| Date | 2 July 1997 |
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| Judgment | R -v- Portsmouth City Council and others. CA 8th November 1996, 81 BLR 6 |
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| The Issue | Tendering and award procedures for public works contracts. |
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| Implication |
In the context of the EC Works Directive a local authority does not award a contract when it transfers works to its own in-house labour organisation. Where the UK Public Works Contract Regulations apply however, in-house bidders are treated on equal footing with external contractors. |
printThe Local Government Planning and Land Act 1980 established the principle which requires local authorities to treat their in-house direct labour departments as if they were independent contractors. If the authority wishes to use its own direct labour to perform work to which the Act applies, it is required to observe certain accounting disciplines designed to cause the authority to employ outside contractors whenever such contractors are more competitive. Subsequent amendments in 1988 and 1992 reinforced this requirement for open competition between the DLO and outside contractors. One consequence of this UK based policy is that a wider range of public works contracts are caught by European regulations which require that the tendering and award process be one which is open to contractors across the community. Article 29 of Directive 71/305/EEC (known as the Works Directive) provides that public authorities shall award contracts either on the lowest price only or on the basis of the most economically advantageous tender. A tender awarded on the most economically advantageous basis may take into account various criteria such as price paid for completion, running costs, profitability and technical merit. In the event this is the approach taken, the authority must state in the contract documents or in the contract notice all the criteria intended to be applied, where possible in descending order of importance. The application of these regulations was closely examined in the case of R -v- Portsmouth City Council recently heard in the Court of Appeal. The Council had a large stock of local authority housing which was being maintained and improved, partly by private contractors and partly by the council's own building works division. In March 1991 the Council sent to the Official Journal of the European Community the notice required under the EC directives seeking expressions of interest for three contracts for building repair and maintenance. The notice stated "Tenders will be accepted on the basis of best value for money. The Council do not bind themselves to accept the lowest or any tender". On receipt of tenders the Council recognised that its own direct works organisation would not be successful on the basis of the lowest price. They also feared that the cumulative effect of a reduction in the work to their in-house organisation would potentially involve very substantial redundancy payments. A number of options were considered, and finally the Council confirmed a decision to award a substantial proportion of the contracts to their in-house organisation. When the lowest tenderers for the different parts of these contracts heard the news they protested vigorously, culminating in their successful applications for judicial review. In the High Court the judge held that by failing to state the award criteria in the tender documents the Council were in breach of the tendering requirements of the EC Works Directive. Somewhat perversely, however, although the Council had failed with regard to the tendering procedures, the Judge held that they were not in breach in relation to the actual award of the contracts. His reasoning was that when awarding work to its in-house works organisation the Council was not awarding contracts properly so called, because it was not possible for the Council to contract with itself. In other words, when a local authority decides to use its own direct labour department, it is deciding not to award a contract. Such a decision is something which falls outside the purview of the EC Directives. Accordingly the contractors would be entitled to recover their abortive tendering costs but could not recover their losses flowing from the failure to award contracts to them as lowest tenderers. This matter came before the Court of Appeal. Lord Justice Hobhouse set out carefully the background to the European procurement regime. He considered also the Public Works Contracts Regulations 1991 which had been put into force in the UK to give effect to the EC Public Works Directive. These regulations in fact go further than their EC counterparts. In particular Regulation 20 (8) makes it clear that the award of work by a council to its in-house labour organisation should be treated as if it were a contract. The sum and substance of all this was that where the contracts were caught by the UK regulations the lowest tendering contractor would be entitled to recover its losses flowing from the non-award of the contract. Where, however, the UK regulations did not apply, and this was held to be the case in relation to two of the Council's contracts, the lowest tenderers were entitled only to recover their abortive tendering costs under the provisions of the relevant EC Directive.
CJ-9724
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