Should Damages in Public Procurement Hinge on Disappointed Bidders’ Commercial Interests? A Comment on Energy Solutions EU Ltd v Nuclear Decommissioning Authority

ASGDr Albert Sanchez Graells, School of Law, University of Leicester

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.

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