This comment has been previously published in eutopialaw. I am thankful to Christopher Brown for having brought this stimulating case to my attention.
In its recent Judgment of 23
January 2015 in Energy Solutions EU Ltd v
Nuclear Decommissioning Authority [2015] EWHC 73 (TCC), the High Court
ruled on a preliminary issue in a public procurement dispute and held that the
review court has no discretion (not) to grant damages for losses resulting from
a breach of the public procurement rules. In my view, the Energy Solutions v NDA Judgment should be criticised at least for
two reasons: firstly, because it misinterprets the EU rules on public
procurement remedies and their link with the general principle of State
liability for breaches of EU law; and secondly, because it creates an
analytical framework based on the commercial decisions of disappointed bidders
that would result in excessive (strategic) claims for damages. Moreover, the Energy Solutions v NDA Judgment sheds
light on an important shortcoming of the system of public procurement remedies
that is perpetuated under the recently adopted Public Contracts Regulations 2015 (SI 2015/102). This
comment addresses these issues in turn.
Background
The dispute arises after Energy Solutions (as part of a bidding
consortium, but that is not relevant for our purposes) was not chosen as the
winning bidder in a tender for a nuclear waste management contract with the Nuclear Decommissioning Authority (NDA).
After expressing its disagreement with the award decision and seeking
additional information in the ensuing debriefing process, Energy Solutions eventually challenged the tender procedure within
the 30-day limit applicable under reg.47D(2) of the applicable Public Contracts Regulations 2006 (SI 2006/5,
as amended, primarily by SI2009/2992).
By the time the challenge was effected, NDA
had already entered into a contract with the winning bidder. Energy Solutions sought compensation for
the damages it alleged to have suffered as a result of the improper conduct of
the tender procedure
NDA tried to bar the damages action by arguing that a failure to
challenge the award decision within the 10-day standstill period provided for
under reg.32(3) Public Contracts
Regulations 2006 (which could have prevented it from entering into the
contract) broke the causal link between any breach of the applicable
procurement rules and the ensuing damages (which, If any, would then derive
from the tardiness of the challenge). NDA
basically claimed that having foregone the possibility to prevent the award
of the contract to another tenderer by activating the suspension foreseen in
reg. 47G Public Contracts Regulations 2006,
Energy Solutions had also lost the
possibility to seek damages compensation. In support of that position, NDA submitted that, under reg.47J(2)(c) Public Contracts Regulations 2006, the
review court retained discretion (not) to award damages resulting from a breach
of public procurement rules in circumstances such as those in the case (ie the lost opportunity of litigating
within the standstill period).
The High Court ruled against NDA on both points. Edwards-Stuart J
found no basis for the
submission that any award of damages is
dependent on the level of gravity of the breach, or any other such factor, and
thus dependent on an exercise of judicial "discretion" or judgment,
or whether, absent any failure to mitigate its loss, having proved a breach of
the [public procurement rules] a
claimant is entitled to anything other than damages that should be assessed by
reference to ordinary principles. It may well be that the claimant's conduct
will have been such that the court will be very reluctant to make any
assumptions in its favour in relation to damages, but that is simply an aspect
of the usual approach of the court to the assessment of damages (para 86).
As mentioned above, this finding
is open to criticism, both for its inconsistency with EU law and because it
creates an analytical framework that may result in excessive claims for
damages. Each of these issues is addressed in turn. The problem derived from
the diverging duration of the standstill period and the time limit for the
challenge of award decisions is discussed last, as it also affects the brand
new Public Contracts Regulations 2015.
The improper conceptualisation of the damages remedy with an EU law
origin
In order to reach a conclusion on
the discretionary or automatic nature of the damages remedy under reg.47J(2)(c)
Public Contracts Regulations 2006, Edwards-Stuart
J embarked on an assessment of the original provision that this regulation
transposes, that is, art.2(1)(c) of Directive 89/665/EC (as amended by Directive
2007/66/EC), as well as its interpreting case law (primarily, Combinatie Spijker Infrabouw-De Jonge
Konstruktie and Others, C-568/08, EU:C:2010:751).
However, in my view, his Judgment fails to extract the adequate conclusions.
It is worth stressing that, as
stressed in paragraph 87 of Spijker (and
repeated in para 69 of Energy Solutions v
NDA), art.2(1)(c) of Directive 89/665 “gives
concrete expression to the principle of State liability for loss and damage
caused to individuals as a result of breaches of EU law for which the State can
be held responsible” (emphasis added). In my view, Edwards-Stuart J
completely misses the point when he tries to distinguish the Energy Solutions v NDA case by stating
that
This is not a claim against a Member State
for a breach of EU law which was intended to confer a right upon a person such
as the Claimant. This is a claim brought by a corporate body against a
national public body under the Regulations, an English national provision
[sic] (para 83, emphasis added).
If nothing else, this position
simply misses the entire EU law doctrine of supremacy and direct effect of
Directives (Van Duyn v Home Office,
C-41/74, EU:C:1974:133)
and the duty of consistent interpretation (Marleasing
v Comercial Internacional de Alimentación, C-106/89, EU:C:1990:395).
Moreover, it is unnecessary for the analysis the High Court needed to complete
in the case at hand. In that regard, it is also worth stressing that, as
clearly established by the Court of Justice in Spijker (and repeated in para 70 of Energy Solutions v NDA)
In the absence of EU provisions in that
area, it is for the legal order of each Member State to determine the
criteria on the basis of which damage arising from an infringement of EU law on
the award of public contracts must be determined and estimated … In the
absence of any provision of EU law in that area, it is for the internal legal
order of each Member State, once those conditions have been complied with, to
determine the criteria on the basis of which the damage arising from an
infringement of EU law on the award of public contracts must be determined and
estimated, provided the principles of equivalence and effectiveness are
complied with (Spijker, paras
90 and 92, emphasis added).
Hence, in order to stress the
point of procedural autonomy (subject only to equivalence and effectiveness), Edwards-Stuart
J did not need to take the difficult (and unacceptable) position of trying to
decouple Energy Solutions’ claim from
its obvious EU origin by rejecting its true essence.
Following on this aspect of the
Judgment, it is also important to stress that counsel properly identified a
further development of relevance in terms of assessing the effectiveness
requirement. Indeed, in Danske Slagterier
(C-445/06, EU:C:2009:178),
the Court of Justice issued additional guidance on the possibility of imposing
certain duties on disappointed tenderers before they can claim compensation for
damages. That case concerned a German rule whereby reparation for loss or
damage cannot be obtained by an injured party that has wilfully or negligently
failed to utilise an available legal remedy (§839(3) BGB).
The dispute concerned precisely the level of diligence that could be required
under EU law from a claimant in damages that had forgone other (theoretically)
available remedies before claiming for compensation.
In a situation that is clearly
comparable to the one in Energy Solutions
v NDA (as implicitly acknowledged by Edwards-Stuart J in para 73), the
Court of Justice ruled that
it is a general principle common to the
legal systems of the Member States that the injured party must show
reasonable diligence in limiting the extent of the loss or damage, or risk
having to bear the loss or damage himself … It would, however, be contrary to
the principle of effectiveness to oblige injured parties to have recourse
systematically to all the legal remedies available to them even if that would
give rise to excessive difficulties or could not reasonably be required of them
… [Union] law does not preclude the application of a national rule such as
that laid down in para. 839(3) of the BGB, provided that utilisation of the
legal remedy in question can reasonably be required of the injured party.
It is for the referring court to determine … whether that is so (paras 61
to 64).
In my view, this provides the
proper framework for the analysis of Energy
Solutions v NDA, as it places the High Court in the position of assessing
whether requiring claimants to challenge award decisions within the 10-day standstill
period is reasonable and can become a pre-condition for their damages claims,
despite the fact that the applicable regulations provide them with a 30-day
period to do so. That is the point of “discretion” (rectius, non-automaticity) in the award of damages derived from
public procurement infringements on which the parties disagreed, and one to
which I will return below.
However, Edwards-Stuart J
insisted (para 78) on his view that the domestic remedy has nothing to do with
the general principle of State liability under EU law (in a frontal disregard
of Spijker para 87), which excludes
the applicability of any guidance ultimately based on the State liability
doctrine (Brasserie du pêcheur and
Factortame, C-46/93, EU:C:1996:79).
In my view, this creates significant confusion and implies a breach of EU law
within the UK legal system (which could, if not remedied, end up resulting in
liability under Köbler, C-224/01, EU:C:2003:513).
The improper focus on the commercial choices or gambles of the
disappointed bidder, which could trigger excessive litigation seeking
procurement damages compensation
My second criticism of the
Judgment in Energy Solutions v NDA
derives from the isolated and commercially-led analysis of the system of
remedies provided by Directive 89/665, as transposed by the Public Contracts Regulations 2006 (and
now the Public Contracts Regulations 2015).
The point of departure for the analysis of the remedies system and,
particularly, the granting of damages, needs to rest on two basic points.
The first one is a point of law.
Damages are conceptualised as an ancillary
remedy under Directive 89/665 [for discussion see S Treumer, ‘Damages for
breach of the EC public procurement rules - changes in European regulation and
practice’ (2006) 17(4) Public Procurement
Law Review 159-170]. In my view, this is particularly clear after the 2007
reforms [similarly, S Arrowsmith, The Law
of Public and Utilities Procurement. Regulation in the EU and the UK, Vol.
1, 3rd edn (London, Sweet & Maxwell, 2014) 178; see also R Caranta, The Comparatist’s Lens on Remedies in Public
Procurement (Istituto Universitario di Studi Europei, WP 2011-1) 7-8],
which aimed at ensuring the effectiveness of the public procurement rules
through stronger requirements of ineffectiveness of contracts concluded in
their breach. This is the proper interpretation of the ensemble of remedies
established under the EU rules and, in particular, given that art.2e(2) in fine Directive 89/665 expressly
indicates that “[t]he award of damages
does not constitute an appropriate penalty”.
Hence, damages are not an
alternative or substitute remedy for the ineffectiveness of illegally awarded
contracts (which can only be replaced with proper penalties imposed on the
infringing contracting authority where public interest mandates the
continuation of the illegally-awarded contract). Moreover, damages are not a free standing remedy, as they must be
based on a (sufficiently serious) breach of procurement rules, which
necessarily carries the consequence of either ineffectiveness of the contract
or penalties for the contracting authority. This is also very clear from the
wording of reg.47J Public Contracts
Regulations 2006, which requires the review court to make findings on
ineffectiveness and civil penalties, while it (simple?) authorises the court to
make findings regarding damages compensation (this is discussed in paras 62ff
of the Energy Solutions v NDA Judgment,
but in a way that goes against the literal reading of the provision).
The second point is a point of
general policy based on economic incentives. In my view, disappointed tenderers
will always have an incentive to seek damages compensation. Once they have
participated in a tender procedure and not been awarded the contract, it is
more favourable for them to seek damages (particularly if loss of profits is
recoverable) than to seek the specific performance of the tender procedure
being brought back to the point previous to the relevant infringement, or even the
award of the contract as such. Once they are put in a position where they have
an automatic claim for damages based on the infringement of the procurement
rules, they will always prefer its exercise to any alternative remedy that
either does not secure them the contract (because it forces a re-tendering) or
awards them the contract (as getting direct financial compensation for the lost
profits is better than having to – properly – execute a contract in order to
create them).
In short, creating an automatic
right to damages compensation for breach of public procurement rules would
become a ‘winning lottery ticket’ for disappointed bidders. It is simple to see
how such unbalanced rights to remedies would trigger excessive litigation. From
a policy perspective, then, it should be required that contractors only be
entitled to damages when a specific, non-financial remedy is not available (ie, when the illegally awarded contract
must be protected in view of a sufficient public interest).
From this perspective, it is hard
to understand how Edwards-Stuart J can consider that
If the claimant is seeking to have the award
of the contract suspended, then it must start proceedings within the standstill
period or, in any event, within the 30 day period and before the award of the
contract. However, if the claimant is merely seeking damages, then it need
only start proceedings within the 30 day period. I do not see any basis for
treating these two remedies as being of different importance: that depends on a
claimant's circumstances and what it is seeking to achieve - the Regulations
give it a choice (para 79, emphasis added).
The relevant point, in my view,
is that the Regulations do not give a
choice to the Court (not the claimant) in terms of the content of the
challenge against an award decision. If the Court finds that there is an
infringement, it must impose the relevant remedies (not only damages), as
clearly established in reg.47J Public
Contracts Regulations 2006 for cases in which the contract has already been
entered into (and in relatively less stringent terms, in reg. 47I Public Contracts Regulations 2006 when
the contract has still not been entered into). Hence, regardless of whether the
claimant complements the claim for damages with a claim for ineffectiveness or
not, the Court must always consider the
possibility and desirability of setting the illegally-awarded contract aside.
Consequently, there should actually not be any difference, from the point of
view of the Court, between the two sets of remedies indicated above. Maybe in
blunter terms, under the applicable Regulations, a claimant is never allowed to actually only seek damages because the
Court is never allowed to only rule on damages.
Hence, considerations such as
those developed in paragraphs 87 to 91 of the Energy Solutions v NDA Judgment must be rejected, since they rely
on the consideration that a claimant can legitimately conclude “for various commercial reasons, that
damages would be an adequate remedy in all the circumstances” (para 87,
emphasis added), and that this needs to be the guiding principle in the
construction of the system of remedies for public procurement infringements.
I of course acknowledge that this
is an approach that implicitly recognises that disappointed bidders do not
challenge award decisions only in their own interest, but also exercise a
(residual, implicit) ‘general attorney-like’ function aimed at catching and
sanctioning infringements of (EU) public procurement law—in a sort of private
enforcement akin but different from
that developed for the equivalent competition law rules. However, I struggle to
see how the system of remedies could be developed in satisfactory way
exclusively considering disappointed bidders’ commercial interests.
The source of the problems: diverging time-limits beyond mandatory standstill
periods
The final issue that bears
comment (and much further thought) refers to the existence of time-limits for
the challenge of procurement decisions that reach beyond mandatory standstill
periods. The situation created under the Public
Contracts Regulations 2006 has just been perpetuated under the recently
adopted Public Contracts Regulations 2015,
which regs.87 and 92(2) perpetuate the problem of a general time-limit for the
start of proceedings that exceeds the mandatory 10-day standstill period. As Edwards-Stuart
J rightly pointed out in the Energy
Solutions v NDA
the Regulations permit an unsuccessful
tenderer to start proceedings after the expiry of the standstill period, and
therefore at a time after which the authority may have entered into the
contract with the successful tenderer: indeed, the Regulations expressly
contemplate this eventuality. I therefore have considerable difficulty in
seeing how a decision not to start proceedings within the standstill period
could be said to be unreasonable. But, as I have already said, this is a
question of fact (para 54).
Hence, the problem that is (now,
clearly) on the table is that the part of the time-limit for the start of
proceedings that runs beyond the duration of the mandatory standstill creates
space for strategic litigation,
particularly if coupled with the ‘automaticity’ (or lack of discretion) for the
award of damages resulting from a breach of public procurement rules discussed
above. There are two possible options. On the one hand, to overrule Energy Solutions v NDA and go back to a Spijker-compliant interpretation of the Public Contracts Regulations (2006 and
2015), so that a judgment of ‘reasonableness’ of the time at which the
proceedings are started is conducted by the court on a case by case basis. This
option creates legal uncertainty and may trigger further litigation at EU
level. On the other hand, to amend the Public
Contracts Regulations 2015 so that the standstill period and the time-limit
to initiate actions coincide. In that case, I would expect the standstill to be
extended, rather than the time-limit to be reduced. One way or the other,
though, the system needs fixing in order to close the gaps that can now trigger
excessive (strategic) litigation.