Even after a contract between the public and the private sector has been signed, it could still be set aside by the Courts following a procurement challenge up to six months after it was entered into.

The introduction of the remedy of ineffectiveness appears to have had an impact on both the private sector and the public sector, particularly in relation to development agreements, which may not previously have been procured via open competition.

In the two years since the introduction of ineffectiveness orders, although we have not seen any ineffectiveness orders granted, we have seen an increase in the number of development agreements and similar contracts being advertised by the public sector, and at the same time, a distinct increase in the number of private sector contractors seeking comfort where the public sector are not procuring such an agreement through open competition.

How does the remedy of ineffectiveness operate in the context of development agreements, and are there ways in which the risk of ineffectiveness can be mitigated?

The remedy of ineffectiveness

Historically, Public Procurement and compliance with the rules set out in the Public Contracts (Scotland) Regulations 2006, has principally been the concern of the public sector. However, the introduction of the Public Contracts and Utilities Contracts (Scotland) Amendment Regulations 2009 has led to an increased awareness of the risk of a procurement challenge for the private sector also.

Prior to the coming into force of the 2009 Remedies Regulations on 20 December 2009, the only remedy available to an aggrieved bidder, where a contract had already been entered into, was an action for damages. Such actions would typically seek recovery of bid costs and loss of profit and, if successful, these would have been payable by the public sector body that had breached the 2006 Procurement Regulations.

The 2009 Remedies Regulations introduced the concept of ineffectiveness orders into the 2006 Procurement Regulations. The regulations now allow an aggrieved bidder to raise an action for ineffectiveness where one of three specific grounds is met. The impact of the imposition by the Courts of an ineffectiveness order is that a contract, which has already been entered into by the parties, can be rendered ineffective and set aside. The three grounds generally cover:

  1. A failure to publish a Contract Notice in the Official Journal of the European Union (OJEU), where one was required;
  2. A failure to comply with the notification and mandatory standstill provisions in the Procurement Regulations, where that breach prevented the aggrieved party from raising proceedings or obtaining a remedy before the Contract was entered into and there has been another breach of the Procurement Regulations that impacted upon the challenger’s chances of being awarded the Contract; or
  3. A failure to award a contract under a Framework in accordance with the terms and conditions of the Framework Agreement.

In relation to the first ground, it is possible to mitigate the risk of an ineffectiveness order, where the public sector body publishes a voluntary ex ante transparency (VEAT) notice in the OJEU and observes a standstill period of 10 days before entering into the Contract. The VEAT must include justification of the decision of the contracting authority to enter into the Contract without publishing a Contract Notice in the OJEU.

In relation to the second ground for ineffectiveness, the correct application of the notification and standstill provisions by the public sector will mitigate against the risk of an ineffectiveness order.
The third ground for ineffectiveness does not apply where the value of the contract is below the threshold levels in the Procurement Regulations, or where the authority observes a standstill period prior to entering into individual call off contracts.

The timescale set out in the Procurement Regulations for raising a claim for ineffectiveness is currently either:

  1. 30 days from the Relevant Date where the Contracting Authority has published a Contract Award Notice in the OJEU in accordance with the requirements set out in the Procurement Regulations or has, by notice in writing, informed all tenderers concerned and all candidates concerned of its decision (the Relevant Date in these situations is the date of publication of the Contract Award Notice or the date of the notice to all tenderers, respectively); and
  2. in any other case, a period of six months from the date the Contract was entered into.

Ineffectiveness and development agreements

One area where the remedy of ineffectiveness is particularly pertinent for the private sector is in relation to development agreements, where the application of the Procurement Regulations is not clear cut. The question hinges around whether or not the development agreement is actually a Public Works Contract, caught within the remit of the Procurement Regulations. The answer to this question depends on the facts of each individual case.

Following the case of Helmut Müller GmbH v Bundesanstalt (C-451/08 Helmut Müller GmbH v Bundesanstaltfur Immobilienaufgaben) which considered the application of the European procurement rules to a land transaction, the UK Office of Government Commerce, which is now part of the UK Government’s Efficiency and Reform Group, published guidance in July 2010 (Procurement Policy Note 12/10), which suggested that a development agreement between a local authority and a developer may be less likely to fall within the definition of a Public Works Contract under the Procurement Regulations if it meets the following relevant criteria:

  1. "The proposed development (or a significant part) is to be undertaken at the initiative and autonomous intention of the developer. (This may be particularly likely if the developer already owns or has control of land to be developed);
  2. The development agreement is ancillary or incidental to a transfer or lease of land or property from the authority to the developer, and is intended to protect the interests of a contracting authority which is the lessor or otherwise retains an interest in the land or property;
  3. The development agreement is based on proposals put forward by the developer, rather than requirements specified by the contracting authority, albeit that these proposals may be sought, and the “winner” chosen by the authority;
  4. There is no pecuniary interest passing from the contracting authority to the developer as consideration for undertaking the development, either through direct payment or indirectly, for example by the assumption of obligations such as contributions towards project finance or guarantees against possible losses by the developer;
  5. The development agreement does not include specific contractually enforceable obligations on the developer to realise a work or works (even if that work or works is recognised as being the general intent of the parties to the agreement);
  6. The development does not consist of, or contain, works for the direct economic benefit of the contracting authority;
  7. The involvement of the contracting authority consists only in the exercise of statutory land-use planning powers."

Where a development agreement does not meet some or many of these parameters, then there is a greater chance that the development agreement could be construed as being a Public Works Contract, caught within the scope of the Procurement Regulations.

Mitigation

Where the parties to such a transaction consider that there may be a risk that any such agreement could potentially be construed to be a public works contract, the public sector can seek to mitigate the risk of a challenge by either following an open and transparent procurement process in line with the Procurement Regulations or by seeking to utilise one of the exceptions to the grounds for ineffectiveness set out in the Procurement Regulations, such as the publication of a VEAT notice, as noted above.

Where the public sector does not wish to publish a VEAT Notice, or does not consider there to be a risk of challenge and the private sector contractor disagrees, then the contractor may wish to consider whether an indemnity is available from the relevant authority in order to mitigate its potential losses in the event that a challenge is ultimately raised. Alternatively, the contractor may wish to consider how best to mitigate the likely exposure in the initial period of the contract.

Local authorities, in good faith, often enter into agreements with private sector developers that involve the sale or transfer of land, which is in turn associated with a requirement that the developer in question implements certain obligations, which can include works, on the understanding that the transaction is not caught within the remit of the Procurement obligations, and a similar question can also arise in relation to the grant of planning permission in exchange for works pursuant to a Section 75 Agreement in Scotland, or pursuant to a Section 106 Agreement in England.

In the event that, following a successful challenge by an aggrieved party seeking to argue that such an arrangement was in fact a Public Works Contract, and an ineffectiveness order was sought and granted, there would clearly be significant implications for both parties. The potential six month risk window can be of significant concern to the private sector contractor, who may have invested significant sums in progressing planning, or works, prior to the Contract being rendered ineffective. Both parties should carefully consider the terms of any such arrangement as early as possible in the transaction, in order to fully evaluate whether the agreement could fall within the scope of the Procurement Regulations and evaluate the risk, and implications, of any potential procurement challenge.

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