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PART 2: CONSULTATION ISSUES

Introduction

15. This part of the document introduces specific topics and information relating to the new remedies provisions on which the Scottish Government is inviting feedback. This feedback is important, as it will help to shape the approach to implementation. The topics include:

i) How some of the new provisions will work in practice; and

ii) The preferred choice of stakeholders where there are optional elements in the new Directive.

16. Stakeholders are reminded that implementation of Directive 2007/66/EC is mandatory. However, we welcome feedback that will help to shape the approach on specific issues where there is scope to influence transposition, as detailed below.

17. From here on, this consultation document introduces each of the discussion topics in turn, by stating the article being addressed and describing the key issues to be considered. The yellow text boxes (shaded, if printed in black and white) contain our specific requests for stakeholder feedback, and clarify mandatory provisions where appropriate.

Article 1: Scope and Applicability of Review Procedures

18. The amendments to Article 1 include these optional elements for Member States.

i) Article 1(5): Member States may require applicants to seek review with the contracting authority first. This is a new feature and would mean that, once such a review was sought, the award of the contract would be suspended until 10 or 15 days (depending on the means of communication used) after the contracting authority's reply, to preserve the applicant's opportunity to bring court proceedings if it remained dissatisfied with the outcome of the review. Were this provision to be implemented, then a further decision will be required on the appropriate means of communication (e-mail, fax, letter etc).

ii) Article 1(4): Member States may require that persons wishing to use review procedures notify the authority of the alleged infringement and their intention to seek review. This is not new, and the Scottish Regulations already impose such a requirement. However, the context and significance of this requirement may be different if a decision is taken to implement option i) above. The Scottish Government therefore seeks the views of stakeholders on whether, and if so how, such a decision should affect the retention or reformulation of the existing requirement in the Scottish Regulations to notify the authority.

Article 2: Requirements for Review Procedures

19. The new provisions in article 2 are broadly similar to the current position, including the availability of: interim remedies; setting aside unlawful decisions; awards of damages; and the option for review bodies to decide not to grant interim measures where negative consequences outweigh benefits.

20. The substantive new provision, at article 2(3), is that no contract award can be made before the court ⁶ has made a decision either on the outcome of the review itself or on interim measures, or before the end of the standstill period (see below).

Article 2a: Standstill Period

21. The provisions in the new Directive are similar to existing provisions in the Scottish Regulations on the standstill period. The main issues arising from the new Directive are:

i) The Scottish Regulations need amending to allow for longer periods (15 days) where non-electronic means are used, although the current Regulations ⁷ do already require the most rapid means of communication practicable to be used.

ii) The Directive states that the timescales (10 days electronic, 15 days for other means) are minima.

iii) The amendments also include a new requirement for contracting authorities to provide each candidate with a precise statement of the exact standstill period.

Article 2b: Derogations from the Standstill Period

22. The following are optional derogations from the standstill period:

i) Where an OJEU contract notice is not required (e.g. Part B Services).

ii) Where there is only one tenderer - no other candidates are concerned.

iii) Under Dynamic Purchasing Systems ( DPS) and framework agreements ⁸, where call-off contracts are awarded, the following rules would apply:

• Above threshold call-offs: the standstill can be waived. However, if authorities choose to waive the standstill period, then the trade-off is that ineffectiveness will apply where there has been a breach of the existing mini-competition rules (see paragraphs 25-26 below).
• Below threshold call-offs: the standstill can be waived without ineffectiveness being made available.

Article 2c: Time limits for Applying for Review

23. Article 2c imposes minimum time limits within which proceedings must be brought. These are 15 days from the day after the contracting authority's decision (with a summary of its reasons) is sent, or 10 days if it is sent by fax or electronic means.

24. Member States may establish longer limits. The Scottish Regulations currently require the review to be brought 'promptly' and in any event within 3 months unless the court considers that there is good reason for extending the period. This is similar to the time limit that applies to Judicial Review proceedings in England and Wales. The meaning of 'promptly' varies with the circumstances of the case. A minimalist approach to article 2c would be simply to amend the Regulations to make it clear that 'promptly' can never mean less than 10/15 days (according to which method of communication is used).

Article 2d: Ineffectiveness

Introduction

25. The principle of ineffectiveness has been introduced to act as both a deterrent to, and a remedy for, illegal direct awards, which are perceived by the Commission to be the most serious breach of the procurement rules. The implementation issues around ineffectiveness are more complex than those surrounding the standstill period, however, because ineffectiveness is a new concept in the procurement context and therefore requires significant consideration about how it will work in practice. Recitals 13 to 26 of the new Directive provide the rationale and the intention of ineffectiveness, and should provide the relevant context for stakeholders.

26. To summarise, under the new Directive, contracts must be considered ineffective in any of the following cases:

i) There is failure to publish a contract notice in the OJEU where this is required by the relevant Public Procurement Directive;

ii) There is failure to comply with the rules on review procedures i.e:

• The suspension of the contract awarding process required by article 1(5) when a review is sought with the contracting authority (if such a requirement is imposed - see paragraph 18 above);
• The requirement that the contract cannot be concluded before a court has made its decision on interim measures or on review - see paragraph 20 above; or
• The standstill requirement - see paragraph 21 above.

But only where:

• The infringement has deprived the tenderer of the opportunity to pursue pre-contractual remedies;
• Such an infringement is combined with a breach of the relevant Procurement Directive, where that breach has affected the chances of the tenderer obtaining the contract.

iii) For contracts based on a DPS or framework agreement, ineffectiveness will apply where:

• The contracting authority has chosen not to observe the standstill period (assuming that the derogation as outlined in paragraph 22 above is exercised); and
• There is an infringement of the rules on mini-competitions as laid down in the Procurement Directives for above threshold call-offs (below-thresholds call-offs are exempt from ineffectiveness).

Issues for consideration

27. The main consultation issues on article 2d are:

i) The choice between retrospective and prospective cancellation; and

ii) Whether the court should have the ability not to apply ineffectiveness where there are good reasons to maintain the contract.

Each of these topics is introduced separately below.

Retrospective vs Prospective Cancellation

28. Recital 21 and article 2d(2) provide that national law must determine the consequences resulting from a contract being considered ineffective. They go on to introduce two possibilities: retrospective cancellation of all contractual obligations (sometimes, as in the recital, called ex tunc); or prospective cancellation, meaning cancellation of only those obligations that have yet to be performed ( ex nunc). The option for national law is which method to choose.

29. Whilst stakeholder feedback will be essential in determining the final policy stance on these options, the Scottish Government is mindful that the existing common law recognises retrospective and prospective cancellation of contractual obligations.

30. Retrospective cancellation would seek to 'undo' what had already been done under the contract prior to the declaration of ineffectiveness. Scots common law already has effect that subsisting and apparently valid contracts may in certain circumstances be annulled by the courts - these are voidable contracts. The effect of a voidable contract being annulled by the courts is that the contract is rendered retrospectively void. Voidable contracts are distinct from void contracts, which are null from the outset, for example ultra vires contracts entered into by public authorities.

31. Prospective cancellation, by contrast, would release the parties from any obligations under the contract after it had been declared ineffective, but would not seek to 'undo' what had already been done prior to the declaration of ineffectiveness. It should be pointed out that, if prospective cancellation is the option provided for in the Scottish Regulations, this would need to be coupled with additional penalties (as discussed in paragraphs 37-41 below). Scots common law already has effect that subsisting and valid contracts can be "frustrated" by certain supervening events. The effect of frustration is that the parties are released from future performance of their obligations. But frustration does not invalidate the contract i.e. the contract is not rendered retrospectively void.

32. The effect of retrospective or prospective cancellation of contractual obligations will often be that one party is enriched at the expense of the other party. The law of unjustified enrichment at Scots common law already allows a party suffering loss in such circumstances to seek a remedy against the enriched party for recompense.

Ability for Courts Not to Apply Ineffectiveness (Article 2d(3))

33. There is an option for national law to allow the court to decide not to render a contract ineffective, if the court finds that there are good reasons for the effects of the contract to be maintained. What constitutes a good reason is addressed in the new Directive in recitals 22-25 and the amended article 2d(3). Some of the key principles can be summarised as:

i) The circumstances should be exceptional, requiring certain overriding reasons relating to a general interest to be respected;

ii) In such cases, alternative penalties should be applied instead;

iii) The court should examine all relevant aspects in making its decision;

iv) Economic interests may only be considered as overriding reasons if ineffectiveness would lead to disproportionate consequences;

v) Economic interests directly linked to the contract concerned shall not constitute overriding reasons, for example: costs of a new procurement procedure; costs of changing to a new supplier; costs of legal obligations resulting from ineffectiveness.

Ineffectiveness - Exemptions (Article 2d(4))

34. The following provides an exemption from ineffectiveness where a contracting authority considers that the publication of a contract notice in the OJEU is unnecessary, e.g. Part B services:

i) Publication of a contract notice in OJEU is not required by the relevant Procurement Directive;

ii) The contracting authority has published a voluntary ex ante transparency notice in the OJEU, expressing its intention to conclude the contract; and

iii) At least 10 days has elapsed from the publication of that notice before the contract is awarded.

35. The Scottish Government also draws stakeholders' attention to the exemption from ineffectiveness, if the related standstill derogation (article 2b(c)) is exercised ⁹, where call-off contracts have been awarded under DPS or framework agreements. This exemption only applies to the public sector, not the utilities sector. Ineffectiveness will not apply where:

i) The contracting authority has sent a contract award decision, with a summary of reasons for that decision, to the tenderers concerned; and

ii) At least 10 days (electronic)/15 days(other means) has elapsed from the date the decision is sent to tenderers;

iii) There has been compliance with the detailed rules on mini-competitions.

36. Stakeholders are reminded about the resulting trade-off between standstill and ineffectiveness for contracts awarded through framework agreements and DPS, which is first described in paragraph 22. Contracting authorities have a choice: either apply the standstill period to the call-off contract, in which case ineffectiveness will not apply; or alternatively, do not apply the standstill period, in which case the ineffectiveness rules will apply where there has been a breach of the mini-competition rules. As previously stated, this choice only applies in the public sector, not the utilities sector.

Article 2e: Infringements of this Directive and Alternative or Additional Penalties

37. Article 2e requires the remedies of fines and shortening the duration of the contract to be available in certain circumstances: sometimes instead of a declaration of ineffectiveness, and sometimes as an additional remedy (if the ineffectiveness is only to be 'prospective' - see paragraph 31 above).

38. There are two different situations in which alternative/additional penalties issues arise under the new Directive:

i) For breaches of the requirement to:

• Suspend procurement following application for review [article 1(5)];
• Suspend procurement before the court has made a decision [article 2(3)];
• Apply the standstill period [article 2a(2)]

where the mandatory ineffectiveness criteria in article 2d(1)(b) cases do not apply (see paragraph 41 below); and

ii) As an addition to prospective ineffectiveness (article 2d(2) cases). In other words, if the outcome of this consultation is that prospective but not retrospective ineffectiveness is implemented, then the court would also impose alternative penalties.

39. The new Directive (Article 2e(2)) leaves no choice about what the alternative/additional penalties must be. Article 2e(2) provides that the award of damages does not constitute an alternative/additional penalty. The only possibilities are:

i) The imposition of fines on the contracting authority; or

ii) The shortening of the duration of the contract.

40. The new Directive requires that the penalties be 'effective, proportionate and dissuasive'. One approach would be to specify these factors in the Regulations and leave the court to apply them in each case when exercising judgment about:

i) Which penalty to apply (or whether to apply both);

ii) The appropriate size of any fine and, where relevant, the length of time by which a contract should be shortened.

41. The Scottish Government also has the option under article 2e, to decide whether, in situations of a kind identified in 2e, ineffectiveness or only alternative remedies should apply, or whether the court should be free to choose between ineffectiveness and alternative penalties at its discretion. These situations may be summarised as follows:

Where there has been an infringement of either:

i) The suspension of the contract awarding process required by article 1(5) when a review is sought with the contracting authority (if such a requirement is imposed - see paragraph 18 above);

ii) The requirement that the contract cannot be concluded before the court has made its decision on interim measures or on review - see paragraph 20 above;

iii) The standstill requirement - see paragraph 21 above.

But only where these infringements are not covered by the ineffectiveness rules at article 2d(1)(b) (i.e. because the claimant cannot show that):

i) He has been deprived of the chance to pursue pre-contractual remedies;

ii) The infringement is combined with a breach of the relevant Procurement Directive ¹⁰, where that breach has affected his chances of obtaining the contract.

Article 2f: Time Limits

42. This article covers provisions for the time limits for seeking a review in Court. Paragraph 1 allows Member States to require that any application for such a review must be made within certain time limits, where ineffectiveness is sought in the circumstances covered by article 2d(1) (see paragraph 26 above). In such cases, Member States may require the application to be brought:

i) Within a certain time period (which must not be less than 30 days) from the day after the date on which either:

• The contract award notice is published, for contracts that are justified as not needing prior publication in the OJEU; or
• The authority informs the candidates of the conclusion of the contract with the reasons required by the existing procurement rules.

ii) And in any event, within a period of at least 6 months from the day after that on which the contract was awarded.

43. Article 2f(2) provides that in all other cases, including claims under 2e(1) for discretionary ineffectiveness (see paragraph 41 above), Member States are free to set any time limit, subject only to article 2c (i.e. not less than 10/15 days). The same issue was covered earlier in this document at paragraph 24, so feedback is welcome as indicated by the text box there.

Other Articles

44. The following articles are listed for completeness. They may be of less interest to stakeholders, so they have not been discussed in this document. These matters are largely irrelevant to the implementation exercise, so feedback on them is not sought:

Amendments to the Classic Remedies Directive 89/665/EEC:

Article 3: Corrective Mechanism

Article 3a: Content of a notice for voluntary ex ante transparency

Article 3b: Committeee Procedure

Article 4: Implementation

Article 4a: Review

Amendments to the Utilities Remedies Directive 92/13/EEC:

Article 3: Corrective Mechanism

Article 3a: Content of a notice for voluntary ex ante transparency

Article 3b: Committee Procedure

Article 8: Corrective Mechanism

Article 12: Implementation

Article 12a: Review

Recitals 29 and 30 also abolish the voluntary attestation and conciliation system due to lack of usage.

Additional question: review procedures

45. Directives 89/665/EEC and 92/13/EEC require Member States to ensure that decisions taken by contracting authorities may be reviewed effectively. In Scotland, suppliers may access both formal and informal review procedures:

i) The Scottish Regulations allow suppliers to bring proceedings in the Sheriff

Court or the Court of Session against contracting authorities which have

infringed their obligations to comply with the Regulations, or any other enforceable Community obligation which may be relevant to awarding a contract. Very few cases are brought to court.

ii) In addition, the Scottish Government has introduced a Single Point of Enquiry ( www.scotland.gov.uk/Topics/Government/Procurement/Selling/supplier-enquiries) where suppliers can seek advice on public procurement legislation and raise issues and concerns about public procurement practices in Scotland. In its current format, the Single Point of Enquiry is not a point of appeal on procurement decisions and its recommendations do not have legal effect. The Single Point of Enquiry has handled approximately 12 cases since its introduction in January 2008.

46. Consultees are invited to note the recent Court of Session decision in Lightways (Contractors) Ltd v North Ayrshire Council¹¹. That case involved interim proceedings for the suspension of a contract award decision. Despite the pursuer satisfying the court that they had an arguable case on three out of four grounds of challenge, the court held that the balance of convenience was not with the pursuer and as such no order for suspension of the contract award decision was made.

Impact Assessment

47. An initial Regulatory Impact Assessments ( RIA) is attached at Annex A. Our initial view is that the new Directive will not have a significant impact on costs to businesses, the third sector or to the public sector. However, we would welcome comments on the initial RIA attached to this document on which comments are welcome.

Conclusion

48. Directive 2007/66/EC covers a number of amendments to the existing Remedies Directives. These provisions are intended to improve the effectiveness of review procedures concerning the award of public contracts, in particular to harmonise the standstill arrangements following contract award and to introduce ineffectiveness as a remedy for illegal direct awards.

49. This consultation document aims to provide a breakdown of the main implications and the optional elements of the new Directive, and seeks stakeholder feedback on those options.

50. The Scottish Government acknowledges that many of the issues described in this document are not straightforward. However, we urge stakeholders to give careful consideration to these matters and provide feedback where requested, as that will ensure a more effective and relevant transposition.

51. We would like to thank you for your interest and look forward to receiving your feedback.

Scottish Procurement Directorate
Procurement Policy and Development
August 2008

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