Procurement Casenote (NI): Assessment of damages in procurement cases – FP McCann v Department for Regional Development

• Northern Ireland

02-02-2021

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Background

The assessment of damages in public procurement cases is a topic which is often debated but rarely directly litigated. Although damages are frequently sought by unsuccessful tenderers, the Courts in the UK are, for various reasons, seldom called upon to actually quantify the losses associated with a breach of the procurement rules. A recent decision1 of the High Court in Northern Ireland highlights the complexity and difficulty associated with such exercises. Although the Courts often assert a willingness and a capacity to assess damages, this case illuminates the challenges that this can present in practice and the legal principles that the Courts will lean on in resolving these.

The High Court decision deals with the assessment of damages awarded to a civil engineering contractor, FP McCann Limited (“Plaintiff”), following two earlier High Court decisions in June 20162 and December 20193 . Those decisions found that the Department for Regional Development (“Defendant”), a Department of the Northern Ireland Executive, had breached its obligations under the Public Contract Regulations 2006 (“PCR”) and that its breaches were sufficiently serious to warrant an award of damages to the Plaintiff.

In April 2009, the Defendant advertised a contract for the design and carrying out of road improvements. The Plaintiff tendered for the contract as part of a joint venture (“JV”) with Balfour Beatty Civil Engineering Limited.

The contract involved two phases, the first of which required the successful bidder to act as a consultant under a professional services contract under the standard terms of NEC3 Professional Services Contract (Option E) providing input into project design development, sharing its experience and expertise and providing advice on construction issues. A target cost was to be agreed by the parties representing the best estimate of what the job should actually cost to complete. In phase 2, the successful bidder would become the contractor for the works under the terms of NEC3 Engineering and Construction Contract, (Option C). The target cost would become the yardstick by which the financial performance of that contract would be measured.

The value of the contract was estimated to be in the region of £80 - £100m and it was to be awarded to the most economically advantageous tender based on quality submission (65%), commercial submission (20%) and presentation (15%). The commercial submission only required estimates to be provided for certain elements of the works, as the full extent of works would not be known until phase 1 was complete.

The JV’s commercial submission was lower than the average of the other tenderers in six of the eight areas of assessment and overall, at £14m, was lower than the average of the other tenders (£19m). The commercial evaluation panel (“CEP”) concluded that the JV’s tender was abnormally low and expressed concern that, if the JV was to be awarded the contract, there was a risk that the parties would not be able to agree target prices for phase 2. The JV’s tender was rejected on that basis and the contract was awarded to another consortium (“LFC”). This led the Plaintiff to initiate legal proceedings.

2016 Decision

In 2016, the High Court held that the Defendant had acted unlawfully by eliminating the JV on the grounds that its tender was abnormally low. In particular, the Court considered that matters which ought not to have been taken into account by the Defendant when deciding to exclude the JV’s bid, may in fact have been a contributing factor to the Defendant’s decision. For example, the Defendant had concerns regarding the JV’s fee, prices for its core management team and the JV’s involvement in another road project, however these matters were not raised with the JV by the Defendant in accordance with Regulation 30(6) of the PCR and the JV had therefore been deprived of the opportunity to respond.

The manner in which the JV’s bid had been presented to the Defendant’s board also drew criticism from the Court. A particular emphasis had been placed on the JV’s bid being valued at 59% of the benchmark price and worth 76% of the next lowest bid. The JV’s bid was therefore presented as being dramatically low, despite the fact that the costs bid did not reflect the overall value of work under the contract. A further issue that concerned the Court was the emphasis placed on the JV’s quoted prices for bitumen, which the Defendant believed to be unsustainably low and significantly below market value. It subsequently transpired during the hearing that the JV’s rates were both sustainable and higher than the rates quoted by the successful consortium.

Overall, the Court considered that the Defendant had breached its duty to the Plaintiff under Regulation 30, in particular by failing to verify the Plaintiff’s offer (or the parts of the offer) which it had alleged to be abnormally low. The Court concluded that there was a significant chance that the Defendant would have reached a different decision when awarding the contract had it not been for the breach. The Court believed that a suitable remedy for the Plaintiff would have been to set aside the award of the contract and to refer the matter back to the Defendant for reconsideration.

However, as the contract had been concluded, the Plaintiff was entitled to damages for its loss. The precise loss to the Plaintiff was not a loss of profit or loss of the contract, but rather a loss of chance to be awarded the contract, in accordance with principles set out in Chaplin v Hicks4.

2019 Decision

In the time that passed between the first judgment in 2016 and the Court hearing the submissions of the parties in relation to the question of damages, the Supreme Court ruled in the case of Nuclear Decommissioning Authority v EnergySolutions EU Limited5 that the conditions set out in Francovich6 applied to procurement breaches. In particular, the Court held that in order for a claim for damages arising out of a breach of the PCR to succeed, an economic operator must show that the contracting authority had committed a sufficiently serious breach.

In light of the Supreme Court’s judgment, the Northern Ireland High Court heard further submissions from the Plaintiff and the Defendant. The Court found that the issue of what might constitute a serious breach had already been determined in R v Secretary of State for Transport ex parte Factortame Limited (No. 5)7 and further summarised by Richard LJ in Delaney v Secretary of State for Transport8 . The Court further relied on the first instance judgment of Jay J in Delaney in which it was stated “that in a minimal/no discretion type of case it will be easier for the claimant to prove the requisite degree of seriousness.”

The Court was conscious not to confuse the discretion and margin of appreciation available to the Defendant when exercising its judgment during the procurement process, with the minimal or zero discretion available to contracting authorities when following fundamental procurement principles and meeting their statutory obligations. The Defendant argued that there had been no bad faith on its part when exercising its judgment in a complex statutory scheme and that its errors did not have a manifest effect on the outcome of the process.

The Court noted that the Defendant had legitimate concerns regarding the possibility of the parties not being able to agree a target cost, but considered that those concerns required the Defendant to conduct an examination. The Court held that there was no margin of discretion available to the Defendant to avoid conducting this examination. Furthermore, the Plaintiff had not been afforded the opportunity to explain the matters which led to the Defendant’s conclusion that the Plaintiff’s bid was abnormally low, nor was the Defendant’s concerns regarding the Plaintiff’s involvement in another tender process raised by the Defendant. These omissions in the process constituted breaches of the fundamental principles of equality of treatment and transparency. The Court was therefore satisfied that the Defendant had committed sufficiently serious breaches which warranted an award of damages.

2020 Decision - The assessment of damages

Finally, in its 2020 Decision, the Court considered the assessment of damages that should be payable to the Plaintiff. The Plaintiff alleged a loss of profit of £12.3m, a figure based on the Plaintiff’s experience of previous similar contracts. The Defendant argued that the Plaintiff had not in fact suffered any loss.

The Court acknowledged that assessing the Plaintiff’s potential loss was not without difficulty, as the target cost that would have been agreed between the parties (had the Plaintiff been awarded the contract) would not have been determined until the completion of phase 1 of the contract.

Notwithstanding the difficulty in assessing the level of damages payable, the Court referred to Chaplin v Hicks in which it was stated that “the fact that damages cannot be assessed without certainty does not relieve the wrongdoer of the necessity of paying damages for his breach”. The Court further relied on the decision of Leggatt J in Yam Seng Pte Limited v International Trade Corporation Limited9 in which the Court held that it should “attempt so far as it reasonably can to assess the claimant’s loss even when precise calculation is impossible” and that the Court should be aided by “the principle of reasonable assumptions - namely that it is fair to resolve uncertainties about what would have happened but for the defendant’s wrongdoing by making reasonable assumptions which err if anything on the side of generosity to the claimant where it is the defendant’s wrongdoing that has created those uncertainties.” The Court also noted that damages should be ‘effective’ when a sufficiently serious breach has been established.

The complex nature of the contract pricing mechanism meant that assessing the quantum of damages was not a straightforward exercise. The Court needed to consider a number of variables, including: (i) the target cost that would have been agreed between the parties; (ii) the potential ‘outrun’ costs that would have been incurred by the Plaintiff; and (iii) the extent to which any overspend would have resulted in an increase in the target costs (e.g. as a result of compensation events) or the degree of ‘pain’ incurred by the Plaintiff.

Determining the Plaintiff’s target cost

To determine the target cost that would have been agreed upon the completion of phase 1, the Court considered a number of different approaches. Ultimately, it decided that the most appropriate methodology for determining a target cost for the Plaintiff involved consideration of its tendered pricing (which accounted for 28% of the overall contract) together with the costs agreed by the Defendant with the successful tenderer (at the end of phase 1) in respect of items that the Plaintiff had not had the opportunity to price. The Court considered that although there would be some differences, it was a reasonable assumption that the costs for the non-tendered items would be broadly similar among all tenderers, although it allowed for some adjustments. The Court stated that, whilst this approach might be somewhat generous to the Plaintiff and contained flaws “given the inevitable uncertainties in making such as an assessment”, it was in keeping with the principles set out in Yam Seng Pte Limited. The Plaintiff’s target cost for the contract was determined by the Court to be £91.5m.

What outrun or disallowed costs should be included?

The Court also considered what ‘outrun’ costs might have been incurred had the Plaintiff been awarded the contract. It found that the Plaintiff would have encountered similar compensation events as the successful tenderer. The Court therefore took those compensation events into account, allowing for a 2.5% discount on the basis that compensation event works would likely have been completed by the Plaintiff at a lower cost.

Furthermore, the Court refused to assume that the Plaintiff would have incurred the same disallowed costs as the successful tenderer, LFC. The Court considered that the disallowed costs of LFC were of their own making and that there was no evidence to suggest that the type of costs incurred were typical over-spends for projects of a similar nature. The Court therefore adopted the figure suggested by the Plaintiff, accounting for adjustments already applied by the Court for the calculation method and compensation events

Other losses allowed

The Court allowed the Plaintiff’s claim for loss of rent in respect of land that would have been made available to the JV had it been awarded the contract. Given that LFC had to lease lands elsewhere as part of the contract works and therefore had to pay rent to a landowner, the Court was satisfied that such a cost would have been incurred and been recoverable by the JV also. The Court also allowed a claim for a sum in relation to pre-cast concrete, which was not in dispute between the parties. Another cost that the Court was prepared to allow related to new asphalt mixing plant which the Plaintiff proposed to build had it been awarded the contract. The Plaintiff argued that the contract works would have contributed £350,000 towards the construction costs and that the plant would have generated £564,800 in sales revenue. The Defendant denied that these were compensatable losses as the mixing plant was never constructed by the Plaintiff, however, the Court was satisfied that some allowance should be made for this lost opportunity.

Other losses excluded

In relation to the Plaintiff’s claim of £1.5m for under-utilisation of plant and labour, the Court was not satisfied that any compensatable loss had occurred. In fact, the Plaintiff had been increasingly profitable and had to resort to sub-contracting haulage during the period in which the contract works were ongoing. The Plaintiff also claimed that it had a competitive advantage as the project site was closely located to the Plaintiff’s quarry and would have allowed the Plaintiff to easily supply aggregate for the works. However, the discovery exercise had produced a document which suggested that the Plaintiff was unable to provide aggregates as it was running at full capacity. Accordingly, the Court was not satisfied that the Plaintiff had lost any opportunity to supply aggregates.

The Court was not prepared to accept that the costs of preparing and submitting its tender were recoverable by the Plaintiff. These were considered to be the costs of doing business and, in any event, were expressly excluded as being recoverable in the tender documents.

The Court also refused to allow any sum for loss of future opportunities. The Plaintiff alleged that being awarded the contract would enhanced the profile and experience of its business, meaning that it would not have needed to form joint ventures for other similar projects. The Court considered this limb of the Plaintiff’s claim to be highly speculative and was not satisfied that there was any evidence that the Plaintiff would have been awarded such contracts in its own right.

How should the Court quantify damages for a loss of chance?

Having considered all of the above factors, the Court turned to the final assessment of damages. It acknowledged that the complexity of assessment was compounded by the Court’s earlier findings on the impact of the Defendant’s failings. Although the Court had found that the Defendant had breached procurement law and there was a significant chance that it would have taken a different decision were it not for those breaches, it had not concluded that the JV would necessarily have been awarded the contract.

The Court cited Lord Hoffman in Barker v Corus (UK) Plc10 who said that the loss of chance of a favourable outcome is a compensatable damage which is subject to a three stage test: (i) the lossmust be a recognised head of damage; (ii) the plaintiff must have lost a chance; and (iii) the lost chance must be quantified by reference to percentages and proportions. The Court was satisfied that the first two steps had been met and turned to quantifying the loss. This required an assessment of the Plaintiff’s probability of (i) being awarded the contract but for the breaches and (ii) (if a contract had been awarded) of the Plaintiff proceeding to phase 2.

The Court recognised that the position was finely balanced. On the one hand, the Defendant had engaged in “significant breaches of duty”; on the other, the Defendant had legitimate concerns about the Plaintiff’s low pricing and the possibility of a target cost not being agreed with the Plaintiff. The Court further accepted that it had adopted a generous approach in favour of the Plaintiff in light of the Defendant’s breaches. As to whether or not the Defendant would have reached the same decision if it had remedied its breaches during the procurement process, the Court could not conclude with certainty that it would.

Taking everything into account, the Court ultimately awarded the Plaintiff 50% of the profit that it would have made had its tender been accepted and had it moved to phase 2. The Court also considered that interest should be allowed and agreed to hear the parties’ submissions at a later stage as to how interest should be calculated.

Comment

In an important area of procurement law where there are few reported cases, this decision is a welcome addition. Although it demonstrates the ability of the Courts to find a way through complex tendering methodologies and hypothetical contract scenarios in order determine a financial remedy, it also illustrates that that this is not a straight-forward exercise and is far from an exact science.

Faced with various imponderables and significant uncertainties, the Court was forced into postulating as to what may or may not have occurred in relation to a number of important factors, and ultimately it could do no more than adopt a 50/50 approach (allowing the Plaintiff 50% of the loss figure that the Court had determined applicable).

The assessment of damages can clearly depend on a host of variables, including the probability of the successful tenderer actually obtaining and performing the contract in full. To its credit, the Court managed to navigate a path through the complexity and ascertain damages for the Plaintiff in what was undoubtedly a difficult case, however one suspects that it may have been a tortuous (and possibly an unsatisfactory) process for all concerned.

Procurement cases will be fact-specific and other situations may not present such complexity, however certain dicta of the Court are of value as they shed light on the general approach that will be adopted. The reliance on the ‘principle of reasonable assumptions’, the inclination to err on the side of generosity towards the Plaintiff where the Defendant is at fault and the Court’s approach to certain alleged losses are all of particular note. Whether the case has any broader implications (for example, in relation to the consideration of adequacy of damages at interlocutory stage) remains to be seen.11

For more information, please contact:

Peter Curran, Partner and Head of Procurement - PeterCurran@eversheds-sutherland.ie

Áine Smith, Consultant, Procurement - AineSmith@eversheds-sutherland.ie

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1 FP McCann Limited v The Department for Regional Development [2020] NIQB 51

2 FP McCann Limited v The Department for Regional Development [2016] NICh 12

3 FP McCann Limited v The Department for Regional Development [2019] NIQB 100

4 Chaplin v Hicks [1911] 2KB 786 CA

5 Nuclear Decommissioning Authority v EnergySolutions EU Limited [2017] UKSC 34

6 Francovich v Italian Republic (1991) C-6/90

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

8 Delaney v Secretary of State for Transport [2015] EWCA Civ. 172

9 Yam Seng Pte Limited v International Trade Corporation Limited [2013] 1 Lloyds Rep 526

10 Barker v Corus (UK) Plc [2006] UKHL 20

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