Remedies Directive Are you properly covered?

Remedies Directive Are you properly covered?

Victoria Barraclough
Victoria Barraclough, Solicitor for HBJ Gateley Wareing LLP

Victoria Barraclough, Solicitor for HBJ Gateley Wareing LLP, says with the new Remedies Directives in force from 20th December, there is an unseen danger for parties who foresee and deal with the risk of any declaration of ineffectiveness in the main awarded contract. They could end up facing no protection at all, despite their agreement. The article looks at this risk, and suggests a simple solution to negate the risk and leave the protection negotiated by the parties intact.

The new Remedies Directives came into force on 20th December 2009 and applies to all public procurement beginning on or after that date. For procurements where there is a formal advertisement, this point is easy to determine. For those where no formal advertisement takes place, then it will probably be the authority seeking offers of interest or responding to offers received.

One of the remedies for not following the proper procedure is that a rejected contractor may be able to seek a declaration of ineffectiveness in relation to the awarded contract. The word “ineffective” was chosen specifically in the Directive as it has no particular legal meaning in any of the EU member states. This leaves it open to some interpretation as to what the effect will be. In the UK it is clear from the enabling Regulations that any ineffectiveness will not be retrospective, but only affect the awarded contract from the date of the court order going forwards in time. A consequence is that the parties to the contract (the contracting authority and the contractor) both need to consider and address the issue of unwinding the awarded contract if a declaration of ineffectiveness is made, and also what, if anything, happens whilst a challenge to the awarded contract is mounted.


For example, it might be agreed that early capital expenditure might be delayed pending the outcome of the court case, but then the effect of this on the contract in terms of delivery by the contractor will need to be taken account of. Timescales may need to be adjusted as a result with a whole series of consequential adjustments. Also if a declaration of ineffectiveness is made after contract award, then some repayment of any capital expenditure already made may be required.

Areas that may need to be addressed would include unwinding costs, treatment of costs already incurred, capital expenditure, licences and consents, plant and equipment, rights to audit and remove embedded software, TUPE transfers and employment liabilities, lost profit and lost opportunity. Whilst the prime fault for any exposure to the risk of a declaration of ineffectiveness will lie with the contracting authority, they will be keen to pass as much of the risk as they can onto the contractor.

The key message is that any protections which will need to be implemented after the awarded contract becomes ineffective should not be contained in the awarded contract itself. The parties should negotiate a collateral and separate unwinding agreement. Otherwise, the protections could be lost entirely on a declaration of ineffectiveness if this declaration is interpreted to encompass the whole of the awarded contract going forwards from that point in time. There are provisions in the enabling Regulations which require the court not to make any order which is inconsistent with a prior agreement between the parties, as long as doing so does not cut across the intent of the remedy. But the Regulations do not actually require a court to make its order in the same terms as the contract, merely not to be inconsistent.

Therefore if the parties had agreed unwinding provisions in the main awarded contract, a court would, following the Regulations to the letter, not be able to make any order which was inconsistent with those terms, but then the unwinding terms would be covered by the declaration of ineffectiveness and cease to be effective! This leaves a “chicken and egg” type issue. Therefore unless the court chose (and it is not obliged to) actually embrace those unwinding terms in the court order, rather than merely not make an order which is inconsistent with them, then the unwinding terms would be lost.

There is nothing in the Regulations which suggests that the court’s power to declare the awarded contract would extend to a linked but separate collateral unwinding agreement.

Whilst it may seem overly prudent, until the courts have established lines of authority on how ineffectiveness will be implemented, then it will be a substantial risk to rely on provisions in the main awarded contract to cover events after a declaration of ineffectiveness. The best way to avoid this is a collateral contract which covers this issue.

No doubt, as the approach of various contracting authorities becomes more standard, then requirements on unwinding will be included in the PQ and ITT stages so that the terms of any unwinding are dealt with in the same way as the terms of the main contract to be awarded and become one of the criteria against which the various potential contractors are assessed.

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