New guidance on when Courts will stop contract awards

Posted by Simon McCann on
A recent case (Covanta v Merseyside Waste Disposal Authority [2013] EWHC 2922, judgement given 3rd October 2013) has highlighted the risks of challenge to major and complex procurements and provided an insight into when Courts will intervene to stop contracts being awarded.

The “Remedies Directive” was implemented in the UK in 2009, introducing an automatic suspension to contract-making where legal proceedings are issued and made known to the contracting authority before the contract is entered into (Regulation 47G). Contracting authorities have the right to challenge the automatic suspension and ask the Court to lift the suspension to allow the contract award to proceed (Regulation 47H). The Court must therefore consider whether it is appropriate to make an interim order stopping the contract from being awarded or to allow it to be entered into.

In making this decision, the Courts apply the three stage test from the “American Cyanamid” case, namely:

  • Is there a serious issue to be tried?
  • Would damages be an adequate remedy?; and
  • Does the balance of convenience favour granting an injunction?

Since 2009, in the majority of cases, Courts have tended to find (mainly on the “balance of convenience” test) in favour of contracting authorities and allow the contract to proceed. However, in the “Covanta” case, the High Court granted an injunction and clarified the grounds on which it would be appropriate to do so. The facts were that Covanta were one of two bidders for a £1 billion waste scheme.

The tender had taken over 6 years and the competitive dialogue phase alone two and a half years. Following final tenders, MWDA ruled certain parts of Covanta’s bid “fundamentally unacceptable” although they were the lower financial bid. Covanta claimed there must have been manifest error, since they could not understand how there could have been such fundamental misunderstandings as to make their tender unacceptable in the context of a 6- year process with over 2 years of dialogue. They issued legal proceedings before the award of the contract and so the automatic suspension came into effect, and MWDA applied to Court to release it.

Following the 3-stage test, the Court decided:

There was a serious issue to be tried (MWDA agreed this);

Damages would not be an adequate remedy. The Court stated that the mere fact that a Court could, if it had to, make some attempt at assessing damages, did not raise a presumption that damages would be adequate.

Equally, there is no presumption in favour of an injunction simply because the EU Directives say there should be a review before a contract can be let. In this particular case, the Court relied on the following key facts –

  • there were so many alleged manifest errors that it would be extremely difficult to work out their effect;
  • there were also many ways in which Covanta alleged MWDA had failed to follow the competitive dialogue procedure. Calculating what the effect would have been had each stage been correctly performed was next to impossible; and
  • Covanta’s arguments raised issues which were similar to those related to undisclosed award criteria. Damages in such cases are virtually impossible to quantify;

The balance of convenience favoured the granting of an injunction because:

  • it is in the public interest that contracting authorities should comply with the procurement rules;
  • damages would not be an adequate remedy;
  • not granting an injunction would deprive Covanta of a remedy prescribed by EU law;
  • Covanta’s damages claim (if an injunction were not granted) was likely to be severe (estimated at £160 million). There was no reason why the taxpayer should have to bear the risk of effectively paying twice for the same services; and.
  • The delay which was likely to be suffered as a result of the injunction (c.9 months) was modest in the context of the 6 years it had taken to get to this stage. Likewise, the impact on the environment in terms of waste continuing to go to landfill during the period of the injunction was modest in comparison to the many millions of tonnes that had gone to landfill during the 6 years of the procurement.

Comment

There are a number of key lessons for contracting authorities from this case. First, complex procurements for high value must be handled with even greater care than usual, since there is a higher degree of risk that, if things go wrong, damages will not be deemed to be an adequate remedy and an injunction will be granted.

Second, contracting authorities must ensure when using competitive dialogue that there are no major misconceptions or misunderstandings by the end of the process. It may be wise in many cases to require bidders to submit “trial run” tenders a short time in advance of their final tenders to make sure that there will be nothing fundamentally unacceptable in the tenders. Given the time and intensity of competitive dialogue discussions, it will be remarkable, to say the least, if an authority gets to the end of the process and then finds that a bidder has fundamentally misunderstood mandatory requirements.

Third, authorities should note the level of uncertainty that is caused by breaches of transparency such as undisclosed award criteria, unclear evaluation processes, and similar issues. The Courts may conclude that the effect of these is such that damages cannot be adequately calculated and thus this is a factor which works in favour of an injunction being granted. Therefore, authorities should make sure that criteria and evaluation processes are clear and are fully disclosed in advance of tenders being submitted.

Fourth, it is now clear that the Courts will take into account issues of proportionality. The Court in this case quite rightly considered it improper that taxpayers should be put at risk of footing a bill for over £160 million, when contrasted with the relatively modest delay and extra cost that an injunction would cause. In many cases, particularly where the subject matter is urgent and/or the costs of delay would outweigh the potential financial claim, a Court may come to a different decision, but authorities should note that the Courts will take into account the costs to taxpayers.

In addition, Courts will be more willing to consider granting an injunction where procurement processes have taken a long time to get to final tender stage, and where the period of delay caused would be relatively modest compared to the overall timescale of the procurement. Therefore authorities should aim to keep procurements moving along and avoid unnecessary delay, since the longer the procurement period, the greater the risk that a Court may consider the delay caused by an injunction to be proportionate.

About the Author

Simon specialises in public and utilities procurement and major projects including construction, development, IT, energy saving partnerships, joint ventures and other vehicles.

Simon McCann
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