Discretion to exclude bidders lawful


3rd August 2020

The exercise of a contracting authority's discretion to exclude several bidders in a rail franchise procurement was proved to be lawful as we take a look at a recent judgment.

Introduction

On 17 June 2020 the Technology and Constructions Court (“TCC”) handed down judgment in 2019 Rail Franchising Litigation. The 2019 Rail Franchising Litigation was one of the Lawyer’s Top 20 cases for 2020 and involved three claims against the Secretary of State for Transport and the Department for Transport, (together (the “Defendant”) which were consolidated into one set of proceedings.

The claims arose from the procurement processes undertaken to let three separate rail franchises – East Midlands; South Eastern; and the West Coast Partnership. The procurement processes fell outside the regulated regime and were not subject to either the Public Contracts Regulations 2015 or the Utilities Contracts Regulations 2016. Instead, the Court analysed the general EU Treaty principles of proportionality, fairness, transparency and equal treatment when reaching its conclusions. The case provides helpful guidance on a range of issues which often arise in procurement challenges, even though the usual regulations were not in issue in these proceedings.

Background

Following a review by the Pensions Regulator, the effect of which was that there was uncertainty over the funding and future costs of the railways pension scheme, the franchise agreement which accompanied the invitation to tender (“ITT”) sought to allocate a greater level the risk of pension liabilities on the successful train operating companies. The terms of the ITT expressly prohibited qualification or the proposing of amendments to the franchise agreement.

Despite the terms of the ITT, the tender submissions of Stagecoach and West Coast Trains Partnership (the “Claimants”) sought to transfer back to the Government a materially greater proportion of the risk in relation to pension liabilities under the railways pension scheme. The Defendant took the decision to disqualify their bids on the basis that their failure to accept pensions risks rendered their bids non-compliant.

After an expedited process, the claims came on for trial in January 2020. A third Claimant, Arriva Rail East Midlands Limited, settled its claim on the eve of the trial.

The Judge comprehensively dismissed all claims. A summary of the key elements of the judgment are set out below from what was a significant judgment spanning over 600 paragraphs.

The discretion to set the contract terms

The Claimants argued that by seeking to impose uncertain pension risks on franchisees, the Defendant breached its duty to act with transparency and fairness. The Judge rejected this argument, setting out that there was no EU or domestic law principle that limits the allocation of the commercial risk in a public procurement. It was for the bidders to decide, based on the terms of the ITT, what was acceptable to them, and whether the proper course of action was to submit a bid or not.

A contracting authority has a wide margin of discretion when drafting the terms of an ITT and it was for the Defendant to determine how the pensions risk should be allocated.

The discretion to exclude

The Claimants’ position was that the provisions in the ITT concerning non-compliance were exceedingly broad and allowed the Defendant to take action for any failure on the part of bidders to follow the instruction in the ITT. In addition, the terms of the ITT afforded the Defendant a wide range of options for responding to non-compliance, ranging from disregarding the non-compliance to disqualifications. The Claimant argued that these provisions gave the Defendant an “unlimited” discretion and amounted to a breach of transparency and fairness.

In considering the position in respect of non-compliance, the Judge applied the objective standard of a reasonably well informed and normally diligent (“RWIND”) bidder. The ITT was clear, a change by a bidder to the risk in the franchise agreement amounted to non-compliance. Applying the RWIND standard, the bidders understood the consequence of qualification of their bids and/or the proposing of amendments to the franchise agreement.

Having established non-compliance, the Defendant was required to decide on the appropriate response. The Judge considered whether the consequences of non-compliance were sufficiently clear to a RWIND bidder. Finding in favour of the Defendant, the court held that a RWIND bidder would recognise that a contracting authority could only exercise its discretion proportionately and not in an unlimited fashion. The discretion was to be “exercised on a principled and proportionate basis”, meaning further detail on the precise circumstances of a non-compliance, that could lead to disqualification, did not have to be included in the ITT. A bidder should be able to predict in what circumstances non-compliance would lead to disqualification. The Judge concluded that the Claimants should have been able to predict that their non-compliance was such that their bids would be excluded. Further, had the Defendant decided not to exclude the Claimants, the procurement process would have been open to challenge by a compliant bidder. A failure to disqualify non-compliance would have amounted to unequal treatment amongst bidders.

Conclusion

A contracting authority cannot be expected to specify, at the outset of a procurement, all of the ways in which a bidder might fail to comply with the terms of the ITT, or indeed the consequence of that non-compliance. Contracting authorities with a discretion to exclude bidders should only do so in a principled and proportionate manner, taking into account the fundamental procurement principles of proportionality, fairness, transparency and equal treatment.

Bidders should recognise the freedom of the contracting authority to set the terms of the competition, including the transfer of risk. If the risk is unacceptable, the judgment in this case indicates that a bidder’s response should be to decline to bid rather than seek to amend the terms of the contract with a non-compliant bid.

A full copy of the judgment can be viewed here.

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