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Public Procurement 2018 | 2 The Implications of Brexit for Public Procurement | ICLG
Home Practice area Public Procurement The Implications of Brexit for Public Procurement
Public Procurement 2018 | The Implications of Brexit for Public Procurement
Procurement Regulation in the UK
Post-Brexit: Short to Medium Term
The Post-Brexit Options
In this chapter, we look at public procurement in a post-Brexit UK. We are nearly eight months on from triggering Article 50 of the Treaty of Lisbon and it remains unclear what the final deal with the EU will look like at this stage. We have therefore sought to identify the issues that the government will have to grapple with as it untangles itself from the EU.
At the time of writing, the state of play appears to be as follows. In January 2017, at a speech at Lancaster House, the Prime Minister set out the UK’s negotiating objectives. One of the key objectives, and the most relevant to public procurement, is that the UK wants to continue to trade as freely as possible in goods and services with the EU by entering into a free trade agreement. In addition, the UK plans to enter into bilateral free trade agreements with countries outside the EU.
On 28 March 2017, the Prime Minister gave formal notice to the EU of the UK’s intention to leave. Negotiations commenced in June 2017 (following a delay due to the General Election). To date, negotiations have focused on the “divorce bill”, the border with Northern Ireland and securing the rights of UK and EU citizens after Brexit.
In a speech in Florence on 22 September 2017, the Prime Minister repeated her objective of securing a new free trade deal with the EU. She also rejected the idea of modelling the agreement on EEA membership or on the current deal between the EU and Canada. Finally, she proposed a longer transition period where the status quo, or something similar, will be preserved for a further two years post-2019 while the parties work out the terms of their future relationship.
The EU’s stated position is that the four freedoms – goods, services, capital and people – come as a package, and that controls on free movement of people are not compatible with full free movement of goods, services and capital. The EU has also said that it will require the UK to settle its “divorce bill” as a prerequisite to negotiations on any transition period and future deal.
Meanwhile, at home, the government has been working on the Repeal Bill (formerly known as the Great Repeal Bill). In broad terms, the Repeal Bill will repeal the European Communities Act and at the same time re-enact all existing EU law and EU-derived law as domestic law. This preserves the status quo, although far-reaching (but temporary) Henry VIII powers are required so that Ministers can amend legislation and regulations that refer to EU institutions.
On the other side of the Channel, President Juncker has recently set out his vision for the future of the EU, which involves deeper integration and more powers to the Presidency.
Brexit raises a number of significant questions for procurement litigation. Any new deal with the EU is likely to have some impact on the way in which cross-border procurement with the EU operates. Exiting the EU also provides an opportunity for the UK to re-think domestic procurement regulation, for example, the detail of the requirements, which sectors are regulated and the extent of access to the courts. For the reasons set out below, it is unlikely that procurement regulation will change significantly in the medium term. There are too many good reasons to maintain the status quo and in any event a new deal with the EU is likely to circumscribe the government’s ability to bring about wholesale change.
Public procurement in the UK is governed by the Public Contracts Regulations 2015, the Concession Contracts Regulations 2016 and the Utilities Contracts Regulations 2016 (“the Procurement Regulations”). These regulations implement EU law (Directives 2014/24/EU, 2014/25/EU and 2014/23/EU) and contain detailed rules governing public procurement procedures over certain thresholds. Where a procurement exercise is below threshold but has cross-border interest, the EU principles of transparency and non-discrimination apply to that procurement. EU law is therefore at the heart of public procurement in the UK.
Procurement challenges for breach of the Procurement Regulations are heard by the Technology and Construction Court. There is also a limited judicial review jurisdiction. Under the Procurement Regulations, there are a suite of remedies available to disappointed bidders including damages, an automatic suspension where the contract has not yet been entered into and in limited circumstances, a declaration of ineffectiveness, meaning that a contract which has been entered into can be declared ineffective by the court.
The UK and the EU have until the end of March 2019 to agree the terms of withdrawal. Until then, it will be business as usual. Current domestic procurement legislation will remain in force, contracting bodies will have to continue to act in accordance with the EU procurement rules, the case law of the European Court (“CJEU”) will apply and the Commission will retain oversight. So, for example, if there is a domestic challenge to a decision to award a contract, an automatic suspension will still come into force if the claim is issued in time.
Similarly, from the international perspective, in the short term, UK companies will retain their rights to participate in the procurement processes initiated by EU institutions and contracting bodies in other Member States.
At the time of writing, the day-to-day business of public procurement litigation has been largely unaffected by triggering Article 50. There have been no test cases raising Article 50 and post-Brexit issues. Procurement challenges tend to happen very quickly, and require swift resolution by the courts meaning that the looming spectre of Brexit is largely irrelevant to the court’s current caseload. This is likely to remain the position going forward. For example, there are no UK procurement cases pending before the CJEU and there is likely to be some judicial reluctance to refer a case to the CJEU now unless it is absolutely necessary. Similarly, the Commission has not brought any infraction proceedings against the UK in the procurement sphere and future proceedings are a reasonably remote possibility given the way in which the UK has implemented the Directives.
The Government’s Repeal Bill (the European Union (Withdrawal) Bill) seeks to preserve all UK legislation which implements EU law post-Brexit. This would mean that the Procurement Regulations will remain in force unless and until the government decides to amend or repeal them. The Bill has had its second reading in the House of Commons and is due to go to committee stage imminently. The basic ingredients are that the European Communities Act 1972 will be repealed, all implementing legislation will remain in force and from exit day, domestic courts will not be bound by any principles laid down or decisions made on or after exit day by the CJEU and cannot refer any matter to the CJEU after exit day.
The jurisdiction of the CJEU is a contentious subject in negotiations. To the extent that the UK obtains single market access, this may come at the cost of accepting some limited jurisdiction of the CJEU. The government is presently against this, and would prefer its suggested free trade agreement to be subject to the jurisdiction of ad hoc court or some other international institution. The terms of the Repeal Bill are set out below, although this may have to change.
The Repeal Bill provides that questions as to the validity, meaning or effect of any unmodified, retained EU law will be decided in accordance with the existing EU case law and general principles of EU law. The Supreme Court will not be bound by any retained EU case law but it will be required to apply the same test as it would for its own case law if it decides to depart from it.
Once the UK has left the EU, it seems unlikely that the UK government will abolish the domestic procurement legislation. This is primarily because there are so many powerful domestic public policy reasons for the regulation of procurement: it protects against the risk of corruption; promotes choice; and supports central and local government in achieving value for money.
The UK also lobbied for concessions in the Public Contracts Directive, and won. It is therefore likely that these features will stay. In fact, the UK has gone further and has “gold plated” the Public Contracts Regulations 2015 by introducing measures to promote the involvement of SMEs in public sector contracts.
From the international perspective, compliance with the EU procurement legislation ensures that procurements are also compliant with international obligations which protects contracts from international challenges and puts UK businesses on a secure footing with international contracting partners. If one adds to this picture the effects of executive inertia and general pressure on the time of parliament to enact a range of other new pieces of legislation, the likelihood that things will stay the same in the medium term is increased.
There are, however, a number of issues that the government will need to grapple with in its Repeal Bill as regards the Procurement Regulations. For a start, the Commission currently sets the thresholds for when the Procurement Regulations are engaged. The government could take the opportunity to significantly change the thresholds once it is no longer bound by EU law.
Second, the Procurement Regulations at present envisage reporting to the Commission in certain circumstances. The government does not intend for the Commission to retain a regulatory role over UK procurement once the UK has left the EU. The Secretary of State will have the power to amend these references to the Commission, however, it is not clear whether he will simply delete the relevant sections or whether the Cabinet Office would take over the Commission’s role. We consider that the latter is more likely. The timing of any amendments/deletion is going to be important. Given all of the other matters that are going to occupy the Cabinet Office’s time, there may well be some period of confusion and uncertainty before amendments can be laid before Parliament and brought into force.
The courts will also need to consider how to apply CJEU jurisprudence post-Brexit. Under the government’s current plans, the jurisdiction of the CJEU ceases on the day that Brexit happens but pre-existing case law remains binding (see above). Notwithstanding this, it is likely that while the interim arrangements are in place, the domestic courts will be asked to consider the application of CJEU case law to any modified statutory provisions. The Repeal Bill seeks to address this problem by stating that CJEU law will apply to modified retained EU law insofar as this is consistent with the modifications. The devil of this will, inevitably, be in the detail.
As time moves on, there is at least in theory greater scope for the courts to develop domestic principles of procurement law. One area which the courts are likely to have to address soon after Brexit is the application of EU-specific concepts to domestic litigation. For example, the principle of non-discrimination has a particular meaning in EU law aimed at ensuring the efficacy of the single market. If the UK does not have access to the single market, litigants could argue that application of this principle has no place in the domestic regime. This could have significant implications for procurement litigation, as breaches of EU principles provide a hard-edged ground of challenge and the courts are not constrained by Wednesbury principles.
Second, a situation may well arise in the future where the CJEU departs from previous jurisprudence or develops the law in a way which would materially change the application of the domestic regulations. In these circumstances, the courts are expressly not bound by CJEU law, but it may be a useful interpretive guide given that the Procurement Directives are relatively new.
As to future reform, it is conceivable that a lobby may develop in favour of the withdrawal or significant amendment of the domestic procurement legislation, perhaps in the interests of promoting freedom of contract domestically and the encouragement of international trade by means of the lessening of governmental regulation. Areas for reform could include alteration of the remedies available, such as limiting claimants to claims for damages, or taking certain sectors out of the reach of procurement legislation.
The picture which is likely to emerge is one of some legislative tinkering and possibly simplification of the procurement regime. For the reasons set out below, an economy entirely free of regulatory restriction is an unrealistic vision, and may even make it more difficult for UK businesses to operate profitably as international trading partners.
There remains, of course, real uncertainty as to the relationship that may prevail between the UK and the EU after the UK has left. One possibility, albeit unlikely, is that the UK will become a member of the European Economic Area (“EEA”), like Norway. In that case, the UK will be required to remain compliant with the EU procurement legislation. The easiest way to facilitate that would be to keep domestic procurement legislation as it is. In terms of enforcement, it would be the European Free Trade Association (“EFTA”) Surveillance Authority which was responsible for the grant of remedies rather than the CJEU. The EFTA Court would hear contested cases, but in so doing it would follow the jurisprudence of the CJEU whenever the provisions of the EEA law concerned were identical to those of the EU.
Another possibility is that the UK may enter into a bilateral trade agreement with the EU which permits the UK to access the EU’s single market (like the agreement between Switzerland and the EU). In that case, it is very likely that the UK would be required to maintain domestic legislation that produces effectively the same regime as that in the EU and therefore the same as that currently in place. However, any enforcement would be solely for the domestic courts. Although it is possible that domestic courts might deviate materially from the jurisprudence of the CJEU, it is relatively unlikely. First, they would be bound to have regard to the jurisprudence of the CJEU when considering legislation whose original purpose was the incorporation of EU law. Second, the development of significant disparities between domestic and EU case law could, as a matter of practicality and politics, jeopardise the trade agreement. As mentioned above, there are good business reasons for maintaining harmony between domestic and international legislation. Whilst domestic courts may not expressly give that as a reason for their approach, it is possible that it might bear upon it.
Free Trade Agreement/WTO
There is also the possibility of a more bespoke trade agreement which does not permit full access to the single market. Recent examples of this include the proposed trade agreement between the EU and the USA (TTIP) and the provisionally in force agreement between the EU and Canada (CETA). Under CETA, Canadian companies have limited access to public procurement within the EU above certain thresholds, and EU companies may bid on Canadian contracts at all levels of government. The principles of non-discrimination and transparency apply. CETA replaces the proposed investor-state dispute settlement (ISDS) with an Investment Court System, which will be public, not based on temporary tribunals and will have independent judges appointed by the EU and Canada. The hearings will be transparent, and will use public hearings and publish documents submitted during cases.
Should the UK leave the EU without securing any trade agreement, then the UK is likely to be obliged to rely upon its membership of the World Trade Organisation and its status as signatory to the Government Procurement Agreement (GPA), a pluri-lateral agreement in place since 1981, in order to access foreign markets. The application of the GPA is determined by the commitments made by each signatory to that signatory’s schedule; it does not otherwise have blanket application across all procurement processes. Since the UK is a member of the EU, it does not currently have its own schedule of the GPA. Rather, the UK abides by the commitments made by the EU. It appears necessary, then, for steps to be taken for the UK to address its position as a signatory to the GPA with the WTO.
Again, there are good reasons why, at the very least in the medium term, the UK would be well-advised to adopt the terms of the current EU schedule. First, the EU legislation from which domestic legislation derives is itself based on the requirements of the GPA. If domestic legislation is already in place to ensure fulfilment of those requirements, no upheaval is necessary. Second, the GPA has aims which are supportive of the development of effective and profitable international free trade: open; fair; and transparent conditions of competition for government contracts.
There are nevertheless some material differences between the GPA regime and the EU and domestic procurement legislation. It does not regulate procurement by privately owned utilities, nor defence procurements. It also does not set out specific remedies which signatories must make available in the event that a procurement is not conducted in accordance with the GPA. This may allow the UK an opportunity to simplify its procurement regime, although such simplification must be balanced with the requirements of any other trading relationships it has or wishes to develop.
So, should the UK leave the EU and not enter into agreements comparable to those with Norway or Switzerland, and choose to negotiate its own schedule to the GPA, it would have the flexibility to make some amendments to the domestic public procurement regime while remaining compliant with its international obligations. Some areas have been identified by commentators as likely targets. These include removing utilities and defence procurements, since this would be consistent with the GPA regime and introduce de-regulation if that is what is sought in the interests of promoting business freedom and international free trade. Other possibilities are the abolition of the ineffectiveness remedy, and the abolition of the requirement of automatic suspension (although it should be borne in mind that the GPA still requires signatories to provide “rapid interim measures” to preserve a supplier’s ability to participate in the procurement process).
Even if the UK government were to take the improbable step of repealing all the legislation governing public procurement, business would not operate in an environment untrammelled by legal control. There could still be claims for breach of implied contract, breach of statutory duty, bribery, corruption or fraud and by way of judicial review, perhaps even under Article 1 Protocol 1 of the European Convention of Human Rights.
One important question is whether a default to common law rules would look significantly different from the procurement regime which currently applies. If the Procurement Regulations were repealed today, there would be a significant gap. However, it is likely that the courts would step in and develop more detailed common law principles.
To take the example of implied contract, there have been a limited number of cases arising from disputed procurements which are not caught by the Procurement Regulations which give an insight into how the courts would apply common law principles to a procurement dispute. Where procurement is not governed by the detailed procurement regime, there is a general principle of public law that tenderers should be afforded fair and equal treatment. Breach of this principle gives rise to an action in damages, but would not engage the suite of other remedies under the Procurement Regulations. Fair and equal treatment involves, for example, following the terms of any invitation to tender. While this may seem as though it gives wide scope for challenges, the courts have made it clear that the implied contract doctrine does not involve principles analogous to the EU principles of non-discrimination and transparency; the doctrine is much more limited.
However, since the awareness of the members of the business community of the commercial efficacy of legal challenge has already become established by years of familiarity with the law of public procurement, it is likely that they will continue to seek advice on other legal avenues to secure fairness in their dealings. This could lead to cases which seek to develop the implied contract doctrine. If one adds to this the development of judicial review over the last decade, it is easy to imagine a world in which the common law steps in to fill a void left by the repeal of procurement legislation. In that case, principles of rationality, fairness, transparency, consistency and non-discrimination in some form would govern public procurement. These are of course familiar and amongst the established objectives of the current domestic procurement legislation.
However, without a legislative framework in place, there would probably be significantly greater uncertainty about the application of such common law principles in any individual case making contracting and litigation about it a more risky proposition. First, the remedies available would likely be much more limited. The burden may shift from a Contracting Authority seeking to set aside an automatic suspension, to a challenger needing to apply for an urgent interim injunction. There may also be more scope for parties to contract-out of court control over procurement: either by contracting authorities seeking to give themselves wide discretion in their ITTs, or parties agreeing to arbitrate rather than go to court.
As well as posing a significant challenge for lawyers and their clients, the Administrative Court might find itself not yet adequately equipped to adjudicate on an increasing flow of such claims. This is particularly because it is not used to dealing with cases where the quantification of loss is in issue or a complex task.
It is also important to have one eye on how the EU may behave post-Brexit as this may have an influence over domestic policy. The EU’s foreign policy covers access to third country procurement processes, through the International Procurement Instrument. It is not yet in force, but when this happens it will give the Commission some wide-ranging powers with regard to third countries. This instrument empowers the Commission to investigate third countries’ procurement regimes with a view to identifying where they discriminate against EU Member States. If discriminatory practices are identified, the Commission can invite the third country to consult on opening its procurement market which could take the form of bilateral treaty negotiations. As a last resort, the Commission can apply a new “tool”, which is effectively a sanction within the EU: where a company from a third country bids for goods or services within the EU, the bid will be deemed to be at a higher price. The Commission has indicated that the tool will only apply above a certain threshold; however, it is yet another reason to maintain the status quo or something similar. If the UK imposed a “buy British” requirement as part of new procurement regulations, it could find itself disadvantaged when bidding for goods or services within the EU.
Another feature of public sector commercial life subject to the same pattern of potential alteration is that of State aid. Whilst the position before Article 50 is triggered will be the same as that for public procurement, namely business as usual, there is again considerable uncertainty about the position after Article 50 has been triggered and in the longer term. The principal issue for any public body or private sector potential beneficiary in the immediate term will be not whether the State aid rules apply – they do – but rather how, if it is decided wrongly during that period that a benefit is not State aid, the European and domestic courts will act in response to a claim. Since a challenge in the UK will usually be by way of judicial review, it will be subject to the usual short time limit and therefore issues are likely to be resolved promptly and with less uncertainty. However, the time scales in the European context are much greater and that is where difficulties may arise, particularly bearing in mind that the grant of State aid is often long term rather than a one off transaction. These uncertainties may prompt the grantor to try to bring payments forward or try to make projects sustainable without funds that could be vulnerable to challenge as State aid. Where that is not an option, public bodies and those which benefit from what may be State aid must be prepared for the remaining possibility of an investigation by the Commission or a reference to the European Court before the two-year period after the triggering of Article 50. Since such investigations and litigation can often take longer, at least one feature of the Article 50 negotiations will be the transitional arrangements for them. On 26th October 2017, the European Commission announced that it had notified the UK of an investigation into whether an exemption from certain UK corporation tax rules amounts to prohibited State aid. The outcome of that investigation is unlikely to be known before the UK leaves the EU.
Once the UK has left the EU, there is a similar picture to that in public procurement with essentially four possibilities: maintaining single market access (like Norway); becoming part of EFTA (like Switzerland); reverting to WTO rules; or attempting to go it alone. In the first case, the UK will be obliged to remain subject to the EU State aid rules. In the second, it is likely that the UK will be obliged to agree to the same or something similar. In the third, the WTO regime will apply, and it is not wholly dissimilar from the EU rules. There is a significant overlap between the concept of State aid and the WTO definition of subsidy. However, there are some differences, e.g. measures which do not involve a cost to the government, such as price controls, will not be treated as State aid but could be subsidies. There are also differences in the modes of regulation and enforcement: there is no scope for prior approval by the WTO but the WTO scheme is more nuanced and flexible in its response to complaints so that it often requires proof of adverse effects rather than simply proof of a prohibited subsidy.
The fourth option, seeking to establish a regime entirely free of restrictions on subsidies and similar measures, is very unlikely. It would simply be too difficult for the UK to maintain trading relationships without submitting to such restrictions since other countries require a level playing field. In addition, the UK may wish to apply State aid rules for reasons of regulating domestic internal competition. There are currently no rules targeted at domestic internal competition because the situation is effectively regulated by the TFEU provisions.
Public procurement regulation is unlikely to change significantly in the coming years. The Great Repeal Bill, assuming it comes into force, will preserve the Procurement Regulations for the time being meaning that the government can take its time to consider any amendments or reform at a later date.
The extent of any reform will very largely depend on the nature of the UK’s continuing relationship to the EU. The closer the UK remains to the EU, the more likely it is that the Procurement Regulations will remain largely as they are and the jurisprudence of the CJEU will continue to apply, or will remain persuasive to British judges. The greatest scope for change comes with a bilateral trade agreement or a hard Brexit, resulting in a retreat to WTO rules. In these circumstances, the government will have greater scope for reform but, as we have explained, is unlikely to take up the opportunity for wholescale reform. A well-regulated procurement market has advantages at home in terms of encouraging competition and best value, and abroad by keeping the UK open to foreign investment. In any event, while the detail of the Procurement Regulations could be trimmed down, domestic principles of fairness, transparency and rationality mean that procurement litigation, at least, is here to stay.
The Implications of Brexit for Public Procurement