Procurement Law – Contract Making Suspensions and non-profit making organisations

Colin Ricciardiello, Sharpe Pritchard

Colin Ricciardiello, partner and experienced procurement law practitioner, dissects recent developments in contract making suspensions and associated regulations in the Public Contract Regulations 2015.

Since the Public Contracts (Amendment) Regulations 2009 came into force in December 2009, the following have been established features in the procurement challenge landscape and are now to be found in the Public Contracts Regulations 2015 (The Regulations):

(i) Once a claim has been issued in cases where a contract has not been entered into, the contract-making is suspended under Regulation 95(1);

(ii) The Regulation 95 requirement to refrain from entering into the contract can be brought to an end by the Court making an interim order under Regulation 96(1)(a).

When a Court considers whether it should bring the contract-making suspension to an end it must under Regulation 96(2) consider:

(a) Were it not for the automatic contract-making suspension under Regulation 95(1), would it be appropriate to make an interim order requiring the contracting authority to refrain from entering into the contract;

(b) If it considers that it would not be appropriate to make such an interim order, it may end the automatic suspension.

In practice, the outcome of an application to end the contracting making suspension can determine whether a claim proceeds at all. It is not uncommon for a Claimant to abandon its claim if it fails to resist an application to end the contract making suspension.

The Courts’ approach to ending the automatic contract-making suspension was considered quite early on in Excel Europe Ltd v University Hospitals Coventry and Warwickshire NHS Trust1. In that case Akenhead J. noted that the contract making suspension regulations were “… saying in the clearest terms that the Court approaches the exercise of interim relief as if the statutory suspension … was not applicable. That means that one does not as such weigh the exercise in some way in favour of maintaining the prohibition on the contracting authority against entering into the contract in question. What in practice it means is the Court should go about the Cyanamid exercise in the way in which the Courts in this country have done for many years”. That clear Cyanamid starting point has been followed in subsequent contract making suspension cases.

In summary the relevant Cyanamid principles are:

  1. Is there a serious issue to be tried;
  2. If there is, are damages and adequate remedy?
  3. If damages are not an adequate remedy, where does the balance of convenience lie?

The threshold requirement for 1) is quite a low and it is rare for it not be passed. (To the writer’s knowledge there is only one reported case where the threshold was not met2).

As for 2), if damages are an adequate remedy that will normally defeat an application for an interim injunction. In procurement challenges this involves considering the difficulty in quantifying damages and whether the Claimant should be confined to a damages remedy only – see the Regulation 98 remedies where a contract has not been entered into.

The exercise at 3) is quite separate to 2) and is concerned with the advantages and disadvantages of granting/refusing an injunction. The public interest in the balance of convenience test by allowing an awarded contract to start is a strong factor in favouring of ending the suspension. That interest depends on the subject matter of the contract and is particularly acute in healthcare contracts. That interest may cause a tension where the losing contractor is a not for profit organisation and it maintains that needs to be awarded the contract in order to continue to operate or to avoid great prejudice. At first blush one would think damages based on lost service payments would always be an inadequate remedy for such an organisation.

In the past 18 months or so there have been five reported health care type cases3 and these healthcare decisions on lifting the contract making suspension do not all go the same way. Their outcome seems to be determined by the impact on the not for profit Claimant if the suspension was lifted. The two most recent cases ended the suspension and are discussed below.

In Kent Community Health NHS Foundation Trust (KCH) v NHS Swale and NHS Dartford Gravesham & Swanley Clinical Commissioning Groups (SDG) SDG ran procurement for adult services. KCH was the incumbent and was unsuccessful in the procurement.

Whilst KCH scored better than the winner on quality, it effectively lost on price. It challenged the award decision by commencing proceedings. SDG applied to end the contract making suspension. At that application KCH maintained that the procurement was not an ordinary commercial exercise and its true purpose in the litigation was not to achieve a financial return as it was a not for profit organisation which existed to serve the public good only. Further KCH argued that as it scored higher on quality the service that the winner provided would be inferior. That, it was argued was a reason to allow it to continue whilst the suspension was in place. Otherwise, the interests of patients would therefore be prejudiced. It also maintained that it could not be adequately compensated in damages because it was a not-for-profit organisation. Lastly, the ending of the contract making suspension would result in a 10% drop in turnover and that would require savings to be made elsewhere to the wider detriment of patients in its care.

Understandably KCH relied heavily Bristol Missing Link (Bristol) where it was held that a “… a non-profit making organisation, which has bid for a contract making no allowance for profit at all, and the minimal amount for overheads, is entitled to say that, in such circumstances, damages would not be an adequate remedy”.

However, the judge in the KCH case disagreed and held: “I can see no reason why damages should be regarded as an inadequate remedy simply because the Claimant, whether a not-for-profit organisation or for other reasons, has not suffered and will not suffer a substantial financial loss”.

Bristol and Counted 4 Community (where the suspensions were not ended) were distinguished in KCH. In Bristol’s case on the basis that would have had a catastrophic effect on Bristol’s ability to provide any of its services. Counted 4 was distinguished on the ground that if the suspension was not maintained then the Claimant would have lost its uniquely trained workforce.

Also on damages it was held that even if a public body existed solely to serve the public good, in the context of public procurements a level playing field was created between public and private sector bidders. Therefore, there was no justification for looking at the adequacy of damages differently. The judge decided that: “… in purely financial terms, the losses that would be incurred if the Trust [KCH] fails to win the contract can be assessed without obvious difficulty and can be made the subject of an appropriate award of damages”.

In terms of balance of convenience, the Judge’s reasoning was interesting in that he held that the balance of convenience did not weigh substantially in favour of either maintaining or lifting the suspension. Accordingly the status quo should be maintained and in this case that was as if there was no contract making suspension in place. If that was so, then SBG would be free to enter into the contract with the winning tenderer. The contract making suspension was accordingly ended.
The most recently decided case (26/1016) was Perinatal Institute (PNI) and Health Care QualityImprovement Partnership (HQIP). PI was a not for profit company and had a public interest purpose of enhancing the quality and safety of maternity care. The procurement concerned the collection and analysis of data through training and use of software across the NHS relating to mortality rates. PI lost the procurement by a margin of 8.2%.

PI relied on Bristol and argued damages were not an adequate remedy and it was unjust to limit it to a damages remedy as it made no profit: “In other words, there are no monetary losses for which damages would compensate”. The Judge decided that the effect of Bristol was not to create a principle that non- profit organisations can never be compensated in damages – rather it identified an argument open to such organisations against which background the consequences l of lifting the suspension could be considered. In Bristol those consequences were held to be ‘catastrophic’.

It was held that PI could be compensated in damages through its tender costs and a contribution to its general overheads. Crucially, PI had existing sources of income (if not profit generating sources) from other NHS work and its staff worked on existing projects. So the income it would have derived from winning the procurement would have gone towards defraying their wider operating costs. Accordingly, it was held that there was no evidence that failure to win would have any negative or ‘catastrophic impact’ on PI’s activities (unlike in Bristol – hence it was distinguished).

The Judge also held that the balance of convenience lay in ending the suspension because the public interest was such that the sooner the contract started the better.

Conclusions

Each case is going vary on their facts so it is not possible to draw a unifying answer as to whether an application to end the suspension will succeed or fail. What will probably be relevant however is: the nature of the service being procured; the public interest in starting the contract promptly; the impact on the Claimant if the suspension is lifted – will it be catastrophic financially (as it will lose a major source of income) or operationally as it will not be able to keep its staff. If the income from the contract it seeks will not go towards profits, does it have a margin in its tender for receipts to meet wider overheads? If so damages may well be an adequate remedy.

Further, whilst not strictly a factor once the serious issue to be tried threshold has been passed, the Judge’s impression as to the overall merits of the claim appears to influence whether the suspension is lifted – the weaker the claim seems to be, the more likely the suspension will be lifted.


1 2010 EWHC 332(TCC).

2 Halo Trust v Secretary of State [2011] EWHC 87 (TCC).

3 Solent NHS Trust [2015] EWHC 457 (TCC) – Community based drug and alcohol treatment service – not for profit organisation – suspension lifted.

Bristol Missing Link Ltd and Bristol City Council [2015] EWHC 876 (TCC) – Domestic violence and abuse support services – not a profit making organisation and contribution to overheads could not be equated to profit. The loss of the procurement would have a serious effect on other services provided. Suspension not lifted.

Counting 4 Community Interest Company v Sunderland City Council [2015] EWHC 3898 (TCC) – Substance misuse services. Damages were held not to be an adequate remedy because the Claimant, a not for profit organisation, would lose its workforce and also its main source of income if the contract in the procurement was not awarded to the Claimant. Suspension not lifted.

Kent Community Health NHS Foundation Trust and NHS Swale Clinical Commissioning Group and Another [2016] EWHC 1393 (TCC) – Adult community services. Not for profit organisation. Damages were held to be an adequate remedy. Suspension was lifted.

Perinatal Institute and Healthcare Quality Improvement Partnership [2016] EWHC 2626 (TCC) – Quality and Safety Maternity Care a not for profit organisation. Damages were an adequate remedy and the suspension was lifted.


This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

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