Why Brexit Could Limit Damages in Procurement Challenges

by Bryan Cave Leighton Paisner

A recent public procurement decision of the European Free Trade Association (EFTA) Court highlights the possibility that aggrieved suppliers in public procurement cases in the UK run the risk of losing their future rights to damages in post-Brexit Britain unless they are specifically retained under the European Union (Withdrawal) Bill.

One of the UK Government’s redlines in the Brexit negotiations was not being subject to the rulings of the Court of Justice of the European Union (CJEU). However the EU 27 were adamant that any disputes over a future EU/UK free trade deal would have to be referred to the CJEU for determination. The UK Government proposed becoming an EFTA member and as a solution referring any disputes to the EFTA Court. However the EFTA Court, the equivalent of the CJEU for non EU members of the EEA, closely follows the provisions of EU law and would not provide, as the case of Fosen-Linjen AS and AtB AS (Case E-16/16) (EFTA Court 2016/16) (31 October 2017) clearly demonstrates, the type of wholly independent tribunal which the UK Government was looking for.

The Fosen-Linjen case is significant as it demonstrates how the EFTA Court will closely follow the CJEU’s lead in the interpretation of EU law which is likely to run contrary to the ruling of UK Courts, an occurrence that will undoubtedly increase after Brexit.

Fosen-Linjen case involved a Norwegian procurement dispute which was referred to the EFTA Court by a Norwegian Court for a preliminary ruling on points of EU public procurement law, as implemented in Norway.

The question before the Court was what level of culpability was necessary by a contracting authority for the Court to award damages for breach of the public procurement law? The Court held that the award of damages (according to the Remedies Directive – Article 2(1)(c) of Directive 89/665/EEC) did not depend on whether the breach of public procurement law was due to “culpability and conduct deviating markedly from a justifiable course of action, or whether it occurred on the basis of a material error or whether it was attributable to the existence of a material, gross and obvious error”.

Instead, the EFTA Court held a simple breach of public procurement law was sufficient to trigger the liability of the contracting authority to compensate the person harmed for the damage incurred. This was provided that the other conditions for the award of damages were met, including demonstrating a causal link between the breach and the damage.

The Court justified its decision by relying on the general EEA law principles of equivalence and effectiveness. No provisions of the Remedies Directive laid down any conditions for the award of damages as a remedy in the field of public procurement. Therefore, it was for the legal system of each EEA state to determine the criteria necessary to be present for the award of damages caused by an infringement of EEA law on the award of public contracts.

However, national rules laying down these conditions must nevertheless comply with the EEA law principles of equivalence and effectiveness. Accordingly the Court held that a rule requiring a breach of a certain type or gravity would substantially undermine the goal of effective and rapid judicial protection sought by the Remedies Directive. It would also interfere with the objectives to guarantee the free movement of services and to ensure open and undistorted competition in this field in all EEA states. Therefore, the gravity of a breach of the EEA rules on public contracts was irrelevant for the award of damages. It followed from the principle of effectiveness and the right to damages under Article 2(1)(c) of the Remedies Directive that a person harmed by an infringement of public procurement law must, in principle, be able to seek compensation for loss of profit.

This ruling goes directly against that of the UK Supreme Court in Nuclear Decommissioning Authority v Energy Solutions EU Ltd (now called ATK Energy EU Ltd) ([2017] UKSC 34). In that case the Court held that a “sufficiently serious breach” pursuant to the rule in Francovitch case was required to establish the liability of a contracting authority to damages for breach of public procurement law.

On the strength of the Fosen-Linjen case it would appear whilst the UK Supreme Court was within its rights to determine the criteria upon which damages would be available under English law, it is likely that had the Nuclear Decommissioning Authority case been referred to the CJEU on a preliminary ruling, the CJEU is likely to have sided with the EFTA Court. The UK Supreme Court’s limitation of damages to cases of sufficiently serious breach would have been likely to have been viewed as infringements of the EEA law principles of equivalence and effectiveness. However the case was not referred to the CJEU as the Supreme Court took the view that the EU principles involved were clear so as not to require a reference to the CJEU as the final arbiter of EU law. In addition the lack of willingness to make a reference was probably also related to the imminence of Brexit and the likelihood the CJEU would not have been able to opine prior to Brexit.

There are two worrying issues which are highlighted by the juxtaposition of these two cases. The first is that the recent UK Supreme Court decision corroborates the concerns of many that parties legal rights and safeguards currently enjoyed under EU public procurement law are going to be rolled back in post-Brexit Britain. Secondly, if the UK Supreme Court has based the availability of damages upon Francovitch principles, what will be the future of damages claims for breach of the public procurement rules after Brexit, given the provisions of Schedule 1 paragraph 4 of the European Union (withdrawal) Bill. This paragraph states:

“there is no right in domestic law on or after Exit Day to damages in accordance with the rule in Francovitch”.

It appears that unless the Courts in some way distinguish the UK Supreme Court decision as not relying on Francovitch principles, which we believe is very hard to do, or Parliament provides specifically for the retention to a right of damages for the breach of the public procurement rules, in post-Brexit Britain, aggrieved suppliers rights to effective remedies could be significantly curtailed.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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