The Supreme Court has clarified the circumstances in which damages may be awarded to an unsuccessful bidder in a flawed public procurement process, ruling that a damages award should only be made where the breach of the procurement rules is "sufficiently serious".

It has also ruled that a damages award cannot be refused on the ground that the claim was not lodged before the contract was entered into.

At the end of March the Government announced it had settled claims brought by Energy Solutions (and, latterly, Bechtel) in relation to the award by the Nuclear Decommissioning Agency (NDA) of a contract for the decommissioning of 12 Magnox power stations (see our alert on this here). The parties to the settlement nonetheless wanted the Supreme Court to proceed with giving judgment on preliminary issues that had been appealed to the Supreme Court (in a hearing held at the beginning of March) regarding the circumstances in which damages may be recoverable for a breach of the 2006 Public Contracts Regulations (the 2006 Regulations).

The Supreme Court ruling

In its judgment on those issues, given earlier this week, the Supreme Court rejected Energy Solutions' arguments that, both in relation to the EU Public Procurement Directive 2004 (the Directive) and the 2006 Regulations (which implemented the Directive in domestic law), damages may be awarded for any breach, irrespective of how serious, of a contracting authority's obligations under those rules. It agreed with the Court of Appeal that liability in damages for breaches of the Directive only arises where three minimum "Francovich" conditions [1] are met, the second of these being that the breach must be "sufficiently serious". However the Supreme Court held (contrary to the decision of the Court of Appeal) that the 2006 Regulations did not introduce wider liability than the minimum set for the EU remedies regime and, therefore, that damages for breach of the 2006 Regulations should only be awarded where that breach was "sufficiently serious".

The Supreme Court went on to reject the suggestion that damages may be refused if the claim is brought after the contract has been awarded. It said that an unsuccessful tenderer is not obliged to take advantage of the opportunity provided by the remedies regime (through automatic suspension) to stop the wrongful award of a contract, by lodging a claim before the contract is awarded. The tenderer is free (subject to the 30 day limitation period) to issue its claim for damages after the contract has been entered into and is not acting unreasonably or failing to mitigate its losses if it fails to stop the contracting authority from perpetrating a breach of duty which the authority could itself stop perpetrating.

What does this mean for damages awards?

By the time of its judgment, the Supreme Court's decision on these issues was no longer needed to resolve the dispute between the parties. Although mindful of the fact that the Supreme Court had still to rule on whether a "sufficiently serious" breach was a requirement for an award of damages, for case management reasons the High Court ruled last December that, in this specific case, the NDA's breach of the 2006 Regulations was a sufficiently serious breach meaning that damages should be awarded. Since then, as already noted, the proceedings have been settled by agreement between the parties.

Despite coming after the resolution of this dispute, the Supreme Court's ruling is important for clarifying the conditions for an award of damages for breach of the procurement rules. These requirements are equally applicable to the new public and utilities procurement rules (introduced by the 2014 EU Directives) which have not changed the remedies regime.

The Supreme Court did not elaborate on how to apply the test of "sufficiently serious" to breaches of the procurement rules.[2] But in its December ruling the High Court considered the "multifactorial approach" applied by the House of Lords in the Factortame (No 5) case [3], noting that not all of the factors it listed are relevant to procurement disputes. However, relying on the first two factors - the importance of the principle which has been breached and the clarity and precision of the rule breached – the High Court found that the failure by the NDA to award the contract to the tenderer whose tender ought to have been assessed as the most economically advantageous offer was, in itself, a sufficiently serious breach of the NDA's obligations to warrant an award of damages. Although it did not need to do so, the High Court also considered some of the underlying individual breaches that had been identified. It concluded that individual breaches of obligations in relation to threshold or pass/fail requirements are sufficiently serious for damages to be awarded, as are other breaches of obligations in relation to evaluation requirements if they (whether individually or cumulatively) would have affected the outcome of the competition.

It is clear from the Supreme Court and High Court judgments that damages may be awarded in cases where the breach of the procurement rules has led to an incorrect award of the contract. This is not to say that other breaches, that do not alter the final outcome, will not be sufficiently serious for an award of damages, but quite how the courts will assess such breaches against the second Francovich condition is for future consideration.

Key Contacts

Jonathan Davey

Jonathan Davey

Partner, Commercial
United Kingdom

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Bill Gilliam

Bill Gilliam

Partner, Head of Commercial Disputes
Leeds, United Kingdom

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Andrew Carter

Andrew Carter

Managing Associate, Commercial
London, UK

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[1] The Francovich conditions derive from EU Court of Justice case law on state liability for loss or damage caused to individuals, including in Cases C-6/90 and C-9/90, Francovich v Italian Republic. The three conditions are that: i) the rule of EU law infringed must be intended to confer rights on individuals; ii) the breach of that rule must be sufficiently serious; and iii) there must be a direct causal link between the breach and the loss or damage sustained.

[2] Under EU case law, the test for finding that a breach is "sufficiently serious", originally formulated in cases concerning liability of member states and Community institutions for breaches of EU law, is "whether the member state or Community institution concerned manifestly and gravely disregarded the limits on its discretion".

[3] R v. Secretary of State for Transport ex parte Factortame Ltd (No.5) [2000] 1 AC 524.