UK Public Procurement hits the headlines: two major public contracts successfully challenged

The announcement of two public contract procurement setbacks last week highlights the ability of suppliers to force the set-aside of procurement decisions where contracting authorities may have failed in their obligations. The announcements come as a timely (and expensive) reminder to the public sector that improperly awarded public contracts are liable to be set aside, and that the subsequent costs of settlement, both financial and reputational, can be significant.

What has happened?

On 27 March 2017, it was announced that fundamental flaws in the tendering process has led the UK government having to pay £100m in damages and legal costs stemming from its mishandling of the way in which it awarded a £6.1bn nuclear decommissioning contract. Claims had been brought by Energy Solutions and Bechtel, the participants in a consortium that had supposedly submitted the losing bid in the procurement.

The settlement accompanied an admission from the government that the procurement process was materially flawed. The Nuclear Decommissioning Authority (NDA) has announced that it will be terminating its contract to handle the clean-up operation nine years earlier than it had previously intended because the scope and cost of the work had materially changed since the contract was procured.

The High Court had previously found that the NDA had manipulated the valuation process in order to avoid disqualifying the ‘winning’ bid and had “fudged the evaluation”[1]. In doing so, the NDA had fallen short in meeting its obligations of transparency and equal treatment under the Public Contracts Regulations 2006.  The High Court went further, finding that had the evaluation been conducted correctly, the Energy Solutions / Bechtel bid would have won.  As a result, the court determined that the failure to award the contract to the most economically advantageous offer warranted an award of damages.  The case settled before the Supreme Court gave judgment on whether the breach by NDA was required to meet the threshold of being ‘sufficiently serious’ in order to justify an award of damages.

The NDA will now begin the process of procuring a new contract when the CFP deal ends in 2019 and a new competed tender process is to be expected. What form of procurement regulations will be in place at that time is unclear due to the on-going Brexit negotiations, although we anticipate that by 2019 there will not have been any significant change to the regulatory requirements for procuring public contracts.

Following another challenge against UK government, American engineering consultancy, CH2M Hill has announced that it is abandoning the £170m Phase 2B deal it had been awarded (but not signed the contract for) to design parts of the HS2 high speed line, amid concerns raised by competitor, MACE, about conflicts of interest. MACE pointed out that Mark Thurston, HS2’s new chief executive, was a former CH2M director. The abandonment of the contract is likely to lead to further delays in the project as HS2 decides how to proceed now.

An independent inquiry has been launched to investigate the faults in the procurement process for the nuclear clean up contract, with the report due in October 2017. MACE, which was due to meet with HS2 Limited on 31 March 2017, has not ruled out a formal legal challenge, despite CH2M pulling out of the contract.

Osborne Clarke comment

The announcement that the government has settled the NDA dispute out of court means that the case will not return to the High Court for an assessment as to the quantum of damages payable. While this means there is no definitive court guidance on the quantum of damages to be paid to bidders the settlement sums disclosed at least provide an indication of the very significant sums at stake.  Whether the Supreme Court will proceed to release its judgment regardless of settlement remains to be seen, and will be watched with interest.

Both decisions taken by government, under pressure from suppliers, emphasise the critical role suppliers continue to play in policing public procurement in the UK.  They also illustrate the substantial compensation available to a supplier incorrectly deprived of the opportunity to be awarded a contract that, had the process been compliant, they would have won.

For public authorities, as with the high-profile failed West Coast Main Line procurement, which resulted in wasted costs of £50m being paid out and government reviews into rail franchise competitions, these latest setbacks will undoubtedly be concerning. An independent inquiry into the NDA procurement has already been announced.

The announcements should embolden suppliers to the public sector, who might be concerned about the fairness of the tender process, either during it or when the award decision is announced. Suppliers should continue to review tender documents and feedback carefully and remain aware of their rights and the duties of contracting authorities when bidding for public contracts.

This article was prepared with the assistance of Jamie Halpin, trainee solicitor at Osborne Clarke.

[1] Energysolutions EU Ltd v Nuclear Decommissioning Authority [2016] EWHC 1988 (TCC) (29 July 2016), paragraph 945.