Playing on a level field

Tendering in the construction industry is currently under the spotlight by the Office of Fair Trading (following the conviction of nine roofing contractors in the West Midlands), and the courts following recent cases concerning the fairness of the tendering process.

In the Office of Fair Trading versus Briggs Cladding and Roofing and Others, contractors were found to have agreed to fix the prices of repair, maintenance and improvement services for flat roofing through collusive tendering. They were fined a total of £330 000 for being in breach of the Competition Act 1998 (the Act).

The Act prohibits agreements, practices and conduct that have a damaging effect on competition. Those found guilty can face fines of up to 10% of the company turnover for each year of infringement up to a maximum of three years. Under the Act, the Office of Fair Trading has considerable powers enabling it to investigate and gather evidence. These include obtaining warrants to enter and search company premises and powers to enter premises unannounced without a warrant to seize relevant documents.

In the case mentioned above, the Office of Fair Trading found that the contractors had colluded to eliminate competition amongst themselves in a number of ways, including:

• Cover bidding – a contractor submitted a slightly higher price, not intended to win the bid but designed to give the impression of competition and ensure that another secretly nominated contractor wins the job.
• Bid suppression – the cartel also used bid suppression by which contractors agreed amongst themselves either to withdraw bids or not to bid at all.
• Bid rotation – pre-selected contractors submitted the lowest bid on a rotational basis.

Briggs was the whistle blower. The Office of Fair Trading exercised its ability to offer leniency to companies that come forward with information about a cartel they are involved in. Briggs was offered 100% immunity from financial penalty as they were the first member of the cartel to come forward with relevant information. Howard Evans (Roofing) Ltd was granted 50% leniency, as it provided information before the Office of Fair Trading’s written notice of its proposal to make an anticompetitive decision.

Given the advantages available to whistle blowers, it is likely that the construction industry will come under further close scrutiny. This should however be welcomed, as anticompetitive practices impact not only on the customer but also the vast majority of contractors within the industry who are unable to compete against cartels.

Unfair tendering

Research has indicated that consultants spent approximately 20% of their fee turnover on winning work and contractors approximately 3%. Historically, there has been little that could be done by unsuccessful tenderers if their tender was unfairly rejected. The problem lay in the fact that the courts traditionally refused to:

• Recognise the sometimes considerable sums expended in tendering.
• Accept that the tender document had any real legal status.

The softening of the position first came in 1970 with the implementation into the UK of the EEC Public Procurement Legislation and Procedure. This was designed to achieve a harmonisation and transparency of procurements throughout the EEC by ensuring an opportunity for all to tender for public work through proper advertising, with no room for bias.

As far as collusive cartels are concerned, it is likely that the construction industry will come under increasing close scrutiny by the Office of Fair Trading

The law as it currently stands is that unsuccessful tenderers can sue for loss associated with preparing for unsuccessful tenders, provided that certain criteria are met and they can demonstrate that in essence the tender process was unfair

In 1990 in the case of Blackpool and Fyld Aeroclub Ltd versus Blackpool Borough Council, the Court of Appeal recognised, perhaps for the first time, that some tenderers spent considerable time and money in preparing tenders and that the process is weighted in favour of the potential employer. The court accepted that an invitation to tender can give rise to binding contractual obligations if it can conclude with confidence that both parties intended to create legal relations based on:

• the express words of the tender;
• the circumstances surrounding the issue of the invitation to tender;
• both of the above.

The law developed further in 1999 with the case of Harmon CFM Facades (UK) Ltd versus The Corporate Officer of the House of Commons. In this much publicised case concerning fenestration works to Portcullis House in London, the judge accepted that there was a duty to consider tenders by potential employers who were also under a duty to act fairly and treat tenderers equally.

In summary for a party to be able to bring an action for a failed tender you will need to demonstrate clearly that the parties intended to create a legal relation. If so, invitations to tender do have contractual force and failures to comply with the procedures contained in them is a breach of contract.

The court will imply a term into the contract that the process must be in good faith, fair and each tenderer treated equally. The fairness of the process will be considered on a case-by-case basis

At long last the law is moving in the right direction to ensure that the tender process is competitive and fair.

• Martin Salt is a solicitor in the Clarks construction sector team. E-mail: msalt@clarkslegal.com or visit www.clarkslegal.com