Money matters: Losing bidders may now be tempted to claim compensation if tender processes are not conducted fairly. But proving it can be tricky

Submitting a tender can be incredibly time consuming and expensive, particularly with the complex procurement structures that exist at the moment. Traditionally, contractors and consultants who have lost money in unsuccessful tenders have licked their wounds and simply got on with it, preferring to allocate resources to chasing new business rather than brooding on the old. But as the recession deepens and the issue of liquidity gnaws, contractors and consultants may be more inclined to seek compensation for their tendering costs and loss of future profit.

But are these costs recoverable? Well, as would be expected, there are differences in dealing with the private and public sector.

In the private sector, the tendering process is not covered by public procurement regulations and courts tend to take the view that unsuccessful bidders should bear the consequences of the risk they consciously took. Except in exceptional circumstances – usually in involving negligent misrepresentation or fraud – the courts are reluctant to regulate pre-contract negotiations or soften the blow of disproportionately harsh bargains.

That said, there have been exceptions. For disgruntled bidders looking to recover damages, the key is the tender process – particularly the risk they have accepted. In the absence of a clear agreement that the work undertaken in the tender process is “subject to contract”, damages may be recoverable, depending upon whether:

  • The work is of a kind usually provided free during a tender process
  • The contractor had accepted that such work would be unpaid
  • The employer has gained a material benefit
  • The failure to award a contract involves any fault on the part of the employer.

In addition, if there is unfairness in the tender process itself, courts have indicated that they may offer some relief for the failed tenderer. Such unfairness could occur if tenders have not been assessed according to the stated criteria or in a uniform manner.

An example is the case of J&A Developments vs Edina Manufacturing (2006) in Northern Ireland. Edina invited J&A and five other contractors to bid for works. The tender document stated that the process would be carried out in accordance with the 1996 code of procedure for single-stage selective tendering. J&A submitted the lowest tender, but was not awarded the contract because Edina subsequently conducted a “Dutch auction” – inviting participants to reduce their tenders through negotiation. As a result, the contract was awarded to the second lowest tenderer, in breach of the code.

Public authorities must award contracts based on objective criteria. If an authority breaches this duty, an unsuccessful tenderer may have a case against it

The court decided that the wording of the tender documents gave rise to a contractual obligation limiting the manner in which Edina could conduct the tender process. Consequently, J&A was entitled to recover the costs of preparing its tender. Furthermore, because J&A would have almost certainly been awarded the contract if Edina had followed the code, J&A was entitled to recover an element of its anticipated loss of profit.

There is more protection for tenderers in the public sector. Procurement of public works in England and Wales is regulated by the Public Contracts Regulations 2006. Under the rules, contracting authorities must award contracts based on objective criteria, complying with the principles of transparency, equal treatment and non-discrimination. If an authority breaches these duties to the detriment of an unsuccessful tenderer, then the tenderer may have a case against it. Damages are awarded based on the costs of bidding for a contract that a firm would have won if the rules had been followed, and the profit it would have made.

Disgruntled tenderers need to launch proceedings within three months of the date when the grounds for bringing the proceedings first arose – unless the court can be persuaded that there is good reason for extending this.

With the market how it is, this type of claim may well become more common. Consequently, tender processes may become subject to greater scrutiny. You have been warned …