Procurement Alert: The Rail Franchise Litigation – exercising discretion lawfully

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Procurement Alert: The Rail Franchise Litigation – exercising discretion lawfully

Published 19 June 2020

On 17 June 2020, judgment was given in the 2019 Rail Franchising Litigation which involved four claims against the Secretary of State for Transport (the “Defendant”) concerning the procurement processes undertaken to let three separate rail franchises.

The procurement processes themselves were not subject to either the Public Contracts Regulations 2015 or Utilities Contracts Regulations 2016, but were subject to key EU procurement law principles and the judgment is extremely useful to both procurement professionals and bidders in respect of the use of discretion to exclude bids that are non-compliant. This briefing summarises the key learnings.

Background

As part of the procurement process the Defendant expected bidders to agree to take on pension risks. Pension liabilities were set out in the draft Franchise Agreement that accompanied the Invitation to Tender (“ITT”). The Claimants considered that what the Defendant was proposing was unacceptable.

The terms of the ITT expressly prohibited qualifications or the proposing of alterations to the Franchise Agreement and specifically in relation to the allocation of pension risks. The ITT further said that any bid marking up the Franchise Agreement, beyond what the Defendant permitted, would be non-compliant. The Defendant stated elsewhere in the ITT that non-compliant bids could be excluded.

Despite the terms in the ITT, having made a commercial decision, the Claimants marked up the Franchise Agreement. They rejected the allocation of the pensions risk and proposed contractual amendments, which sought to transfer risk from the franchisee to the Defendant. The Claimants were subsequently excluded from the process for submitting a non-compliant bid.

The discretion to exclude

The Claimants argued that the provisions in the ITT around non-compliance were “exceedingly broad” in covering any failure to follow an instruction in the ITT. Further, by allowing the Defendant a discretion as to how it responded to non-compliance, for example by taking an action other than exclusion, gave the Defendant an “unlimited” discretion. The Claimants argued that these provisions went against the principle of transparency as it left bidders in a “state of uncertainty”.

In respect of whether a mark-up of the Franchise Agreement was non-compliant with the terms of the ITT, the judge applied the standard of a “reasonably well informed and normally diligent” tenderer (“RWINDT”). This is an objective test. The ITT said that the Franchise Agreement could not be marked up and the position on risk was set out. As a consequence a RWINDT would have understood the consequences of a mark-up on this basis.

As there was non-compliance, the Defendant had to decide what to do in respect of the non-compliance. Again, the judge considered what a RWINDT’s understanding of the provisions would be. A RWINDT should know a contracting authority would need to exercise its discretion rationality and proportionally and not on an unlimited or arbitrary basis. On that basis, the ITT was not required to identify the specific circumstances that might lead to disqualification. Only where no discretion would be exercised would the ITT need to be explicit. A RWINDT should be able to predict what areas of non-compliance would lead to exclusion. In this case, with the terms of the ITT stating that the contract could not be marked up, a RWINDT could predict that non-compliance would likely lead to exclusion.

One interesting point from the case was that the Defendant had a scale where it rated areas of non-compliance from 1-5. The Claimants argued that this was undisclosed criteria, whereas the Defendant argued this was no more than an administrative tool. The Defendant argued that the tool was to flag areas of non-compliance and that the final decision would be made away from the tool. In this case the tool was not undisclosed criteria, the judge citing case law from the CJEU that a contracting authority must be able to have some leeway in how it carries out evaluation provided that it does not change the award criteria that it has established.

What if the Claimants had not been excluded?

The Claimants hoped that they would not be excluded despite their actions. They had hoped that others would do the same and as a consequence the Defendant would change its position. In reality the other bidders had complied with the ITT and accepted the risk. This meant that had the Defendant allowed the Claimant to proceed, it would put itself at procurement risk. Treating the Claimant’s bid as compliant would have led to unequal treatment amongst the bidders in the competition.

Practical tips for contracting authorities

  • Be aware of what is in your tender documents and in particular any “boiler plate” wording around discretionary exclusion. Do the documents give you the discretion to exclude for non-compliance or has it been drafted as an absolute prohibition?
  • When drafting your tender documents, are there any areas where there should be an absolute prohibition and can that be justified? If you are not using a negotiated procedure or have not done sufficient market testing, the prohibition may result in good tenderers being disqualified.
  • If you do have a discretion to exclude and use it, you must do so taking into account the key procurement principles of transparency, equal treatment, non-discrimination and proportionality and you must communicate to the excluded tenderer why you have made that decision.

Practical tip for bidders

  • If you have concerns or queries about a potential area for non-compliance or a way in which your bid may be excluded, use the clarification process to raise queries with the contracting authority. In this case, the Claimants did not raise a formal clarification about the consequences of pensions non-compliance. If they had, they may not have taken the gamble they did.

Authors

Hannah Chapelhow

Hannah Chapelhow

Newcastle

+44 (0)191 404 4121

Tim Dennis

Tim Dennis

Newcastle

+44 (0)191 404 4003

Victoria Fletcher

Victoria Fletcher

London - Walbrook

+44 (0)20 7894 6658

Mary Mundy

Mary Mundy

Leeds

+44 (0)113 251 4727

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