The Merseyside Waste procurement injunction - lessons for public bodies

Waste landfill iStock 000005619965XSmall 146 x 219John Houlden and Patrick Parkin look at the lessons from the High Court's recent decision to grant an energy company an injunction over the award of a £1bn waste contract.

As reported in Local Government Lawyer on 8 October 2013, in the judgment in Covanta Energy Limited v Merseyside Waste Disposal Authority [2013] EWHC 2922 (TCC), the High Court has taken the potentially significant step of granting an unsuccessful bidder an injunction, preventing the award of a major waste contract to a SITA consortium. You can read the initial report on the judgment by clicking here.

This article considers why this judgment may be significant to local government practitioners.

The injunction suspends the procurement process, run under the competitive dialogue procedure, until such time as Covanta, the unsuccessful tenderer, has its claim finally determined. The trial is expected to take place within the next seven to nine months.

Covanta alleges that there were "manifest errors" in the evaluation carried out by Merseyside, notably that two of five key elements scored 0%, despite the services being the subject of dialogue since late 2007. It also makes a general assertion that if, after six years and substantial engagement during a competitive dialogue process two items were scored at zero, then there was probably something very wrong with the process. This is akin to arguing that "despite discussing the requirement with you we did so badly that there must have been something wrong with the process".

Why might this be a significant judgment for local government lawyers?

For some time the Courts have preferred not to suspend procurement processes when unsuccessful bidders bring a procurement challenge where it can be shown that damages are an adequate remedy. Instead, they have favoured an approach that allows the procurement process to continue, awarding damages to a challenger that can show that it has suffered a loss due to an authority's breach of procurement law. This approach has been taken even where the quantification of damages has been speculative or based on a discount.

But the Covanta case is a rarity. It is the first case for some time that has granted an injunction in these circumstances and breaks the trend of the Courts being seen to defend procuring authorities or at least to allow them to get on with their business. Although decided under the former (2006) rules, the decision on awarding an injunction was fundamentally the same as would have to be taken under the current rules and this case consequently sends a real message to authorities about what they might expect from procurement which are now coming to an end, regardless of when they started.

The test for granting an injunction

When considering whether an injunction is to be applied, the Court must consider:

  • If there is a real issue to be tried. This is a very low threshold. Any serious case is likely to satisfy it. However, claims brought more than thirty days after a cause of action is known to a bidder are barred by time limitation. The judge went as far as noting that whether a bidder is able to claim will depend critically upon what the authority has told the bidder during the process and when;
  • if damages are an adequate remedy (see below); and
  • whether the balance of convenience lays in favour of granting the injunction, or refusing the injunction.

This is known as the American Cynamid test.

The Court's application of the American Cynamid test here is particularly interesting and, if applied in a similar manner in future cases, has the potential to pave the way for more injunctions, delayed procurement processes and delayed delivery of services to the public. In overview the decision was:

  • Damages was not an adequate remedy for either side. However, there were a series of reasons why damages were inadequate for the bidder whereas the only reason why damages were inadequate for the authority was the likely environmental impact of further delay.
  • The balance of convenience lay in preventing the contract being entered until after the court process was complete - a period which could be several years and would involve significant cost and evidence.

Why did the High Court find that damages were not adequate?

This is the most interesting and potentially far-reaching aspect of the judgment. The Court held that damages would be inadequate for the bidder for the following reasons:

It would be "difficult and imprecise" to quantify the bidder's loss where there are numerous alleged errors in the evaluation process.

Does this mean that whenever a procurement challenge comprises numerous allegations that damages are inadequate? This appears to amount to an admission by the courts that they are unable to conduct an adequate or meaningful assessment of losses from failing to get a contract whenever a large range of complaints are raised.

The quantification of Covanta's loss of chance would be difficult because the actual rate of return would "depend on so many variables".

Surely, in the majority of major procurements, the rate of return has many variables. Does this mean that the Courts will no longer seek to quantify the loss of chance for more complex contracts? Traditionally the Courts have been prepared to make decisions - often in very broad terms – on chances of successfully tendering and consequently loss. The view taken by the court this time consequently appears rather despairing. It is worth noting that it also assumes that an assessment of the lost chance of winning would be the correct form of damages in such a case, which has been considered arguable in the past.

When considering Covanta's claim that the competitive dialogue procedure itself was not properly followed, the Court held that the quantification of damages would be "virtually impossible" because it would need to "look at every relevant exchange" between the parties to see if Covanta was misled. Then, an analysis would need to be carried out to ascertain whether these errors were the reason that Covanta lost out to SITA. This would involve assessing how the errors affected Covanta's bid, as well as SITA's, and how either party may have acted differently had the process been adhered to in a compliant manner.

If such an assessment is "virtually impossible", how does a Court approach matters of causation in procurement cases? Surely the assessment of who would have won, but for the specified breaches, is necessary to determine who wins the case? The judge did appear to accept in his reasoning that this exercise will in fact be required anyway in this case.

Why are the findings relating to the balance of convenience interesting?

Once the Court established that damages were not an adequate remedy, it turned to whether the balance of convenience lay in favour of granting the injunction, or refusing the injunction and allowing the procurement process to proceed. It was held that an injunction should be granted because:

It is in the public interest that "authorities…comply with procurement legislation".

This will be the case in any procurement matter.

The waste procurement was "a major contract involving a large sum of money".

This suggests that injunctions may be more likely where large scale, complex procurements are concerned.

If Covanta was successful at trial and no injunction had been obtained, the quantum of damages could be in the region of £160m (being Covanta's claimed loss of profit). Merseyside does not have the money to meet this liability, which would then be met by the taxpayer.

Does this mean that where challenges are brought against smaller authorities or in any higher value procurement (where any authority, large or small, will struggle to meet the liability) that a Court will now lean towards granting an injunction?

So what next?

This case may be distinguished on its particular facts, perhaps on its value (being approximately £1 billion), the long duration of the procurement process (being about 6 years) or the term of the proposed contract (being 30-35 years). Local government lawyers, we suspect, will certainly be hoping that it is distinguished.

However, if it is followed by the Courts, it could mark a turning point in procurement law. Unsuccessful bidders will be provided with a greater incentive to bring procurement challenges, believing their prospects of overturning an award decision are greater, rather than making do with damages.

It is also often the case that the success or failure of an initial injunction will determine whether both sides are prepared to pursue expensive and time consuming litigation to a conclusion. If no injunction is granted and the contract is signed, dissatisfied bidders often prefer to settle their claims so all parties can move on. Where an injunction is granted however, the authority is faced with the choice between litigating for an extended period using public funds or abandoning the procurement and starting again – often more cheaply and more quickly.

If more injunctions (technically automatic stays on the right to enter to contract) are allowed, there are a number of implications for local government and public authorities generally. If project timetables are significantly delayed by the grant of an injunction, the delivery of public services may be delayed. Limited resources will be stretched. Costs of defending procurement challenges, which may increase in number, will rise. Interim service delivery arrangements will need to be considered.

Is the incumbent contractor able to, or prepared to continue providing the services beyond the initial expiry date until such time as the procurement challenge is resolved? Is in-housing of the service an option? How will this judgment sit against the approach of the European Commission and Cabinet Office, who are seeking to facilitate faster, more efficient public procurement?

All eyes are on the courts' next move.

John Houlden and Patrick Parkin are part of law firm Burges Salmon LLP's procurement law team.