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Damage limitation

26 June 2017 by Robert Bell

Competition law: Damage limitation - read more

UK Supreme Court imposes shock decision regarding EU public procurement rules

In a recent shock decision, the UK Supreme Court handed down a ruling that will have a pronounced effect on future public procurement claims and limit claimants’ rights to damages.

In Nuclear Decommissioning Authority v Energy Solutions EU Ltd (now called ATK Energy EU Ltd) (2017) the Supreme Court decided that not every breach of the EU public procurement rules would entitle a claimant to damages. This is in spite of an express provision in the relevant UK regulations implementing the applicable EU Directives that breaches of the public procurement rules would amount to a breach of statutory duty.

Claimants bringing a case against a contracting authority have, for many years, proceeded on the basis that if the contracting authority breaches the public procurement rules, and the breach is proven and the claimant has suffered loss or damage as a result, then there should be a right to damages. But, in this landmark judgment, the Supreme Court decided damages will only be available if the breach is ‘sufficiently serious’.

Major public importance

The court’s decision ended a long-running litigation between the Nuclear Decommissioning Authority and Energy Solutions EU Ltd, now called ATK Energy. Although the parties had already agreed terms settling the action, they asked the Supreme Court to hear the appeal and rule on whether damages were available for breach of the public procurement rules and, if so, in what circumstances. This was an issue of major public importance.

The normal applicable principles relating to the availability of damages for a breach of statutory duty under English law are that the claimant only has to prove there is a statutory duty under law, that the claimant is one of those persons belonging to the class of persons that the law was designed to protect, and, by virtue of the breach, the claimant suffered loss and damage.

The UK regulations implementing the EU Public Procurement Directives expressly recognised that a breach of the Directives’ provisions was a breach of statutory duty under English law. The courts have always interpreted this duty in the UK implementing regulations as meaning a claimant had a right to damages according to the principles of domestic law.

The Supreme Court decision has changed all that. The right to damages has now been limited so that claimants’ rights to damages are confined to cases where the breach of the rules is ‘sufficiently serious’.

The court agreed with the Court of Appeal’s earlier judgment, that damages for breaches of the public procurement rules (as set out in the EU Remedies Directive) were only available if the three ‘Francovich’ principles applicable to violations of EU law were satisfied.

The principle of state liability

In Francovich and Bonifaci v Republic of Italy (1991), the European Court addressed fully for the first time the question of state liability for breach of Community law and what duties a member state had to compensate individual citizens for that breach. This case is relevant to the public procurement rules because these are EU law rights conferred on individuals, including companies, and are imposed on contracting authorities as emanations of the state.

The European Court ruled that it is a principle of Community law, that member states are obliged to make good the loss and damage caused to individuals by breaches of Community law for which they can be held responsible. The conditions under which that liability gives rise to a right to compensation depends on the nature of the breach of Community law that gave rise to the loss and damage.

In Francovich, the court looked at the failure of Italy to transpose into national law a Directive, the implementation date of which had long since passed. The court indicated the conditions which had to be satisfied to ground liability on the part of the member state. Three prerequisites apply:

  • The result prescribed by the Directive should entail the granting of rights to individuals
  • The contents of those rights must be identified on the basis of the provisions of that Directive
  • A causal link must exist between the breach of the state’s obligation and the loss and damage suffered by the injured parties.

Member state obligations

It is up to each member state as part of its national law to ensure there are rules guaranteeing the effective protection of Community rights. Those national rules must not be less favourable than those relating to similar domestic claims, and must not be so framed as to make it excessively difficult to obtain compensation.

The Francovich principles were further developed in the 1996 Brasserie/Factortame judgment (Brasserie du Pêcheur SA v Federal Republic of Germany and R (Factortame Ltd) v Secretary of State for Transport).

The court has recognised a general principle common to the legal systems of the member states that unlawful state conduct gives rise to an obligation to make good the damage caused. On the basis of this principle, a member state’s breach of a directly effective Treaty provision (including its failure to transpose correctly a Directive into national law) gives rise to liability where:

  • The rule of law infringed must have been intended to confer rights on individuals
  • A manifest and serious breach is present
  • There is a direct causal link between the breach of the obligation resting on the state and the damage sustained by the injured parties.

Therefore, as a matter of EU law, compensation or damages for breaches of EU law were only available if the breach was a manifest and serious breach of Community law by the state, or now more frequently referred to as a ‘sufficiently serious breach’.

Overturned for UK

However, the Supreme Court judgment overturned the Court of Appeal’s decision regarding the application of the Francovich conditions to breaches of UK procurement regulations (namely the Public Contracts Regulations 2006). Instead, the Supreme Court holds that damages are still subject to the Francovich conditions and only available when the breach is ‘sufficiently serious’.

The Supreme Court added that the Court of Appeal was wrong in assuming a claim for damages under the UK Regulations could be viewed as purely a private law claim for a breach of a domestically-based statutory duty. If that was so, the EU conditions under Francovich would not apply. However, as the UK Regulations imposed Community law duties, the Francovich principles apply and there was a requirement to show that any breach was sufficiently serious to obtain damages.

It was always open for the UK Parliament to go further than EU law and not restrict damages for breaches of the UK Regulations to those cases which met the Francovich conditions. However, the Supreme Court found that Parliament had not done this and that it was its clear intention not to ‘gold plate’ the UK Regulations. This was consistent with the wording of the UK Regulations (specifically Regulation 47I and 47J) in which the word ‘may’ [award] was used in the context of the court’s power to award damages.

In this case the claimant did not issue proceedings until after the award of the contract to the successful bidder. Therefore they did not invoke the automatic suspension of the contract award process. They just waited to issue proceedings and claim damages after the award of the contract.

The question therefore arose whether the claimants had a duty to mitigate their loss by bringing proceedings at the first available opportunity. However, the court confirmed that a claimant did not have a duty to launch proceedings at the first available opportunity and to invoke the automatic suspension. It could legitimately wait until after the contract had been awarded to launch proceedings and claim damages, as long as it was within the required limitation period under the UK Regulations.

Implications for litigants

The Supreme Court ruling has implications for aggrieved bidders and contracting authorities. Although the court’s decision related specifically to the Public Procurement Directive (2004/18/EC) and the relevant UK implementing regulations, it is equally applicable to claims under the 2014 Directives and the Public Contract Regulations 2015.

It will also apply equally to the 2014 Utilities Directive and their subsequent UK implementing regulations. This is because the utilities covered by the rules will still be looked at as emanations of the state and enjoy ‘special and exclusive rights’ as licensed undertakers in respect of their respective field of activities. In addition, the rules relating to remedies have not changed in any material way since the 2009 Remedies Directive.

This is good news for contracting authorities which will see their liability for damages for all breaches of procurement law limited to those circumstance where a challenging bidder can show that the contracting authority’s breach was ‘sufficiently serious’. Therefore those aggrieved by a tender process may well be better served taking action at the first available opportunity to invoke the automatic suspension of contract award, rather than delaying and gambling that, after the award of the contested contract, a court would find the relevant breach sufficiently serious.

The test for whether a breach is sufficiently serious is fairly high. Based on EU jurisprudence the decisive test appears to be whether the contracting authority ‘manifestly and gravely disregarded the limits on its discretion’. Factors which are relevant to assessing whether the test is met include:

  • How clear it was that the authority’s conduct was a breach of the rules
  • How much flexibility or discretion a contracting authority had under the relevant provision of the law
  • Whether the breach and damage caused was intentional or negligent
  • Whether the court considers the error of law to be excusable or not.

There is going to be some considerable uncertainty about the way the courts are going to interpret this concept and this will now, no doubt, be the subject of future procurement litigation.

Robert Bell is a Partner at Bryan Cave LLP

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