EU Procurement: abnormally low and non-compliant tenders

In the current economic climate, with budgets significantly reduced, councils and other contracting authorities are coming under more and more pressure to reduce costs. Procurement and competitive tendering is an obvious route to making economic savings. However in times of recession, tenderers can sometimes be moved to put in a bid that might be considered to be low, even abnormally low. What protection is there for other tenderers and what should a contracting authority do in these circumstances?1

For the contracting authority, there are, of course, two considerations: first, what if the bid is so low that ultimately it could lead to higher costs and/or performance issues over the duration of the contract; and second what is the position of the other parties to the tender process? Can they challenge the tender process if the contract is awarded to a tenderer who is thought to have submitted an abnormally low price?

Contracting authorities can award a contract on the basis of either the lowest price (which is not permitted for competitive dialogue and is not suitable for negotiated procedure) or the most economically advantageous offer (taking into account criteria linked to the subject matter of the contract, such as price, quality, technical merit, cost-effectiveness, delivery date and aesthetic and functional characteristics). The Regulations do not define what constitutes an “abnormally low” offer, nor is there much helpful guidance to date on the point from the ECJ or the courts. Possible things to look out for include:

(i) Significant variations from the other bids;

(ii) A bid that comes in, in whole or in part, below what the contracting authority was expecting based on its own market knowledge and costings;

(iii) The assumption of greater risk than had been anticipated.

The risks to the contracting authority include:

(i) Non-performance;

(ii) Missing out on a better overall tender package;

(iii) Greater overall costs; including additional management costs and post tender variations;

(iv) The costs of retendering; and

(v) Legal costs of a procurement challenge

Under Regulation 30(6), if an offer for a public contract is abnormally low, the contracting authority can reject it, but only after it has: requested in writing from the bidder an explanation of the offer or part of the offer which it considers to be abnormally low, taken account of the evidence provided in response to the request and subsequently verified the offer or parts of the offer being abnormally low with the bidder (Reg 30(6)(c)). Regulation 30(7) sets out the types of information that may be requested under Reg 30(6). This could include: the economics of the method of construction, manufacturing process or services provided; any technical solutions suggested by the bidder, or exceptionally favourable conditions available to the bidder; the originality of the works, goods or services to be provided; compliance with relevant local employment/working conditions and the possibility of the bidder obtaining state aid.

In Varney v Hertfordshire County Council2 Varney was one of the unsuccessful tenderers for the contracts for the operation of the 18 Household Waste Recycling Centres. Flaux J held that a contracting authority cannot reject an offer that is abnormally low unless it has investigated certain aspects of that offer. In other words, the relevant provisions operated purely so as to provide procedural protection for a tenderer whose bid might be rejected as being abnormally low, and created no duty in favour of other tenderers. Varney, had argued that the council was under a general duty to investigate tenders that are abnormally low generally. Flaux J rejected this, stating that there was nothing in the Directive or the Regulations to support such a contention. Such a duty could only arise where the council either knows or suspects that the tender in question is abnormally low. The Regulations only require a contracting authority to investigate a tender that appears to it to be abnormally low and which it proposes to reject for that reason.

So what can the contracting authority do?

Certainly, the prudent contracting authority, where it has concerns that any bid is abnormally low, should fully investigate whether that bid is sustainable. But that is a matter of commercial common sense as much as it is one of good procurement law practice. An abnormally low tender which may be rejected is one that is priced at such a level that the authority considers itself, in all the circumstances, unable to rely upon the contract being properly performed. That conclusion might follow even if the contract was not actually loss-making, if it did not generate a normal level of profit, but it would not necessarily follow if losses would be sustained.

In the UK, there is of course no domestic legislative definition to draw upon. In theory, the issue of whether a particular tendered price is abnormally low might be viewed from two perspectives: comparison with some absolute standard; or comparison with the other bids received. The most obvious absolute standard would be the normal market price, but save in the case of fairly straightforward contracts there may often not be an established market price against which comparisons may readily be made. Another possible standard might be the authority’s own pre-estimate of what it expects to have to pay for the service in question, but the authority may be ill-equipped to make an accurate estimate, especially in a fluid and changing market, or in the case of a complex or unusual contract.

In Varney, there was another bid which was a suspected abnormally low bid. The other tenders were not considered abnormally low, because they were consistent with one another and did not deviate from the mean average of all tenders received for the sites for which they had tendered. This is the “anomaly threshold” test. An authority has a discretion as to what test it uses for identifying what may be an abnormally low tender and it is permissible to use a comparison with the average of the tenders submitted for the contract as a threshold for determining whether a tender is abnormally low .

The Council had also investigated the tender price against the likely cost of performing the relevant services. To take site attendance costs, they were expecting to pay more by way of site attendance charges under the new contracts. The abnormally low contract stood out because its proposed site attendance charges were all less than was being charged under the existing contract. Finally, what happened in the Varney case was that three of the sites were awarded to the tenderer who had the abnormally low overall tender. Whilst it was felt too much of a risk to offer more than the three sites, the Council felt that it was a risk worth taking to offer them the sites they already operated. The court agreed. The evidence showed that there was no evidence that the tenders for the three sites had been unsustainable and that overall the contracts were making a small profit.

When may a tender be rejected as abnormally low?

Having called for and received an explanation of the pricing, what conclusion has to be reached based on that explanation before the right to reject the bid arises? Where there is no pre-defined method of identifying tenders that appear abnormally low and may call for an explanation, the answer to this question will also serve to define what an authority should be looking out for when tenders are received. Fundamental though this question is, there appears to be no authority that addresses it directly.

Various formulae appear in the decisions of the European Court. They include whether the bid is “genuine” (Lombardini)3 and whether it is “reliable and serious” (T-4/01 Renco SpA4). These formulae are not entirely helpful. What is meant by asking whether a bid is “genuine” or “serious”? It would be right to assume that the bidder wants to win the bid - otherwise he would bid artificially high, not low. Does the bidder truly intend to fulfil the contract at the tendered price, or will he increase the price by charging for various “extras”, or by threatening to walk off the contract? Remember that it will normally be difficult to mount a successful challenge to the authority’s decision to accept the bid, unless the issue has been ignored altogether.

Some judicial guidance on abnormally low tenders came in March 2012, when the European Court heard a preliminary reference from a Slovak court on the extent of obligations on authorities to seek clarification in relation to (a) abnormally low tenders, and (b) non-compliant tenders.

Case C-599/10 SAG ELV Slovensko and Others

This case involved the award of a contract for the supply of toll collection services on motorways and roads in Slovakia. Tendered using the restricted procedure, clarifications had been sent to two (ultimately unsuccessful) bidders in relation to a number of aspects of their tenders including in relation to what were said to be abnormally low prices. Both replied, but they were then excluded from the tender process. Both bidders appealed and the Slovak Supreme Court asked the CJEU for a preliminary ruling on whether a contracting authority was obliged to seek clarifications from bidders where an abnormally low tender is suspected before excluding that tender?

The answer to that question was yes. The CJEU considered previous EU case-law on the rules governing abnormally low tenders, and in particular the Lombardini case. Article 55 makes it mandatory for a contracting authority to examine the details of tenders that are abnormally low in order to prevent the contracting authority from acting in an arbitrary manner and to ensure healthy competition between undertakings:

“Accordingly, the existence of a proper exchange of views, at an appropriate time in the procedure for examining tenders, between the contracting authority and the tenderer, to enable the latter to demonstrate that its tender is genuine, constitutes a fundamental requirement of Directive 2004/18, in order to prevent the contracting authority from acting in an arbitrary manner and to ensure healthy competition between undertakings.’”

Non-compliant tenders

The judgment is, however, more helpful on the general question as to the extent of obligations on authorities to seek clarification before deciding to reject a tender for being imprecise or non-compliant or failing to meet the tender specifications. In contrast to the situation concerning abnormally low prices, there are provisions which expressly set out the procedure to be followed in the event that the contracting authority finds, in a restricted public procurement procedure, that the tender submitted by a tenderer is imprecise or does not meet the technical requirements of the tender specifications.

Remember that, in principle, once tenders have been submitted, those tenders can no longer be amended either at the request of the authority or at the request of the tenderers. The principle of equal treatment of tenderers and the obligation of transparency preclude, in that procedure, any negotiation between the contracting authority and one or other of the tenderers. To enable the contracting authority to require a tenderer whose tender it regards as imprecise or as failing to meet the technical requirements of the tender specifications to provide clarification in that regard would be to run the risk of making the contracting authority appear to have negotiated with the tenderer on a confidential basis, in the event that that tenderer was finally successful, to the detriment of the other tenderers and in breach of the principle of equal treatment.

Therefore, an authority will not be obliged to seek clarification of a tender when it will be rejected because it fails to meet the technical requirements. However, an authority can, exceptionally, seek the correction or amplification of a tender, particularly where mere clarification is required, or to correct obvious material errors, provided that such amendments do not amount to a new tender. Such a request can be made only after the authority has looked at all the tenders. Further, the request must be sent to all tenderers in the same situation, unless there are objective grounds to justify different treatment for example if the tender must be rejected in any event. If an authority chooses to seek clarification, it must do so in respect of all elements that are imprecise and it cannot then reject the tender on the basis of an element on which it did not seek clarification.

A UK approach - can you prohibit caveats in tenders?

In Turning Point Ltd v Norfolk County Council,5 Mr Justice Akenhead considered issues of limitation as well as qualifications/caveats to tenders in public procurement. In December 2011 the Council invited Turning Point and others to tender, sending them the ITT which included a condition that the Council “will accept no caveats to proposals or variant bids…”

Turning Point raised a number of questions on the ITT. The Council responded in January 2012. Despite this, Turning Point still considered that the information provided was inadequate or incomplete. Nevertheless, Turning Point submitted a tender, which included a Note on their pricing schedule which amounted to a clear caveat.

On 12 March 2012, the Council informed Turning Point that they had not been successful as their tender contained a qualification. Turning Point complained and on 28 March 2012 issued proceedings claiming that the information provided at the tendering stage was wholly inadequate and incomplete. The Council asserted that the proceedings were brought too late as they were not within 30 days of when Turning Point either did or should have become aware of the inadequacies (if any) in the tender information - as required by Regulation 47D. Mr Justice Akenhead agreed that the allegations were time-barred. He considered that Turning Point must have known of the inadequacies (if any) of the information by no later than 9 February 2012 when they submitted their tender to the Council. Turning Point had not issued their claim until 28 March 2012. Whilst the court may extend the 30-day time limit, the Judge did not consider that there was any good reason to do so. He stated that:

“a good reason will usually be something which was beyond the control of the given Claimant; it could include significant illness or detention of relevant members of the tendering team.”

With regard to the Note, Mr Justice Akenhead held that this was a clear qualification or at the very least a caveat. Had the Council accepted it, they would have been responsible for redundancy costs. The Judge did not consider that the Council should have sought clarification from Turning Point before rejecting their tender as the ITT had made it clear that there were to be no qualifications or caveats - a requirement which he considered was perfectly fair, reasonable and common. Furthermore, there was no express entitlement within the ITT for the Council to go back to tenderers on the pricing schedule for clarification - nor did he consider there to be an implied obligation for the Council to do so.

If seeking clarification, remember to ask everyone

The principles in the Slovak case were followed in Clinton v Department for Employment and Learning6 where the ability to seek the clarification of tenders was considered by the High Court in Northern Ireland. Here, 13 tenderers were invited by the authority to clarify their tenders, but not Clinton. Clinton was later excluded as it had failed to provide sufficient evidence of its experience. It argued that by asking other tenderers to supplement areas of their tenders, but not Clinton, the authority had breached its duty of equal treatment.

The High Court agreed. The authority had a discretionary power in the ITT to seek clarification from tenderers. Failing to use that discretion to clarify the claimant’s tender, when it had specifically sought clarification of tenders submitted by others in a similar (if not the same) position, infringed the duty of equal treatment. Seeking clarification from Clinton would have complied with the principles of legal certainty and good administration. This meant that the original tender decision was set aside.

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• 1. Unfortunately, the limited legal protection which we review here only applies to tenders in the public and not the private sectors.
• 2. [2010] EWHC 1404.
• 3. Impresa Lombardini [2001] EUECJ C-286/99.
• 4. Renco SpA v Council of the European Union [2003] E.C.R. II-17.
• 5. [2012] EWHC 2121 (TCC).
• 6. [2012] N1QB2.