Helen Bolton and Stuart Thompson New rules have paved the way for more challenges to public contract awards. So how do you protect yourself if you’re the preferred bidder?

On 22 February 2010, Mr Justice Arnold granted Morrison Facilities Services an interim injunction preventing Norwich council from awarding a contract to Connaught Partnerships. This case serves as a reminder that unsuccessful bidders continue to challenge procurement processes and that when the challenge is successful, the courts are willing to grant an interim injunction.

The number of challenges looks set to increase as the Public Contracts (Amendment) Regulations 2009 allow an unsuccessful bidder to force the authority to suspend the procurement process or ask the courts to declare the contract ineffective. How can contractors manage this risk?

Before contract award

Before the contract is awarded, the 2009 regulations permit an unsuccessful bidder to notify the authority it intends to challenge the process. The regulations state that once the authority receives notice of a claim, it should not award the contract. This may cause uncertainty for the successful bidder, as it will be difficult to plan for a project with an indefinite start date, so it is important for the contractor that the authority deals with the claim as quickly as possible.

One way of ensuring this is for the two parties to enter into a written undertaking as soon as the contractor is told it is the preferred bidder. This could include provisions setting out whether the authority is obliged to contest the notice and how it should conduct the proceedings. For example, will the contractor want the authority to disclose to the other side confidential information relating to its bid? Probably not.

The undertaking could also address whether, if the suspension continues for a certain period of time, the contractor should be entitled to revisit its original price and programme. If the authority elects to start a new procurement process, the undertaking could state whether it is obliged to pay the winner’s bid costs, although the authority is likely to resist this.

will the contractor want the authority to disclose confidential information relating to its bid? Probably not

After the award

A contract can be declared ineffective once it has been entered into. If it is declared ineffective, the contractor can use the regulations to recover damages from the authority. However, rather than fight over whether certain losses are too remote, it would be advisable to agree at the outset what losses, costs and expenses the contractor is entitled to recover.

A separate collateral agreement setting out these terms should be entered into when the contract is drawn up, because if the contract is declared ineffective, the authority will probably not be bound by any terms dealing with ineffectiveness.

When negotiating the terms of the collateral agreement, the contractor might consider the following:

  • It should ensure it will be fully compensated. For example, it could ask for all its bid costs, all costs arising out of or in connection with the works, finance costs, demobilisation costs, subcontractor breakage costs, employment costs and all other similar costs and expenses.
  • Will the contractor seek to recover loss of profit?
  • The OGC guidance suggests the collateral agreement should state when the compensation will be paid. The contractor will probably want it to be paid shortly after it has been ruled that the contract is ineffective. It may take some time for it to gather the information to determine its losses so it could submit an interim account.
  • The collateral agreement should include its own dispute resolution procedure, probably adjudication.
  • The agreement could cover what happens to intellectual property rights, confidentiality and indemnities, in relation to future claims.

Authorities may issue draft collateral agreements as part of the bidding process, which are likely to be weighted in their favour. The challenge for the contractor will be to negotiate favourable compensation provisions amid competitive tension.

There are uncertain times ahead for contractors as unsuccessful bidders are likely to start using the new rules to disrupt the procurement process. Contractors should be looking to protect themselves and should consider the use of undertakings and collateral agreements to achieve this.