brexit and trade

Currently it appears likely that declaratory decisions of the CJEU on EU law will still be taken into account in the UK after Brexit. A UK/EU deal may also require UK to sign up to compliance with the EU procurement regime. 

Under the World Trade Organisation (WTO) General Procurement Agreement signatories (including the EU and currently, therefore, by extension the UK) should mutually open government procurement on fair and transparent conditions. The EU satisfies this obligation (and lays down rules covering procurements by its own member states) through a suite of detailed procurement directives. The UK has implemented the EU framework using domestic regulations and by doing so satisfies the WTO requirements. The Trade Bill published in November 2017 anticipates the UK taking steps to join the General Procurement Agreement in its own name.

Hence even under WTO rules, a procurement regime will be required and initially at least it will reflect the existing EU based regime. Should future trade be conducted through a form of the WTO structure the existing issue will therefore still need to be determined.

The future direction of this issue therefore remains in the European balance. Its impact (even on the current cases) also remains unresolved in the UK in light of the approaches taken by the High Court and Supreme Court to aspects of the relevant test.

What is at the heart of procurement law remains a divided question. Ultimately it may be a policy issue about the balance between the rights of bidders and of taxpayers.

Key contact

Ian Tucker

Ian Tucker Partner

  • Dispute Resolution
  • Procurement Disputes
  • Procurement and Subsidy Control

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