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Autumn 2006
Projects Bulletin
International
PPP accelerates in the United States
For a number of reasons, Public Private
Partnerships ("PPP") as understood in
the UK and in other European markets
such as Ireland, the Netherlands and
Germany, have been slow to develop in
the US. However in the last couple of
years there has been increasing activity
in that market and we are beginning to
see the growth of what could be a very
substantial PPP sector.
Fragmentation in the
market
One of the factors making the
development of PPP techniques
difficult in the US is the fragmented
nature of the governmental and legal
structure. In the UK when the
Thatcher Government decided to
introduce PFI it was relatively easy for
central Government to ensure that all
central Government departments
adopted the financing technique - this
was achieved by restricting other
opportunities for authorities to obtain
the necessary financial support for
capital expenditure. In the case of local
authorities, they were encouraged to use
PFI by a mixture of carrot (the
availability of PFI credits from central
Government) and stick (the lack of any
other source of Government support for
the necessary spending).
In the United States on the other hand
each individual state has its own elected
politicians and parliamentary structure;
its own judicial system; and its own
procurement legislation. Although there
are numerous federal agencies, most of
them situated in or around Washington,
they do not have the same ability to
bring about the wholesale adoption of a
new approach to procurement, even if
that was something they wanted to
promote.
Accordingly progress towards PPP
structures in the US has been patchy,
with some states appearing to embrace
the concept with a degree of enthusiasm
and others showing considerable
hostility. It is noteworthy that approval
of the Indiana Toll Road project,
referred to below, only managed to
secure a very narrow majority in the
Indiana Congress, which split on party
lines, despite the fact that it was actively
promoted by the Governor.
Another reason for the comparative
fragmentation of the market is that there
is no such thing as a national health
service or a unified public school system
- it is hard to envisage a programme such
as LIFT or Building Schools for the
Future being "rolled out nationally" in
the US.
Recent road projects
Progress to date has occurred mainly in
the road sector. Here the structure
adopted is very different from that used
in the UK, or most other markets
Welcome to the Autumn Edition of
the Projects Bulletin.
US PPP have been somehow slow to
develop but we are now seeing
increasing activity in this sector. You
will find more on this potentially
substantial market in this bulletin, as
well as news on recovery of PFI bid
costs (page 6), the implications of avian
‘flu on contracts entered into under
FIDIC red book (page 4), standstill
period in public procurement and the
Rapiscan case (page 10) and planning
considerations on amendments to PFI
projects (page 11).
Contents
PPP accelerates in the US
1
Bird flu and the FIDIC Red Book
4
Birmingham healthcare PFI project
6
Recovery of bid costs
6
EU proposals for increased
7
confidence in public procurement rules
Rapiscan and the standstill
period
10
Amendments to PFI projects
and planning considerations
11
Who to contact
12
Projects Bulletin
adopting PPP techniques. The
financing relies on the fact that there is a
network of existing publicly owned
tolled highways in the US, where users
are already accustomed to paying cash
tolls. Invariably the public authority,
which could be a state government or
city council, is short of cash for the ongoing maintenance and operation of the
road and is unwilling for political reasons
to increase the cash tolls payable by
motorists. Traditionally the funding for
maintaining public sector roads has
come from the "gas tax" but with
gasoline prices spiralling upwards there
is no room for increases in gas taxes.
In a number of recent projects, a private
sector consortium has agreed to "buy"
the road from the relevant public
authority for a fixed period of time (75 or
99 years is normal) by making a large
capital payment on day 1. This leaves
the public authority in possession of a
large amount of cash (always attractive
to politicians), which can be used for its
road programme generally or on other
projects which are necessary in that
particular locality. The consortium
operates the road and is required to
make improvements in terms of
modernising the toll collection system;
the consortium secures its return by
collecting the cash tolls over the life of
the concession. The consortium is
permitted to raise the tolls and from the
point of view of the municipality or state
government it is politically more
advantageous to have a private sector
operator raise tolls than for the
municipality to do so. Most projects
have some degree of regulation in the
contract limiting the extent to which the
operator may push up the toll rates.
Toll roads with high usage by out of
state users (i.e. cross state highways) are
easier to impose higher tolls on, since
the burden is borne by users who do not
vote locally.
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Recent deals with this structure include:
Chicago Skyway Project
The eight mile Chicago Skyway has
been leased for 99 years to a
consortium led by Cintra and
Macquarie. The upfront payment
was $1.8 billion. The private sector
operator has installed an electronic
toll system which is proving popular
with users and reportedly in the last
six months of 2005 traffic volumes
rose by 5% and revenue increased by
33%.
Indiana Toll Road Project
A 75 year lease has been granted to a
consortium led by Cintra and
Macquarie. The upfront payment is
$3.8 billion. The Indiana Toll Road
does not currently have an electronic
toll collection system but the private
sector operator will introduce one.
According to the Governor, Mitch
Daniels, it is currently costing the
public sector 34 cents to collect each
15 cent toll!
Trans Texas Corridor
This is an innovative scheme under
which a package of potential projects
will be scoped, specified and
implemented. A consortium led by
Cintra and Zachry (a Texas based
contractor) are leading the
advisory/implementation team.
Pocahontas Parkway Project
A lease of this nine mile road in
Virginia was sold to Transurban, an
Australian toll road operator, for USD
611 million.
Nationwide
It has been estimated that the toll
roads and bridges in the US have a
combined annual revenue exceeding
USD 6 billion.
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Other sectors
Outside the road sector, there has been
some work done studying the possibility
of using PPP techniques for the
development of new hospitals in
Louisiana. This is stimulated by the
fact that Louisiana, unusually for
American states, has a state-wide
network of hospitals designed to provide
a fallback for those citizens who are
unable to access privately funded
hospitals. The state of Louisiana is now
considering using PPP financing to
update these hospitals and the lead
project is the University Hospital in
Baton Rouge.
There are also projects for light rail and
metro, such as the project currently
being bid to extend the Bay Area Rapid
Transit ("BART") out to Oakland
Airport in California. Chicago is
promoting a form of PPP, linked to
commercial property development
opportunities, to develop a rail link
between downtown Chicago and
O'Hare Airport.
Most of the running has to date been
made by companies originating from
outside the United States, since they
have experience of PPP in other
countries. Macquarie and Cintra have
been very successful in winning
highway projects and their success is
causing domestic US contractors and
finance houses to take this market
seriously. We can expect to see a
growing presence of US domestic
contractors joining bid teams for PPP
deals.
What about a unitary
charge structure?
The UK structure, incorporating a
monthly unitary charge, has not really
featured so far in the US. However this
structure offers a number of advantages
for public sector awarding authorities
which they do not gain from the current
US structure. For example, where a
large capital sum is received up-front, it
may be difficult to impose suitable
checks and balances on the use of the
cash. It is not out of the question that
an incoming administration, perhaps
composed of a different political makeup, may squander the cash which has
been carefully set aside by the original
administration. Also there is less ability
to impose controls on the operator when
all the consideration has passed from the
operator to the awarding authority on
day one.
Under the unitary charge mechanism,
where payments are made monthly by
the awarding authority to the operator,
there is the opportunity each month to
make deductions for unavailability or
poor performance and this in itself
provides a control mechanism for the
public sector client throughout the life
of the concession.
Increasingly, domestic US institutions
(building contractors, banks) will
participate in, or lead, bidding
consortia. To date most of the
running has been made by non-US
entities.
More projects will adopt a unitary
charge mechanism, which in itself
will lead to a change in the financing
structure.
We will see an increase in the number
of federal or national pilot
programmes, such as the Penta P
programme being developed by the
Federal Transit Administration.
For further information please contact
Christopher Causer.
From our discussions with various
public sector authorities in the US, it is
clear that a number of them are now
looking hard at the unitary charge
mechanism and one of the reasons
behind this is the ability to impose a
degree of control throughout the life of
the contract through the deductions
mechanism. This in itself makes the
transaction easier to sell to taxpayers.
Moreover the unitary charge is the most
obvious structure where a new road
needs to be constructed, as opposed to
transferring a road with existing cash
tolls.
Future developments
With eleven offices in the United States,
we are actively engaged in promoting
PPP in a number of states. Looking into
our crystal ball for the next year our
predictions are as follows:
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Projects Bulletin
Bird Flu and the FIDIC red book
Pandemic Scenario
Loss and expense
Aside from the quality of the finished
works, an Employer's chief concern in
any project is for the works to be
completed on time and to budget.
Pandemic influenza (flu) poses a threat
to both of these goals. This article
focuses on one of the most popular
forms of engineering contract, the
FIDIC Red Book Conditions of
Contract for Works of Civil Engineering
Construction, fourth edition,
incorporating amendments 1988 and
1992 ("the Red Book"). Imagine a
scenario where a Contractor is engaged
under the Red Book and has
commenced work on site. A pandemic
then occurs and the Contractor stops
work, or is instructed to stop in order to
protect the Employer's
process/manufacturing capacity.
The Red Book specifies certain events
as "Employer's Risks" (Clause 20.4). If
such events occur the Contractor is
entitled to its loss and expense in
rectifying the damage caused. A
pandemic is not specifically listed as an
Employer's Risk. Clause 20.4(h) refers
to “any operation of the forces of nature
against which an experienced contractor
could not reasonably have been
expected to take precautions”, but it is
unlikely that this phrase will cover
pandemics as its more literal
interpretation is by reference to natural
phenomena such as extreme weather
events, earthquakes, volcanic eruptions
etc. The Red Book also specifies
certain events as "Special Risks" for
which the Contractor bears no liability
(Clause 65). A pandemic is not a
Special Risk.
What is the risk?
Pandemic flu occurs where a strain of
flu arises which is so different from
those already in existence that the
global population has no resistance to it.
Such a strain of flu will spread more
quickly and infect more people than
ordinary flu. Fear of pandemic flu is
high at the moment because of the risk
that the bird flu virus H5N1 will mutate
into a form which can be transferred
from human to human. In the event of
a flu pandemic, the UK government
expects 25% of the population to
become ill and is warning businesses to
allow for staff absences of 15%. A
vaccine will not be available until at
least 4 to 6 months after the first
outbreak in the UK. Even if anti-viral
drugs are available at the start of the
outbreak (and prove effective) they will
not provide a cure, only ease the
symptoms. The worst case scenario is
that half the population falls ill and over
700,000 people die.
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AUTUMN 2006
Given that pandemics do not fall into
the category of either Employer's or
Special Risks, the Contractor does not
have an automatic right to claim loss
and expense arising from the
occurrence of a pandemic.
Delay
Clause 44.1 sets out the events in which
the Contractor can claim an extension of
time for completion of the Works.
Delay caused by pandemics is not
specifically referred to but is probably
caught by clause 44.1(e), which refers to
"other special circumstances which may
occur [emphasis added] other than
through a default of or breach of
contract by the Contractor or for which
he is responsible".
This means that the Contractor will be
able to claim an extension of time if the
Works are delayed by a pandemic.
Protection of
manufacturing
Where the Employer halts the Works in
order to protect its manufacturing
ability, it will do so by asking the
Engineer to suspend the Works, as he is
entitled to do under Clause 40.1.
Under Clause 40.1, where a suspension
is ordered to protect the Works, there is
no cost consequence to the Employer.
However, a suspension which is ordered
to protect the Employer's
manufacturing ability cannot be said to
be necessary for the safety of the Works
themselves. In this case the Contractor
will be entitled to an extension of time
and loss/expense under clause 40.2.
Clause 40.3 deals with suspensions
which continue for over 84 days. If the
Works are suspended for more than 84
days, then the Contractor can notify the
Employer that the contract will be
terminated if the Works are not
resumed within a further 28 days.
Such a termination will be treated as an
event of default by the Employer,
meaning that the Contractor will be
entitled to payment of all outstanding
sums due to it, payment for any goods it
has already ordered and any loss or
damage arising out of the termination.
This could include its loss of profit and
other indirect or consequential losses.
Where the suspension relates to part of
the Works only, the contract will not be
terminated but the suspended works
will be treated as if they have been
omitted from the Works by the
Employer, with the Contract Price
being adjusted accordingly.
Release from
performance
Under Clause 66.1 the parties are
released from performance "if any
circumstance outside the control of the
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parties arises… which renders it
impossible or unlawful for either or
both parties to fulfil his or their
contractual obligations…". Where the
Engineer does not order a suspension
under Clause 40.1 but work is
prevented by the outbreak of a
pandemic, the Contractor might seek to
rely on this clause to extricate itself
from the contract. However, in order to
take advantage of this clause the
Contractor would have to show that the
pandemic made it impossible for it to
complete the Works or it was unlawful
to continue working, e.g. for health and
safety reasons, not just that it delayed
the works. In the event of the
Contractor being released from its
obligations under Clause 66.1, it would
only be entitled to payments due to
date and payments for goods already
ordered. It would not be entitled to
payment for any other losses arising
from termination.
Possible amendments
to the Red Book
It is unlikely that contractors will accept
any significant change to the overall
risk allocation adopted by the Red
Book. It seems fair that delay caused
by an uncontrollable event such as a
pandemic should entitle the Contractor
to an extension of time. Equally, it is
fair that any loss and expense should
not be passed on to the Employer.
However, the Employer's need to
protect its manufacturing ability can be
catered for without significantly altering
this balance. Clause 40.2(d) could be
expanded to include suspensions
ordered to protect the Employer's
manufacturing ability as well as those
necessary to protect the Works. The
following wording would achieve this:
"Unless such suspension is:……(d)
necessary for the proper execution of
the Works or for the safety of the Works
or any part thereof or to protect and/or
maintain in operation the Employer's
manufacturing capability at any location
adjoining or in the vicinity of the Site
(save to the extent that such necessity
arises from any act or default by the
Engineer or Employer or from any of
the risks defined in Sub-Clause 20.4).
Sub-Clause 40.2 shall apply." [Proposed
new wording appears in italics].
The effect of this amendment is that
the Contractor will retain its right to an
extension of time under Clause 44.1,
but will not be able to claim
loss/expense or terminate the contract
under Clause 40.3 if the suspension
lasts for over 84 days. Given that the
government predicts that a flu
pandemic would come in one or more
waves, each lasting around 15 weeks,
employers might also consider
specifying a period longer than 84 days
(12 weeks). Part II of the Red Book
contains optional clauses which the
parties can choose to add to the
contract.
Optional clauses for Clause 34 include
the following: “In the event of any
outbreak of illness of an epidemic
nature, the Contractor shall comply
with and carry out such regulations,
orders and requirements as may be
made by the Government, or the local
medical or sanitary authorities, for the
purpose of dealing with and overcoming
the same.” This clause should be
incorporated into the contract. Whilst it
does not change the entitlement of the
Contractor in the event of a suspension
being ordered by the Engineer, this
clause clarifies the Contractor's
obligations regarding its own staff and
labour.
Conclusion
It is possible for employers to protect
against the risk of pandemic flu without
altering the basic risk allocation of the
Red Book. Employers can do so by
ensuring that any rights of termination
for prolonged suspension allow
sufficient time for a pandemic to pass.
Also, specific provisions can be inserted
into contracts requiring the Contractor
to take steps to minimise the risk to the
Works.
Key points
Delay caused to the Contractor by a
pandemic can be claimed as an
extension of time. However, the
Contractor cannot claim its
loss/expense.
If the Employer suspends the Works
to protect its manufacturing ability,
the Contractor will be entitled to an
extension of time and loss/expense.
If the suspension continues for more
than 84 days, then the Contractor
can, after giving notice, terminate the
contract and is entitled to payment
for any loss or damage it incurs.
If a pandemic renders performance of
the Works impossible or unlawful,
then the Contractor can terminate
the contract. However, a mere
delay caused by a pandemic is not
enough; performance has to be
impossible or unlawful.
There are amendments which can be
made to the Red Book to cater for
pandemic risk without radically
altering the risk allocation between
Contractor and Employer.
For further information please contact
Yassir Mahmood.
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5
Projects Bulletin
£553m major healthcare PFI project signed by
Balfour Beatty Construction and Haden Young
A team from Kirkpatrick & Lockhart
Nicholson Graham led by projects
partner Christopher Causer advised a
joint venture composed of Balfour
Beatty Construction Limited and
Haden Young Limited on the £553
million PFI construction contract for
the design and construction of new
hospitals in Birmingham. Financial
close was reached on 14 June 2006.
The second largest bond deal after
Bart's, the Birmingham project is
financed by EIB and a bond issue
guaranteed by FGIC. The new
hospitals, based at the Queen Elizabeth
Hospitals site in Birmingham, will be
the second largest PFI healthcare
facility after Bart's. Once operational in
2010, it will provide 1,213 new beds, a
108-bed specialist psychiatric hospital
and teaching facility and a separate 32bed mental health local facility.
The project is challenging as it is spread
over two sites, with a very complex and
intricate allocation of property between
landowners. It involves two trusts, one
being a foundation trust, and requires
works on the trusts' retained estate. The
construction work has been under way
since last summer, including demolition
of existing Victorian healthcare
buildings and the removal of hogweed
and Japanese knotweed.
Causer (partner - head of projects
group) and projects associate Sophie
Charveron included Steven Cox
(partner - property), Kevin Greene
(partner - construction), Jonathan
Lawrence (partner - banking),
Sebastian Charles (partner - planning
and environment), Yassir Mahmood
(associate - projects) and Eleanor
Smith (associate - property).
For further information please contact
Sophie Charveron.
The Kirkpatrick & Lockhart Nicholson
Graham LLP team led by Christopher
Recovery of bid costs
The industry has long been concerned
with the cost (and time) of closing deals
and the recent hiatus in the health
service PFI/PPP has caused real
hardship to bidders. For those that are
not given the green light, with large
amounts at stake, bidders will want to
know the prospects of recovering those
costs.
Sir Malcolm Bates, in his first review of
the PFI process in 1997, recommended
that "where a decision is made not to
proceed with a project and that decision
is not related to the viability of tenders
received, contractors' bidding costs
should be refunded".
Although this recommendation has no
legal force, it is assumed that all
responsible government organisations
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AUTUMN 2006
(central and local) will follow it.
What options does a bidder have to
recover its costs in the event the Bates'
recommendation does not apply, or an
Authority will not abide by it, or there is
no preferred bidder's letter dealing with
costs? There are four areas worth
considering.
Restitution/Unjust
Enrichment
For a claim to be successful the other
party must normally have received a
benefit. This may be the case, for
example, where planning permission
has been obtained and the Authority
can take the benefit. There is also
some support for the argument that a
party can receive a benefit where it
requests services even though those
services could be described as
preparatory to performance Countrywide Communication Limited
v ICL Pathway Limited [2000] CLC.
Estoppel
Estoppel is a rule of law which prevents
a party alleging a fact in support of its
claim if it has previously by word or
conduct represented the contrary to the
other party. Estoppel is said to be "a
shield and not a sword". However, as
Brandon LJ stated in Amalgamated
Investment & Property Co Ltd v Texas
Commercial International Bank Ltd
[1982] QB, "While a party cannot found
a cause of action on an estoppel, he
may, as a result of being able to rely on
an estoppel, succeed on a cause of
action on which, without being able to
rely on that estoppel, he would
necessarily have failed".
Projects Bulletin
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Misrepresentation /
Negligent Misstatement
Implied Contractual
Promise
Economic loss is only recoverable in tort
if there is a negligent misstatement by
one party where a duty of care existed
and the other party relied on and was
entitled to rely on the statement.
Having invited bids and chosen a
preferred bidder knowing that
significant costs will be incurred in
working up the scheme, there are fertile
grounds for arguing that there is an
implied contractual promise that the
Authority will act in accordance with
the parties' reasonable expectations, at
least not dissimilar to the Bates
guidelines.
A duty of care would not generally exist
in a tender situation and the invitation
to negotiate generally contains
disclaimer provisions. However, the
PFI process is such that it is not beyond
legal principles that in certain situations
such a duty might arise. In such
circumstances, deliberately withholding
information or indeed providing false
information may well give rise to a
cause of action.
Conclusion
Having an express contractual right in
the preferred bidder letter is the only
sure way of recovering bid costs in the
event of cancellation of a project.
Following the current trouble in the
NHS bidders will also now want to
consider negotiating compensation for
additional funding of the bid costs
where the scheme is delayed through
no fault of their own.
Failing any such express contractual
right, the Bates recommendation may
allow recovery of bid costs "ex gratia"
where a project is cancelled.
If neither of these apply the
circumstances of the deal may give rise
to a cause of action for the recovery of
some, if not all, of the wasted bid
costs.
For further information please contact
Trevor Nicholls.
EU proposals for increased confidence in public
procurement rules
Fairer and more
efficient remedies
As announced in our previous issue,
after simplifying the rules applicable to
the procurement of public contracts,
the EU Commission now turns its
attention to the remedies available in
case of breach of these rules. Many of
you encountered difficulties when
using the existing remedies to
challenge unlawful awards of public
contracts. The biggest difficulty was
that, until the Public Contracts
Regulations 2006 ("Regulations") were
adopted on 31 January 2006, the only
remedy available to unsuccessful
bidders after a contract award was
damages. Public contracts awarded in
breach of the procurement rules could
not be set aside, cancelled or declared
void, so claims had to be brought to
court before the contract was awarded
(with the exception of collusion and
bad faith).
Frequently, some contracting
authorities were tempted to engage in a
race to sign the contract as soon as
possible, in order to make it
irreversible. As in the UK, the decision
to award a public contract and the
execution of the contract are usually
contemporaneous. In Alcatel and
Others (C-81/98 [1999] ECR 1-7671),
the ECJ held that it is unacceptable for
contracting authorities to rush to
execute a public contract following a
known or alleged infringement of the
procurement rules, as a measure to
secure the preferred bidder.
Since the Regulations came into force,
a claimant is now entitled to require a
court to suspend a contract until the
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Projects Bulletin
judges decide on the breach of
procurement law claim. The only
condition is to submit the claim within
10 days of the award decision, during
which period (the "standstill period")
the contracting authority is not allowed
to execute the contract.
Whilst mandatory standstill periods are
already implemented in some Member
States, they are not widespread in the
EU. This means that an English
contractor bidding for a public works
contract in another Member State may
find it more difficult to bring a claim
against an illegal award of contract if
different practices and rules apply
elsewhere.
Acknowledging these difficulties, the
EU organised an extensive consultation
on the functioning of the current
remedies in the classical and utilities
sectors. The EU Commission then
published a proposal for reform of the
current Remedies Directive making
standstill periods compulsory, on 4 May
2006.
Authorities must give
reasons for nonselection
Under the current Regulations, it is
only on the request of an unsuccessful
bidder that contracting authorities must
give the reason why its bid failed to
meet the award criteria (Regulation
32(4) and (9)). Any economic operator
that has either applied to be selected in
a tender or submitted a tender is
entitled to bring a claim for
infringement of public procurement
rules.
It may become compulsory for all
contracting authorities in the EU to
provide reasons for non-selection to all
bidders if the reform is adopted. Where
a contracting authority receives a
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request from an unsuccessful bidder
asking for the reasons why its bid was
not successful, the authority would
have to reply at least three days before
the end of the standstill. Will this
greatly improve the economic
operators' confidence in public
procurement rules and encourage
authorities to comply with the
procurement rules more readily?
Pre-contractual
notification and
automatic suspension
A claimant must inform the contracting
authority of the alleged breach and its
intention to submit a claim. In the UK,
proceedings must be brought within
three months from when the ground for
the claim arose (Regulation 47(7)). The
High Court has the necessary power to
review alleged claims before full
proceedings are brought. A serious
weakness of the current remedies is the
absence of a period of time to review
award decisions before the contract is
executed.
Contracting authorities may be granted
an immunity from challenge and
suspension when the "general interest
of non-commercial and economic
nature" requires it (for instance where
urgent works must be carried out to
school buildings before the school year
begins).
It is disappointing that the Commission
did not address the issue of long,
protracted negotiations for complex
projects such as PFI contracts, and does
not define at what point in a tender
process the award decision is
communicated. According to the OGC
guidance on the standstill period, the
earliest point in time that an award
decision can be communicated to all
tenderers in a negotiated award or a
competitive dialogue is when the
contracting authority "ceases dialogue
or discussions with other bidder(s) and
announces the appointment of the
preferred bidder" (OGC guidance note
on the ten-day mandatory standstill
period, March 2006). It is at this point
that the standstill period commences
under English law.
Ten-day standstill
period
Contracting authorities and preferred
bidders have to wait at least 10 calendar
days from the communication of the
award decision before executing the
contract (Regulation 32(3)). The
Commission suggests extending the
obligation to enforce standstill periods
to all Member States.
The standstill period would be:
applicable to all categories of public
contracts;
short: ten calendar days (7 calendar
days for urgency, call-offs from
framework agreements and dynamic
purchasing); and
not applicable in circumstances of
extreme urgency.
There would be discretionary
derogations for:
framework agreements concluded
with a single economic operator;
call-offs without competition;
open procedure awarded to single
bidder; and
restricted or negotiated procedure
where tenders are excluded for a
reason other than failing to meet the
contract award criteria.
Sanctions
Contracts awarded in breach of the precontractual notification obligation or
the standstill period would be invalid
i.e. without any contractual effect. The
invalid contract could however still
have certain effects as between the
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parties or in relation to third parties, up
to a period of six months from the
conclusion of the contract. This may
cover circumstances such as where
orders for materials must be made as
early as possible or until a replacement
contractor is selected under a new
award procedure.
should give potential bidders and
lenders more confidence in the fairness
and effectiveness of the procurement
rules.
For further information please contact
Sophie Charveron.
Derogations would be available when
the national review board or courts find
that "overriding reasons based on
general interest of non-economic
nature" require that the effects of a
contract already executed are not
challenged, despite an infringement of
procurement rules. Should the proposal
go ahead, the risk is that excessive use
of such derogations may render the
reform worthless, as it would allow
illegally awarded contracts to remain as
they stand.
Is it likely that this
reform will take place?
The Commission's proposal is now
with the European Parliament and the
Council of Ministers, awaiting their
"co-decision" (in other words,
consensus). The reform would
consolidate the first steps put into
place by the Classical Directive 2004
for better and more effective rules.
The compulsory standstill period aims
at preventing contracting authorities
from racing to execute public contracts
immediately after the award decision.
Some will deplore that the proposal
does not go far enough and does not
impose an obligation on contracting
authorities to notify participants of
other decisions made during the
procedure, such as the decision not to
select them.
In our view, this reform should
encourage contracting authorities to
award contracts in compliance with the
procedures and, more importantly, it
AUTUMN 2006
9
Projects Bulletin
Rapiscan and the standstill period
Rapiscan Systems Limited v HM Revenue and Customs 2006
EWHC 2067 (QB)
The Public Contracts Regulations
2006, which came into force on 31
January 2006, created a mandatory tenday "standstill" period between a
contract award and the conclusion of a
contract with the successful tenderer.
The decision in the case of Rapiscan
Systems Limited v HM Revenue and
Customs [2006] EWHC 2067 (QB)
shows that unsuccessful bidders have a
right to delay the contracting authority
from entering into the contract pending
a full and proper debriefing.
The case
HMRC put out a tender for the supply
of scanners to scan large vehicles when
they enter the UK, advertised in July
2005 under the 1995 Public Supply
Contracts Regulations. HMRC also
adopted certain aspects of the new
Public Contracts Regulations 2006,
including a standstill period. The
contract award was decided on 14 July
2006 and Rapiscan was unsuccessful in
its bid. HMRC planned to execute the
contract on 26 July 2006 and provide
information to unsuccessful bidders at a
debrief meeting on 1 August 2006.
Rapiscan requested information
regarding the award decision and
pending receipt of that information, it
sought to extend the standstill period
by a few more days and defer the
execution of the contract. HMRC
refused the extension and gave
information on the reasons why
Rapiscan's tender was not successful on
21 July 2006. Rapiscan brought
proceedings before the High Court to
prevent the execution of the contract
from going ahead. HMRC replied that
it had no obligation to provide
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AUTUMN 2006
information because Rapiscan's request
had no procedural basis in the
Regulations. It argued that if Rapiscan
was entitled to request further
information, its case had been
answered by a letter of 21 July 2006.
The judgment found in favour of
Rapiscan only seven days after
Rapiscan had requested further
information and only six days after
receiving a response from HMRC.
The judgment
The Judge held that Rapiscan's
concern that the award procedure had
not been carried out as set out in the
tender documentation was valid and
the criteria marking mechanism was
unclear. Further information was
needed to clarify the criteria. She
rejected HMRC's claim that they had
clarified the position by a letter dated
21 July 2006. Reasons for a contract
award must be provided to a tenderer
within 15 days of a request. However
the requirement to ensure transparency
is overriding and when there is still
time to set aside a contract award, the
ten day standstill period can be
applied. HMRC should have extended
the standstill period as the contract was
not urgent and Rapiscan had indicated
that further information might avoid
proceedings. Dobbs J held an
injunction would be ordered if
undertakings were not offered by
HMRC.
Lessons to learn
Bidders unsure as to why they were
unsuccessful should write to the
authority immediately, clearly stating
information and clarification sought.
If not clarified within the ten-day
standstill period, the tenderer can apply
to court to restrain the conclusion of the
contract.
Contracting authorities must endeavour
to answer clearly and as fully as possible
to requests for reasons from
unsuccessful bidders received within a
standstill period. Their response should
give clear reasons for the decision not to
award the contract to that bidder.
Contracting authorities can also extend
the standstill period when appropriate.
They should be aware that any lack of
transparency will persuade the courts to
order that the execution of the contract
is retrained.
For further information please contact
Christopher Causer or
Sophie Charveron.
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Amendments to PFI projects and
planning considerations
It has been hitting the headlines that
several high profile PFI projects have,
as financial close approaches, been
forced to reconsider the original scope
and scale of the project due to financial
or "affordability" pressures. For
example dropping buildings from the
project or reducing the scale of what is
built may be proposed to save costs.
Often, this review occurs after planning
permission for the project has been
granted. When such decisions are
being made it is crucial to be aware of
the planning and hence cost and
timescale implications.
If the result is that a new planning
resubmission is needed, or that the
proposal becomes susceptible to a
third party judicial challenge, then the
consequences are serious. A third party
challenge to a planning permission may
be brought by local objectors, or even
potentially disappointed bidders for the
project. Even if unsuccessful a
considerable delay may arise, and that
risk alone may necessitate re-starting
the planning process. Re-starting the
planning process may itself contain
risks of delay, for example if planning
policy has changed since the time of
the first application, or local
circumstances have altered, affecting
the need for the project. Below are just
a few of the issues that need to be
considered when making decisions
about changes to PFI schemes.
Minor amendments
The first issue is the question of
whether the changes proposed can be
agreed as "minor amendments" to the
original scheme, or whether what is
proposed is sufficiently different that a
new planning application will need to
be made. It has been the practice of
local planning authorities to allow "nonmaterial" amendments to a permitted
development without obtaining fresh
planning permission. If the change to
the project is a minor amendment, the
sponsor may go ahead and make the
change without consulting the Local
Planning Authority ("LPA"). However
on a large project, the sponsor may opt
to seek a letter from the LPA that the
change contemplated can be viewed as
a minor amendment.
Any project should be cautious in
relying on such a letter following the
decision of the Court in Reprotech
(Pebsham Ltd) v East Sussex CC
[2002] 4 ALL ER 58. In Reprotech
the Court ruled that although the
opinions of planning officers are
helpful, the only way a Developer can
get a binding determination as to
whether planning permission is
required, is to make a formal planning
application.
Developers, in light of the recent
increase in third party challenges to
planning permissions, must be certain
that what is contemplated really is a
non-material change as the informal
indication of the LPA cannot be relied
upon as binding in the event of third
party challenge. If an amendment is
material, in practice, not all LPAs will
require a full application involving the
resubmission of all plans.
Whilst all planning permissions are
subject to an implied time limit in
which development must be
commenced, there is no time limit
implied for completion of a
development, unless provided.
Therefore, if a project sponsor chooses
to build out only part of the scheme, it
could argue that it is not in breach of
planning.
The planning permission will cease to
have effect after a period of not less
than 12 months from the date the
notice is issued. This means that the
building work must be completed in
that time, or run the risk of the partially
completed development potentially
becoming unauthorised. In such
circumstances the LPA may decide to
take enforcement action requiring the
developer to remove the partially
completed structure and make good the
site.
However, in practice, the risk of a
completion notice being served is
probably small as they are very rarely
used and can be appealed. The more
likely alternative if there is no
condition relating to completion, is for
the LPA to take enforcement action
within 4 years for a development not
being in accordance with approved
plans. Both issues are a concern,
especially if the project has become
contentious.
Implementation of a
project in part
Environmental Impact
Assessment
If a sponsor deletes certain elements he
may be able to argue that the scheme is
being implemented in accordance with
the original planning permission in
part, rather than being amended.
In making a decision as to whether an
amendment to the scheme is " minor "
or "material", one other consideration of
particular importance, is the effect the
amendment will have on the
AUTUMN 2006
11
Projects Bulletin
Environmental Statement ("ES")
submitted with the original
application, in accordance with the
requirements of the Town and
Country Planning (Environmental
Impact Assessment) (England and
Wales) Regulations 1999 ("the
Regulations"). Environmental Impact
Assessment ("EIA") is the process by
which environmental issues are taken
into account during the planning
process, i.e. by requiring applicants to
produce an ES to describe the likely
significant effects of the development
in question on the environment and
proposed mitigation measures.
been met. A project may have gone
through an EIA process on the basis
that a building comprised in part of the
scheme would be built to screen a row
of nearby houses from visual and noise
impacts of the main development. If
the scheme is altered to drop this
building, the visual and noise impacts
may need to be considered afresh
through changes to the original ES.
EIA issues are one of the hot spots for
third party challenge in planning,
causing significant delays to the
projects in question. It could mean
restarting the planning powers with all
the potential for delay that entails,
especially if, since the original
permission was granted, there have
been changes in local circumstances,
including the need for the project or a
change in planning policy, which since
the Planning Compulsory Purchase Act
2004, is more fluid than ever before.
For further information please contact
Sebastian Charles
The ES is circulated to statutory
consultation bodies and made available
to the public for comment. Not all
developments are subject to EIA. The
Regulations apply to large-scale
developments where there is obvious
potential for environmental damage.
Almost all of the types of project for
which PFI will be used will require
EIA. Planning permission cannot be
granted unless the decision-making
body has not only taken into account
the specified information about the
environmental effects of the proposal,
but has also stated in its decision that it
has done so. Permission can be
quashed if this requirement has not
Who to Contact
Kirkpatrick & Lockhart
For further information contact the following
Christopher Causer
ccauser@klng.com
Nicholson Graham LLP
T: +44 (0)20 7360 8147
110 Cannon Street
Stuart Borrie
sborrie@klng.com
T: +44 (0)20 7360 8155
London EC4N 6AR
Trevor Nicholls
tnicholls@klng.com
T: +44 (0)20 7360 8177
www.klng.com
Kevin Greene
kgreene@klng.com
T: +44 (0)20 7360 8188
T: +44 (0)20 7648 9000
David Race
drace@klng.com
T: +44 (0)20 7360 8106
F: +44 (0)20 7648 9001
Sebastian Charles
scharles@klng.com
T: +44 (0)20 7360 8205
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AUTUMN 2006
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