Enemies of the state

We are told so often that we live in interesting times it, is hard to remember what normal times were like. One aspect of today's way of life is that officialdom has more power than ever before and much greater scope for abusing it. However, the remedies available to people who are badly affected by the misuse of power are much more effective and extensive than they have ever been before. These remedies are garbed in the superficially unsexed-up clothing of misfeasance, state regulation and procurement. However, they can directly affect construction contractors, as the Three Rivers and Harmon cases vividly show.

The backdrop to the remedies offered by these cases is 17th-century misuse of political power and the quaintly termed tort, or civil wrong, of misfeasance in public office. The relevance of these remedies to today's contractors arises from the frequency of public tendering and the contracting out of public and state-financed projects. In this context "public" extends to local authorities and any other state entity.

Let us consider the problem of misuse in the context of a contractor wishing to bid for a large specialist segment of a public works contract, such as for the supply of cladding panels. The contractor's face does not fit politically. Maybe the contractor has French connections or is located in the wrong part of the country, or a rival contractor has made significant donations to a certain political cause. For whatever reason, the job goes to a rival for what are thought to be other than commercial reasons given that the successful company's tender or its prices are known to be much higher.

This was the situation in Harmon vs House of Commons, which involved the erection of cladding for the Portcullis House office block being built in the early 1990s for backbenchers – at such a cost that the tenders for the cladding alone came in at more than £40m in 1995 prices Harmon had a French parent and an American grandparent company and it submitted the lowest bid. However, the contract was let to an English company after an unfair tendering process that was neither open nor transparent. These abuses appeared to infringe the European Procurement Directive and had been carried out by an official who was effectively manipulating the procurement process so as to ensure that the House of Commons bought British.

Lloyd's law
In a landmark judgment, helpfully reported in full in 2000 in the construction law reports by Professor Furmston, Judge Humphrey Lloyd provided a full remedy to the wronged contractor and in doing so developed the remedies available to a private contractor suffering from abuse of power by public officials or bodies.

In order to provide Harmon with the success it deserved, Judge Lloyd had to breathe life into the arid public works contracts regulations 1991, giving effect in Britain to the directives concerned with the award of public works contracts, and into the common law remedy of abuse of power by a public official. In doing so, he had to seize on and further develop the common law remedy of misfeasance in public office.

This remedy had been revived after the BCCI banking collapse caused, so the depositors allege, because the then-banking regulator, the Old Lady of Threadneedle Street, could and should have closed the bank down much earlier and before the deposits had been made. Instead, it had turned a blind eye to BCCI's obvious fraudulent activities for extraneous political reasons. This claim, Three Rivers DC vs Bank of England, goes to trial in 2004, but only because the House of Lords confirmed the misuse basis of the claim in a landmark procedural ruling three years ago.

Let's look briefly at the law. First, the European dimension created by the regulations. It goes without saying that the directives and the regulations are mired in verbal complexities. In summary, a public body or a utility letting a works contract with a value in excess of £3.3m must make public its intentions. It must provide full, transparent and fair tendering procedures covering the wording of the tender documents, the eligibility of tenderers, the exclusion and comparison of tenders, the selection process, the variation or withdrawal of the tender process and the award of contracts to the lowest or most economically advantageous tenderer.

There is, of course, obvious scope for difficulty in unravelling and applying the detail. The project manager in Harmon was found to have committed a number of deliberate breaches of the regulations, including a failure to use transparent selection criteria, considering variations in the successful tender without allowing Harmon the advantage of those variations, adopting a buy British policy and selecting a tender by wrongly assuming that the employer had already designated suppliers for the selected tenderer.

Judge Lloyd held that where competitive tenders were sought for projects, an agreement comes into being whereby the state contracts with every tenderer that it will conduct the procurement process fairly

The importance of the case lies in the way in which Judge Lloyd gave effect to the regulations. He first determined that the regulations applied to, and should be made to apply to, the substance and not merely the form of the detailed provisions. In other words, the court had to consider the real effect and not merely the surface application of the regulations.

Judge Lloyd went on to provide an effective financial remedy to Harmon for the breaches of the regulations. He decided that Harmon had a substantial remedy – subsequently reported at more than £7m – as a works contractor, if it could show that it would have had a chance of being awarded the contract but for the breaches of the tendering regulations. If so, it could recover its full tendering costs and the loss of the profit that it would have earned had it performed the contract. If the profit or margin could not be established, Harmon, as the dissatisfied tenderer, could instead recover damages based on its loss of the chance of making a profit on the contract. This head of recovery would be based on the twin chances of Harmon being awarded the contract and then of making a profit on that contract.

Judge Lloyd also developed contract law in a significant respect. He held that in the public sector, where competitive tenders were sought for commercial projects from the private sector, an initial contract comes into being whereby the prospective employer impliedly contracts with every tenderer that it will conduct the tendering process on a fair basis and will consider all tenders received fairly. This aspect of the decision is undoubtedly controversial but is fully articulated and grounded on firm foundations. It enables the many rucks in the Byzantine texture of the underlying eurolaw, and of the available remedies for breaches of the regulations, to be smoothed over. The need for such a smoothing over can well be seen as necessary and obvious.

Malice aforethought
Let us now turn to Harmon's alternative remedy for misuse of state power. The origins of this remedy lie in the fractious election processes of the 18th century, when the limited electorate had to vote in public. Voting officials or poll clerks would often be bribed to exclude named individuals from voting, or to terrorise them into voting for a particular candidate. The limited franchise meant that a handful of votes affected in this way could turn the election. These malpractices were widely lampooned by Hogarth and by other cartoonists of the day. Hence the remedy of misfeasance being allowed against the public poll clerk – usually confined to the award of a small sum in damages.

Nowadays, any public official, or their employer vicariously, is liable in damages where they exercise their powers as a public official in a way that is intended to injure someone – "targeted malice"– or for an improper or ulterior motive.

In this second aspect of misfeasance, the official must have acted in bad faith, knowing that their act was not lawful. The remedy is available to anyone who it could have been seen would probably be injured by the unlawful act. The damages that can be recovered include consequent financial loss but only if that loss could be seen at the time of the wrongful act as being one of its probable consequences. These are the criteria for recovery that are set out in the BCCI case.

Judge Lloyd held that the criteria were made out in the Harmon case. He gave a wide meaning to the term public official. He found that the official knew that the public procurement regulations were being disregarded and he found that it was probable that Harmon would suffer the loss of tendering costs and profit it was claiming. Judge Lloyd also found that aggravated or exemplary damages were not appropriate. These are only to be awarded in cases that have historically allowed for them or where the conduct of the public official is not only unlawful but constitutionally oppressive. Neither test was satisfied.