Public Procurement: falling foul of the Public Sector Directive

United Kingdom

Public authorities (local councils, government departments, NHS Trusts etc.) and some utilities are required to follow the EU public procurement regime when letting certain types of contract. The relevant rules are in the 2006 Public Contracts and Utilities Contracts Regulations.

The public and utility regimes differ slightly, but both have as key tenets that purchasing authorities treat economic operators (tenderers) “equally and in a non-discriminatory way”, and “act in a transparent way”. Further, where the purchaser defines technical specifications in terms of performance or functional requirements, those requirements must be “sufficiently precise to allow an economic operator to determine the subject of the contract”.

A recent Court of Appeal decision gives some insight into the interpretation of these principles.

The case concerned provisions in a legal-services contract which permitted a public authority unilaterally to vary the terms of the contract after it had been entered into. The power to vary was wide-ranging, i.e. the public authority could change most of the terms of the contract (including payment provisions) simply by giving notice. The objection made to the contract was that it was let on terms X, with the public authority being empowered to change the terms to Y. It was argued that this power infringed the EU procurement rules because it was not “transparent”, i.e. it was not clear on what basis and in what manner the power could or would be exercised.

The objection to the variation provision was upheld by the Court of Appeal. The Court said that although the power to vary the terms of the contract had been disclosed to tenderers, the fact that it was not clear how the power might be exercised meant that the contract fell foul of the requirement of “transparency” under the EU rules.

This poses an interesting issue for the public procurement of building and engineering contracts, which invariably permit the public authority or utility to vary the scope of the contractor’s work, with a corresponding adjustment to the contract price. Will a contract fall foul of the EU procurement rules if it fails to describe in adequate detail the circumstances in which the work may be varied? The case does not address the point squarely, although the court did suggest that it is only where the power to vary the content of a contract is wide-ranging, with little indication being given as to how the variation power may be exercised, that the “transparency” principle will be offended. Indeed, if a purported “variation” amounts to a material change to the original terms of the contract, the result may be a requirement for a new procurement.

The EU procurement rules represent an unavoidable administrative minefield for public bodies and utilities alike. Failure to comply with the rules potentially entitles a disgruntled tenderer to sue for the profit it would (or could) have made had the rules been followed, and the contract awarded to the aggrieved contractor. A contractor may also potentially recover its wasted costs of tendering, if it can be proved that, had the correct tender procedure been followed, the contract in question would have been awarded to the contractor.

Reference: R (Law Society) v Legal Services Commission [2007] EWCA Civ 1264. Click here for a link to the judgment.

Further information about this article, case and its implications is available.