Procurement challenges – lessons to be learned from the case of EnergySolutions EU Ltd V Nuclear Decommissioning Authority

Angelica Hymers, Browne Jacobson

In late July the High Court handed down its judgment in the case of EnergySolutions EU Limited v Nuclear Decommissioning Authority [2016] EWHC 1988 (TCC). The proceedings concerned the procurement of a significant contract for the decommissioning of 12 nuclear reactors through an arrangement worth several billion pounds. This case highlights how important it is that contracting authorities comply with their procurement obligations, in particular the EU law duties of transparency and non-discrimination.

The facts of the case are very detailed and lengthy and so we have not gone into the specifics where it adds little to our analysis of the key points. We have referred to EnergySolutions EU Limited as the ‘Claimant’ and the Nuclear Decommissioning Authority as the ‘Defendant’ throughout this article.
Background

The Claimant was part of a consortium which was unsuccessful in its tender for the contract for decommissioning nuclear reactors tendered by the Defendant (the Contract). The Contract was awarded by the Defendant to another consortium (the Successful Bidder). The procurement process was lengthy and complicated. The Claimant estimated it had spent £10,000,000 in preparing its bid and through its involvement in the procurement process. Ultimately, however, the difference in score between the Claimant and the Successful Bidder was only 1.06%.

The claimant alleged a number of issues in respect of the conduct of the procurement by the Defendant, which it said had resulted in the Successful Bidder being awarded the Contract unlawfully. These complaints related to:

  • changes to important elements of the scoring mechanism at a late stage in the procurement process
  • changes to the scores given to bidders without appropriate records being kept of the reasons for the changes
  • awarding scores which did not properly reflect the quality of the bid
  • limiting the permanent records of the evaluation process to the absolute minimum of information in order to make it more difficult for challengers to bring claims
  • failure to evaluate tenders consistently with what bidders had been told during dialogue
  • inconsistency in the evaluation approaches and scores awarded to bidders
  • seeking clarification differently in respect to some bidders
  • providing a reason for its decision to award the contract to the Successful Bidder to the Claimant which was different to its reasons relied upon in court
  • failing to exclude bidders from the process where they had failed a pass/fail question.

The Claimant stood to lose £100,000,000 in fees as a result of losing the Contract and, following a process of discussion and disclosure between the Claimant and Defendant as to the conduct of the process, the Claimant issued proceedings.

The legal framework

The procurement was governed by the Public Contracts Regulations 2006 (PCR 2006). The Defendant is a statutory authority and is accordingly a contracting authority for the purposes of the PCR 2006. The PCR 2006 imposes obligations upon contracting authorities to “treat economic operators equally and in a non-discriminatory way” and to “act in a transparent way”. These are fundamental legal principles which underpin procurement law, and breaches of these principles can lead to the award of a contract being unlawful. They apply to all contracting authorities throughout the procurement process, except in very limited circumstances.

In addition to the regulatory framework, the court also considered some key cases which are relevant to the conduct of procurement processes, for example, the case of Commission v Ireland [2010] Case C-226/09 in which it was held that the principles of equal treatment, non-discrimination and transparency require a contracting authority which has adopted a procedure for assessing bids to comply with its own process. In practice, this means that a contracting authority cannot change the methodology it uses for evaluating bids part way through a procurement process. It also means that a contracting authority should not deviate from the process it sets out in its procurement documents.

Although the PCR 2006 were repealed and replaced by the Public Contracts Regulations 2015 (PCR 2015) in February 2015, the principles which were relevant in this case are the same under the new regime and accordingly, this case is of real significance to contracting authorities conducting procurement process under the PCR 2015.

The first and second claims

Three sets of proceedings were issued by the Claimant in respect of the procurement process carried out by the Defendant. The Claimant’s first claim was issued within the time limit for issuing proceedings set out in the PCR 2006, but not within the time limit to trigger an automatic suspension of the contract award procedure. This meant that the Claimant could only claim for damages and could not ask for the Contract to be awarded to it instead of the Successful Bidder.

A second claim was issued shortly afterwards to respond to issues raised by the Defendant in its response to the first claim. A preliminary hearing on the first two claims was heard in December 2014.

The Defendant argued in respect of the first claim that the Claimant’s failure to issue proceedings before the Defendant had entered into the Contract (which would have triggered an automatic suspension of the contract award procedure) meant that the Claimant had in some way broken the chain of causation and damaged its position with respect to the claim, and went on to question whether the court had a discretion not to make an award of damages in those circumstances.

The parties appealed the decisions of the court of first instance, and on appeal the Court of Appeal [2015] EWCA Civ 1262 held that:

  • a failure to issue a claim and serve it before the Defendant enters into a contract does not break the chain of causation in respect of the Defendant’s breaches and the loss caused to the Claimant
  • the courts have no discretion as to whether or not to make an award of damages to a Claimant who can show that they have suffered loss as a consequence of breach of duty by the Defendant under the procurement regulations.

The effect of these judgments for contracting authorities is that currently, a contracting authority cannot argue that by failing to issue proceedings before the authority has entered into the contract means that the Claimant should not be entitled to damages. However, the Defendant has requested permission to appeal these decisions to the Supreme Court and the hearing has not yet taken place, which means that there is likely to be further judicial commentary on the point in future.

The third claim

The third claim was issued by the Claimant after disclosure of information by the Defendant in respect of the evaluation process. It related to alleged breaches of the Public Contracts Regulations 2006 in relation to the Defendant’s evaluation of the tenders submitted by the Claimant and the Successful Bidder, including claims that the Defendant had:

  • sought clarification of two competing bids in a way which breached its obligations of transparency and equal treatment
  • awarded scores to the Successful Bidder which were not supported by the comments of the individual evaluators
  • amended the scores given to the Successful Bidder and the Claimant in ways which were not justified
  • not acted properly in considering pass/fail thresholds in respects of some parts of the Successful Bidder’s tender, so that some parts of the Successful Bidders’ tender should have achieved a ‘fail’ when in fact the Defendant awarded them a ‘pass’.

The joined claims

The issues in the first, second and third claims which had not been at issue in the preliminary hearing were joined and heard together (EnergySolutions EU Limited v Nuclear Decommissioning Authority [2016] EWHC 1988 (TCC)). At trial, the court focussed primarily on the evaluation and clarification process undertaken by the Defendant. However, a number of other issues also arose.

One point the court was asked to consider was whether the court had jurisdiction to intervene in circumstances where the Defendant had exercised its discretion (for example in making a scoring decision) but not made a manifest error of judgment. This is a key issue for contracting authorities, who regularly use their judgment when making decisions on evaluation. The courts have recognised (for example in the case of Lion Apparel Systems v Firebuy Ltd [2007 EWHC 2179 (CH)) that contracting authorities do have a margin of appreciation in matters of judgment or discretion, and therefore the court can only disturb the contracting authority’s decision where a manifest error (which is a clear error) has been made. The court clarified in this case that there is no requirement that the error should make a real difference to the outcome of the procurement, but the error must be material. This does not mean that the court can interfere simply because a different decision could have been made, but does allow interference by the court if a clear, material error has been made. This means the court can reconsider a score where a contracting authority has made a manifest error in its reasoning for awarding that score.

The courts in the Lion Apparel case recognised that no margin of appreciation exists where the issue in question is one of compliance with the obligation of transparency or equality – contracting authorities are under a strict obligation to comply with these requirements which are relevant at all times throughout the procurement process.

Criticisms of the procurement

The court made a wide range of criticisms of the procurement and the approach taken by the Defendant to the court proceedings. These criticisms should serve as a stark warning to contracting authorities as to the approach that the courts will take to any attempts to subvert the procurement rules or avoid scrutiny by disappointed bidders.

One key criticism raised by the judge was that it appeared that the Defendant had attempted to get rid of information that might have been detrimental to its case had proceedings been issued. This included providing training materials to its evaluation team which made reference to ‘shredding notes’ (although the Defendant argued that this had not been the final form of the training materials) and providing instructions not to keep written notes except for on the electronic evaluation system where such notes could be deleted when they were no longer required. The court found that the Defendant was “acutely aware that an unsuccessful bidder might challenge the outcome of the competition” and that accordingly it had adopted a defensive approach to how it performed evaluation. This included restricting note taking by evaluators and “considering whether to shred notes”. The Court found this particularly concerning given the statutory obligation upon the Defendant to perform the evaluation transparently. In general, the court found that the approach taken by the Defendant to evaluating the tenders was directing at minimising the information that a disgruntled bidder would have access to and resulted in parts of the evaluation process “wholly lacking in transparency, in breach of the obligation of transparency upon [the Defendant]”. The judge felt that this was an entirely inappropriate way for a public body to act.

Further, the Defendant was criticised for marking bidders inconsistently. One of the Defendant’s witnesses denied that there was any requirement for consistency when marking, directly contrary to the guidance evaluators had been given. This combined with the lack of ability for bidders to take notes or record their thinking in relation to evaluation lead to unequal treatment between the Claimant and the Successful Bidder, a further breach of the Defendant’s statutory obligations.

As part of the process, the Defendant appointed a law firm to advise on its responsibilities and obligations in respect of the procurement. The advice the Defendant was given was not before the court because it was legally privileged. However, the court did note that the Defendant’s legal advisors had been intimately involved in the evaluation process, and that the fact that documents relating to their involvement were not disclosed meant that certain information about the approach to decisions taken by the Defendant was not available to the court, which did not assist the Defendant in defending the claim.

In respect of the issue of pass/fail questions, the Defendant was criticised by the Claimant for failing to disqualify the Successful Bidder where it had failed to pass a pass/fail question. In his evidence one of the Defendant’s witnesses said that he had realised during the procurement process that the thresholds which meant that bidders could be disqualified could have very serious effects for the procurement, and suggested that these had been applied to criteria which in fact were perhaps not so serious as to warrant a potential disqualification. This realisation, it was suggested, had led to the evaluators increasing the score that would otherwise have been given in circumstances which otherwise justified a fail. This should come as a real warning to contracting authorities designing procurement processes. It is very important to consider whether failing to meet a particular threshold is sufficiently serious that a bidder should be excluded from the procurement process. Requirements of this nature should be applied transparently, which means that where a bidders’ tender deserves a below threshold score, that score should be given. However, this will potentially have serious effects particularly where there are a limited number of bidders. Accordingly, great care should be taken when including pass/fail questions in a procurement process – the case law on this point has confirmed that a contracting authority has no discretion to disregard a failure to meet a threshold requirement where such discretion is not included in the published procurement documents.

In respect of the evidence given by witnesses who gave evidence on behalf of the Defendant, the judge noted that they “suffered from what, on occasion, bordered on an almost obstinate refusal to accept that any mistakes or errors had been made at all by the [Defendant], in any respect…” and accused them of “illogicality…claiming that [the Defendant’s] own stated reasons did not mean what they, on the face of the words, in fact stated”. He went on to say that “logic became an early casualty during the [Defendant’s] evidence… at times the degree to which the different [Defendant] witnesses sought to explain the contemporaneous reasons as meaning something quite different from their natural words became an extraordinary exercise in the tortured misuse of the English language.” It is rare that procurement cases come to court but these criticisms are a particular lesson on how not to deal with questioning from the court – trying to defend arguments which are indefensible will often not assist a case and can lead to an increase in the reputational damage suffered by a contracting authority.

Ultimately, the court found a number of breaches by the Defendant of its obligations under the PCR 2006 and concluded that had the Defendant appropriately scored the bids, including giving appropriate scores to the pass/fail thresholds, the Successful Bidder would have been disqualified from the tender process, and the Claimant would have been awarded a significantly higher score which would have resulted in the contract being awarded to the Claimant.

Conclusions

This was undoubtedly a very complicated procurement process which took nearly two years to complete. The Defendant had clearly gone to some trouble in designing the process and had appointed lawyers to advise at the evaluation stage and specialists to design the software used during the evaluation process. Nevertheless, the Defendant attracted heavy criticism from the judge, who found that it had “fudged” the evaluation to achieve a particular outcome. The case should come as a warning to contracting authorities, who can learn a lot from the issues highlighted by this litigation.

The Defendant was particularly criticised for the approach it had taken to dealing with the risks of challenge. Rather than focussing its energy on ensuring that there would be no grounds for challenge in the first place, it appeared to have taken steps to ensure that there were no records of decisions it had taken that could be disclosed in legal proceedings should they be issued, by preventing evaluators from keeping notes and possibly by destroying contemporaneous notes. It is important to note that this was one of the reasons why the court felt that the Defendant had breached its obligation of transparency. The judge held that “it is difficult to see how the proposed or intended destruction of contemporaneous documents could ever be consistent with those obligations”.

Contracting authorities should take care to keep records of contemporaneous decisions, particularly in the evaluation process – these records are often invaluable where a challenge arises in enabling a contracting authority to show why it made a decision and to rebut the challenge. It is relevant that such notes could be disclosed in litigation and of course steps should be taken to ensure that those notes do not reflect badly upon the contracting authority, but that can be achieved by giving those involved in the procurement proper training and ensuring they fully understand their obligations in relation to evaluation and decision making.

Linked to the question of transparency is the issue of how a contracting authority justifies and explains its decisions in court proceedings. The court in this case criticised the Defendant for failing to call individuals who had been intimately involved in the procurement process and who could have given important evidence on the decisions made by the Defendant. The court notes that it was open to it to draw adverse inferences from the failure of a party to litigation to call an important witness and therefore this should be avoided. It is also likely that where witnesses take an approach to questioning which seeks to justify unjustifiable decisions, the contracting authority will attract criticism from the court.

Procurements are often considered to be risky areas for contracting authorities, and to some extent this is true – with high value contracts, a disgruntled bidder may well consider litigation to protect its interests. However, the risks can be minimised to a significant degree through a properly designed process, well trained evaluators and a structured evaluation process. Above all, the importance of keeping in mind the authority’s obligations of proportionality and transparency, and making decisions with those obligations in mind cannot be understated. It is always better to spend time and money at the outset ensuring that the process is compliant with the contracting authority’s procurement obligations than trying to limit the information that a disappointed bidder can access, which, as the Defendant in this case found out, can cause significant reputational and financial damage.