AG has advised the Secretary of State for Transport on the successful defence of the 2019 Rail Franchise Litigation, with Judgment handed down today.

The Case considered a wide range of legal issues, several of which will be relevant to many other procurement processes.

Background to the case

The 2019 Rail Franchising Litigation involves four separate claims against the Secretary of State for Transport (the Defendant), which have been case managed into a single case. The claims arose out of three separate rail franchise procurement competitions run between 2017 and 2019: East Midlands; South Eastern; and the West Coast Partnership (involving both West Coast and HS2). A particular issue that arose in those competitions was the extent of pensions risks that were required to be accepted by the franchisee under the contract terms accompanying the invitation to tender (ITT).

The Claimants had submitted bids which refused to accept the pensions requirements. Other bidders, including the winning bidders in two of the competitions (the third competition having been cancelled) had accepted the pensions requirements.

The Defendant disqualified the Claimants on the basis that their refusal to accept the pensions requirements rendered their bids non-compliant and the ITT gave the Defendant the discretion to disqualify non-compliant bids. The Claimants challenged their disqualification. 

One of the claims was settled by the parties shortly prior to the start of the trial. The three remaining Claimants were all unsuccessful in their claims on the pensions requirements, with the Court finding that the relevant terms of the competitions, and the disqualifications, were lawful. The key elements of the judgment are summarised below.

The pensions requirements and the discretion to set the contract terms

The Claimants argued, among other things, that the Defendant was in breach of his duties of transparency and fairness by "seeking to impose allegedly large or uncertain pensions risks" on the bidders. 

The Court found that there was no legal restriction on "the size of a risk that may be allocated to one contracting party or another in a public procurement" and no legal principle that a procurement must be structured in a way that enables all potential bidders to bid. It was noted by the Court that "uncertainty of outcome is the essence of risk" and that this is something that bidders have to deal with in any substantial procurement.

It was up to the Defendant to determine how the pensions risks were to be allocated: a contracting authority has a wide margin of discretion in the balancing of risk against available public finances.

The extent of pensions risk imposed by the Defendant on bidders was accordingly lawful.

The approach to non-compliances in the ITTs and the decision to disqualify

The ITTs included a broadly drawn provision on non-compliances that gave the Defendant a wide range of potential options for responding to any given non-compliance, ranging from disregarding the non-compliance to disqualifying the bidder. The Claimants argued that this conferred an unlimited discretion on the Defendant and that this was a breach of transparency and fairness.

Again, the Court disagreed and found that the terms of the ITT were lawful. The ITT made clear that a change by a bidder to the risk allocation in the contract terms was to be treated as a non-compliance. The discretion to disqualify in those circumstances was not then unlimited, but was to be interpreted in accordance with the relevant legal principles with discretion to be exercised on a principled basis. Any reasonably well informed and normally diligent (RWIND) bidder would know that the discretion was to be "exercised on a principled and proportionate basis", meaning further detail on the precise circumstances of a non-compliance that could lead to disqualification did not have to be included in the ITT.

The Court also found that the actual application of the discretion to disqualify the Claimants was lawful. As part of this, the Court considered the position of those bidders who had complied with the Defendant's instructions and accepted the pensions risks in their bids. The Court found that, although the ITT offered alternatives to disqualification (such as inviting re-bids on different terms), had the Defendant chosen to do anything other than disqualify the Claimants, then "the risk of a successful challenge by compliant bidders would have been extremely high and not a risk that the Defendant could sensibly contemplate unless absolutely compelled to do so, which he was not". 

Practical considerations

While the specific public procurement rules that apply to the rail sector were a feature of this case, much of the analysis is grounded in the general EU Treaty principles, particularly equal treatment, transparency and fairness. It is therefore of wide application to contracting authorities and utilities undertaking procurement processes.

The finding around the discretion of the contracting authority (or utility) to set the terms of the competition, including the required transfer of risk, is a welcome – if unsurprising – clarification. 

Similarly, the rules around non-compliances in these competitions, and the breadth of the discretion that was reserved, is in our experience typical of high value and complex procurements. In many cases, it is impossible for a contracting authority or utility to specify at the outset all of the ways in which bidders might fail to comply with the stated requirements, or to determine in advance exactly how it will respond should any such non-compliance arise. Instead, the confirmation in this case that reserving discretion is permissible, and that the answer lies in exercising that discretion in a proportionate and principled manner, should offer a practical route through this thorniest of procurement issues.

AG's involvement

AG advised the Defendant in this case. The team was led by Partner Bill Gilliam (Litigation) and Managing Associate Ryan Geldart, and included Managing Associate Paul Rowley, Associates James Damarell, Emily Wallam and Colette Watling, as well as Partners Michael Rainey (Procurement) and Paul Hirst (Head of Transport).

The Defendant's multi-advisor legal team also involved the Government Legal Department, DLA Piper, and Eversheds Sutherland. The 11-strong Counsel team was led by Fionnuala McCredie QC and Rhodri Thompson QC.

AG also advised the Department for Transport on the procurement process for the West Coast Partnership franchise, with the team led by Paul Hirst, Michael Rainey and Legal Director Ursula Gould.