Procurement Bill [HL]

Written evidence submitted by Dr Aris Christidis, Lecturer in Law at Newcastle University (PB36)

Introduction

01. This submission is based on the latest version of the Procurement Bill (PB). It focuses on Part 9 (REMEDIES FOR BREACH OF STATUTORY DUTIES) and 10 (PROCUREMENT OVERSIGHT). It proposes some changes to the current versions of these two parts. [1]

02. It also discusses the introduction of implied contractual terms in clauses 77 and 78. This submission proposes that the content of these clauses should be more carefully considered by the Committee.

Part 9: Review system and remedies for breach of statutory duties

03. It is well recognised that an effective review system is important for the realisation of many policy objectives of public contracts regulation including accountability, transparency, value for money and fair treatment of suppliers. [2]

04. Hence, in addition to the substantive legal framework, the new legislation needs to provide an effective review system and appropriate remedies for aggrieved suppliers and other interested parties.

05. Part 9 of the current version of the PB provides remedies for breach of statutory duties. The remedies are divided into two categories. The first category is pre-contractual remedies, and the second category is post-contractual remedies. This submission focuses on the latter.

Post-contractual remedies

06. The provisions around post-contractual remedies are more extensive than those for pre-contractual remedies. An order of the former remedies may also carry more implications. For example, a contract may be at a mature performance stage and any intervention to it may have an impact on the contracting authority, the contractor and the public interest in uninterrupted service delivery.

07. The architecture of post-contractual remedies is very similar to the current one under the Public Contracts Regulations (PCRs). [3]

08. One change concerning those remedies introduced in the PB is the terminology used. Hence, for example, the term "ineffectiveness" under the PCRs has been replaced with that of "setting aside" while the term "overriding of general interest" under the PCRs has been replaced with "overriding public interest".

Conditions for set aside

09. An important and positive development in the PB is the expansion of the conditions upon which the set aside remedy may be ordered under clause 102.

10. In particular, in addition to the conditions of a contract being awarded without a notice, breach of the automatic suspension requirement, court order or the standstill period, clause 102 also makes that a set aside condition is satisfied when there has been an unlawful modification of a contract.

11. Clause 102 (f) further provides that a set aside condition is met when a breach becomes apparent after the contract has been entered into or modified and such breach has affected the chances of the claimant to seek a pre-contractual remedy.

12. Clause 102 (f) is an interesting condition and one that departs from the current grounds for ineffectiveness under the PCRs. Any breach can become apparent after the contract has been entered into. Clause 102 (f) sets no other requirement, and this seems like a catch-all provision.

13. What this means is that once a claimant can demonstrate that they "have suffered or are at risk of suffering loss or damage as a consequence of (any) breach" (clause 97 (3) (b)) and that breach deprived them of the opportunity to seek a pre-contractual remedy (clause 102(1)) then the court "must" [my emphasis added] set aside the contract according to clause 101(2)(a). This is subject to an overring public interest in clause 101(5).

14. By implication of clause 101(7), framework agreements are also subject to an order for setting aside. However, this needs to become explicit in the new legislation since clause 101(2)(a) only refers to contracts and modification of contracts.

15. It is not clear what the relationship between damages and set aside is. Clause 101(2)(a) suggests that if any of the violations in section 102 are met, the court "must" [my emphasis added] set aside the contract or modification. Clause 101(2)(b) however goes on to say that the court "may" in any event make an order for damages.

16. Hence, it is not clear when a damages claim would be appropriate. Damages could be appropriate, for example, when overriding public interest reasons require the contract to go ahead under clause 101(5). However, in such case, clause 101(4) provides for alternative remedies that include the shortening of the duration of the contract or the goods, services or works to be supplied under the contract.

17. The conditions as drafted are unnecessarily complicated requiring a lot of cross-referencing and as demonstrated above clause 102 (f) is unclear as to its scope and purpose.

18. The better view here is for the new legislation to provide the set aside remedy as the default remedy for any violation that undermines the general principles of transparency and fair treatment of suppliers and which has deprived the claimant of either (a) winning the contract (b) fairly competing for the contract or (c) challenging a decision before the contract was entered into.

19. A broader wording provides more discretion to the court to assess the circumstances of the case, including the gravity of the violation and decide accordingly on an order to set aside or the shortening of the duration or scope of the contract or take no action.

20. Further, the new legislation could add that in its decision the court may want to consider the behaviour not only of the contracting authority (since the rules in the PB are only focused on regulating the behaviour of the procuring entity) but also the contractor.

21. For example, if the contractor acted dishonestly entering a contract knowing about the breach, a remedy (including a restitutionary remedy) to them may be barred (depending on the gravity of the breach). This, in turn, could create an additional layer of deterrence that would safeguard the integrity of the procurement system.

Consequential matters between parties after a set aside order

22. It should be noted that the PB does not specify how consequential matters between parties should be regulated. Clause 101(8) states that an order of setting aside or reducing the term or scope of a contract may make provisions for restitution and other consequential matters or supplementary matters.

23. Therefore, consequential matters between parties are to be solely regulated by the express terms of the contract in question. This is not a satisfactory position. The purpose of the set aside remedy is to restore the contract to the status quo ante as much as possible for the benefit of suppliers that have been substantially deprived of the opportunity to compete or win the contract.

24. Hence, any compensation to the contractor following a setting aside or an order reducing the term or scope of the contract should, in principle, be limited to the reasonable value of the works, goods or services provided and have benefited the contracting authority.

25. However, if for instance, a badly drafted contract provides for some overcompensation to the contractor that purpose is not served. It may also be costly to the public purse. For example, a contracting authority may have to cover the cost of compensation to the contractor whose contract was set aside and the cost of a potential new contract.

26. Therefore, the new legislation needs to make at least a requirement that any consequential matters arising from a set aside order be reviewed by the courts to make sure that they are in line with the purpose of the remedy and the court’s order. If not, the court should have the power to render those provisions in the contract ineffective. This seems to be the current position under Regulation 101(6) of the PCRs and should also be provided in the new legislation.

Safe harbours from set aside

27. One of the difficulties with post-contractual remedies and in particular a remedy such as that of set aside (including the alternative remedies of reducing the duration and scope of the contract) is that inevitable intervention to a contract. Various interests are involved, including that of the contractor, the claimant, the contracting authority and most importantly the public interest in uninterrupted service delivery.

28. For that reason, both the PCRs and the current version of the PB provide for "overriding public interest" considerations that act as safe harbours from a setting aside order and the ordering of the alternative remedies of the shortening of the duration or scope of the contract instead under clause 101(4).

29. In particular, clause 101(3) states that the duty of the court to set aside a contract or modification does not apply if the court is satisfied that there is an overriding public interest in not setting aside the contract or modification (for example, in respect of defence or security interests or the continuing provision of public services). The way this provision is drafted allows the court discretion as to whether and when such overriding reasons will be met.

30. However, clause 101(5) provides some limitations on what the courts can consider. In particular, clause 101(5)(a) provides that courts may have regard to the financial consequences of setting aside the contract or modification only in exceptional circumstances. Yet, there is no explanation of what such exceptional circumstances may be.

31. The first Explanatory Notes version [4] published on the 11th of May 2022 provided in paragraph 549 that the financial consequences of setting the contract aside can only be taken into account in exceptional circumstances (likely to be macroeconomic impacts). However, without providing any further guidance as to what such macro-economic impacts may be.

32. Further, clause 101(5)(b) precludes costs that are directly associated with the contract, including costs that are associated with a delay in the performance of the contract or the contract as modified.

33. It submitted, that costs associated with the performance of the contract should not be precluded from the assessment of the court when considering whether there is an overriding public interest that requires the contract to go ahead. Costs associated with the performance of the contract could impact the budget of the contracting authority and consequently, may also affect the quality of goods, works or services purchased.

34. It is submitted that the better view here is to allow the courts to consider all the circumstances of the case, including the interests of the parties involved. What should take precedence over any other interest when assessing those overriding public interests is the interest in uninterrupted service delivery. This should be made explicit in the new legislation.

35. It is submitted that the only restriction in the court's assessment of overriding public interests should be costs associated with the legal obligations arising from setting aside the contract or modification (clause 101(5)(b)(iii)). As explained at 26 above, the courts should be able to review any provisions regulating consequential matters and whether such provisions are compatible with the aim of a set aside order (i.e. returning the position before the contract was made as much as practically possible).

Alternative remedies

36. Clause 101 (4) of the PB's latest version provides for alternative remedies in the event the court is satisfied that there is an overriding public interest in not setting aside the contract or modification. These alternative remedies are the shortening of the duration of the contract or the shortening of the scope of the contract.

37. The shortening of the duration of the contract as an alternative remedy to the ineffectiveness remedy is already available under Regulation 102 of the PCRs. What the PB has added is the reduction of the goods, services or works to be supplied under the contract and has got rid of the civil financial penalty.

38. The alternative remedies provided in the PB are appropriate and proportionate. They are an improvement of the position under the PCRs.

Ranking of post-contractual remedies and the role of damages

39. The government did acknowledge that the bidder’s primary objective is to obtain the contract instead of receiving compensation for losses. [5] Indeed, this should be the case even after the contract has been entered into. Any challenge by an aggrieved supplier should aim at the contract and the retendering of the contract when possible. When that is not possible, the courts should order the shortening of the duration or scope of the contract.

40. It is not clear under the current version of the PB in what circumstances damages would be an appropriate remedy. It could be said that damages are appropriate when there is a breach of the rules and a set aside condition is not met. However, clause 102(1) when read with clause 101(2) almost precludes this possibility.

41. In particular, clause 101(2)(a) states that if a set aside condition is met the court "must" [my emphasis added] make an order setting aside the contract… while clause 102(1) in effect provides that a set aside condition is met if the court is satisfied that a breach of the rules has precluded an aggrieved supplier from either competing for a contract (102(a)) or challenging a decision (102(b)-(e)) or when any other breach becomes apparent after the contract is entered into.

42. Hence, the conditions for set aside, capture all types of violations that can affect the chances of a claimant challenging a decision before the conclusion of the contract or violations that have deprived them of the opportunity to fairly compete for it. If the court is satisfied that there is an overriding public interest, it will order the alternative remedies of reducing the term or scope of the contract. As a result, the role of an award of damages is not clear.

43. It is submitted that in order not to discourage legitimate challenges post the entering of a contract, the new legislation should cap damages to litigation and, where appropriate (for example when a set aside is not ordered) to bidding costs.

45. The capping of damages will discourage speculative claims since all claimants will aim for the setting aside of the contract in question. [6] Limiting the available damages to tender preparation and/or litigation costs is also in compliance with the WTO rules of the Government Procurement Agreement. [7] The capping of damages was proposed in the Green Paper but was then rejected without any sufficient justification. [8]

46. The new legislation could provide a clear ranking of remedies to help the court. These should be in order the following: a) the setting aside of the contract, b) if that is not possible, the court should order the alternative remedies and c) damages that should cover litigation and tender preparation costs where appropriate.

Claimants and standing

47. The position of the PB on standing is the same as the PCRs. Challenges are only available to aggrieved suppliers. An innovative idea is to extend the scope of standing to some other interested parties such as trade associations and professional bodies that represent suppliers. Extending the scope of standing to such bodies could first provide an additional layer of deterrence for contracting authorities and safeguard the probity of the system and could prove beneficial to small businesses that may not have the financial means to challenge contracts or are not willing for fear of retaliation.

Part 10: Procurement Oversight

48. Part 10 of the PB requires the delegation of investigatory powers to an appropriate authority. This authority should be able to investigate the contracting authority’s compliance with the requirements of the PB and issue recommendations following the investigation.

49. There is a lot of value in establishing an oversight independent authority with investigatory and corrective powers post before the conclusion and after the conclusion of a contract. [9]

50. For example, it can fill the gap of oversight and enforcement when aggrieves suppliers or other interested parties do not have the incentive to challenge a decision or a contract. Likewise, it can fill the gap of oversight and enforcement when aggrieved suppliers or interested parties are reluctant to bring a claim because of possible adverse consequences such as fear of retaliation by the contracting authority, the cost of ligation or the difficulty of proving the violation of a rule.

51. Such an oversight mechanism could also prove to be superior to a supplier review system in some respects. For example, the cost of review to a compliant contracting authority is apt to be small. In addition, authorities that perform the oversight tend to be impartial and non-confrontational.

52. Further, such an oversight authority could evaluate and intervene in both the procurement and contract execution phase. It can safeguard the probity of the contract and enhance the confidence of all interested parties that a contract was concluded and executed in compliance with the rules and in the public interest.

53. However, there are two conditions for such a mechanism to work effectively. The first is that the authority bestowed with the function of oversight has corrective powers (i.e. should be able to intervene when there is evidence of unlawful decisions in the procurement process). This is not the case under the current version of the PB where the scope of the authority is limited to providing recommendations to the contracting authority. These recommendations are further restricted by clause 105(3).

54. The second condition is that the authority is independent of the government. According to the ‘Green Paper – Response to Consultation,’ the Procurement Review Unit (PRU) - which seems to be the authority that will perform this function – will be sitting within the Cabinet Office. [10] The authority needs to move away from the Cabinet Office and act in an independent capacity or under the supervision of the Parliament.

Implied right to terminate public contracts (clauses 77 and 78)

55. Clause 77 provides for an implied right to terminate public contracts. This clause is going to amend Regulation 73 of the PCRs. It introduces an implied term in any public contract where the contracting authority may unilaterally terminate the contract if a termination ground applies.

56. The grounds for termination are very narrowly defined and are not justified. For example, clause 77(2)(a) provides the contracting authority can terminate a contract when there has been an unlawful modification but not when there has been an unlawful award of a new contract.

57. By the same token, clause 77(2)(b) provides that the contracting authority can terminate a contract where ‘a supplier has, "since" [my emphasis added] the award of the contract, become an excluded or excludable supplier’. The wording here suggests that if a supplier was already an excluded or excludable supplier at the time of the contract award, the contract cannot be terminated. There is no logic in this.

58. Further, other circumstances that may equally undermine well-established principles in public procurement regulation such as transparency, accountability and fair treatment or not included in the list of circumstances that give the right to a contracting authority to terminate a public contract.

59. An example of such circumstances is when after the conclusion of the contract, it is found that there is a conflict of interest between a person who influences a decision made by or on behalf of the contracting authority and the supplier.

60. It is submitted that the Committee should think more carefully what the purpose of this implied right to terminate and how it should be designed. [11]

20 February 2023