What the judgment means

Harmon was nominally a British company that was owned through a French subsidiary by a US holding company, Apogee Enterprises. It was run from France. The defendant was a statutory corporation that could sue and be sued like any other such organisation. Seele Alvis was a British company that was German- and British-backed. The fenestration works incorporated a cladding and curtain-wall system, and also functioned as a structural engineering component of the building.

The legal background

Article 6 of the Treaty of Rome prohibits "any discrimination on grounds of nationality". Article 30 disallows any "quantification of restrictions on imports". Other articles impose "freedom to provide services", and these have been extended to public works contracts by various EC Directives. The public works contracting authority has to decide on an open, restricted or negotiated procedure for tendering (directive 93/37). This directive also lays down that the criterion on which the award of contracts must be based is either "the lowest price" or "the most economically advantageous tender".

The British government passed, in 1991, the Public Works Contract Regulations, which covers all public works contracts and relates to tenderers for public works projects that are nationals of and established within an EU member state. These regulations expressly incorporate the provisions of the relevant directives. Section 20(3) requires the public works authority to spell out the criteria on which it will award contracts where the most economically advantageous basis is to be used. Transparency is secured by requiring the authority, if asked, to set out the reasons why a tenderer has been unsuccessful. Section 31(3) provides that an unsuccessful tenderer can sue for damages.

The facts

Prequalification of tenderers was sought in December 1993 on the basis that the tender award would be judged on "overall value for money". This phrase was deliberately nebulous. About 13 companies applied to be allowed to tender, of which four were invited to tender, including Harmon and Seele. The submitted tenders were opened in July 1995, with Harmon being the lowest (£40m) and Seele/Alvis second (£41m). Both tenders were thought to be too high, given the budget of £21m, so the tenderers were invited to bid for other technical options.

Following the retender in September 1995, Harmon appeared to be the front-runner. "Option A1", tendered by Harmon at £29.7m, and "option B2" by Seele/Alvis at £32.4m represented apparently the most advantageous solutions. Harmon had not tendered on option B2. Seele/Alvis were asked to reprice option B2, and Harmon and another contractor were asked to reprice option A1. Harmon's last price for option A1 was £29.5m, whereas Seele/Alvis' for option B2 was £32.3m.

Seele/Alvis was preferred, although it was clear that the two final tenders were not like for like, relating as they did to different technical options. The judge described the tender evaluation process at this stage as "a charade". Seele/Alvis having been awarded the contract, Harmon asked why it had not been successful. In responding, the defendant did not give the real reasons why Harmon had not got the project, and introduced reasons that never formed part of the decision.

Liability findings

Judge Lloyd decided that Harmon was entitled to sue for a breach of the Public Works Contracts Regulations. The fact that its holding company was American was not relevant. Much of the fabrication work was to be done in France by its French subsidiaries. The judge found that the defendant and its project team never applied any common selection criterion other than price. He was particularly critical of the tender criterion "overall value for money": this term was "nebulous and imprecise" and "capable of different interpretations".

Although the term was to be equated to "most economically advantageous" in the regulations, it had to be further defined to secure compliance with them. The terms involve concepts that do not "have any real meaning except in their context". The rationale is that a tenderer has to know the detailed criteria that will be used to assess its bid. The judge held that these have to be stated and identifiable as criteria. As the tender documents failed to do this, the House of Commons was bound in law to award the contract on the basis of price alone.

The judge found that there was nothing inherently wrong in the House of Commons taking early steps to interest UK contractors in the project. However, the defendant "encouraged or permitted to continue a policy that the fenestration package should be awarded to a UK-owned contractor, that that policy affected the tendering procedure and … the defendant … applied arbitrary methods to secure Seele/Alvis' tender at the expense of Harmon"; this clearly was a beach of European law.

Insofar as the contract was concerned, the judge found that it was clear English law that, in the public sector where competitive tenders are sought and obtained, the prospective employer is contractually obliged to consider all tenderers fairly. The House of Commons was in breach of this obligation; it had not treated Harmon fairly. "There was a failure to be transparent, fair and open and to treat Harmon equally." It was also in breach of its duty in failing to give the proper reasons to Harmon as to why it had been unsuccessful.

There was a further claim by Harmon that the House of Commons was guilty of "misfeasance in public office". This involves the deliberate or dishonest wrongful abuse as given by a public officer. The judge found that the House of Commons was guilty of misfeasance in public office because there was knowledge that the regulations and procurement law would not be, and was not being, complied with.

Damages

Effectively, damages were the only remedy available to Harmon. It had to prove damages in the same way as if there had been breach of contract. Harmon was entitled to be compensated for being deprived of its entitlement to be treated in accordance with the law. It could recover its wasted tender costs as well as the profit that it would have earned if it had got the job. Some allowance had to be made for the possibility that it would not have got the job even if a level playing field had operated.

The judge did not ultimately decide how much was to be awarded to Harmon: this would be dealt with at a later hearing. However, one factor was identified by the judge as having a possible bearing on the quantification of loss of profit: in 1998, Harmon's holding company, Apogee, withdrew from all its European curtain-wall and related projects, and it went into liquidation.

Even if Harmon had won the Portcullis House tender, the question arose as to whether the holding company would have pulled the plug on it part way through the project. The liquidator reported that Harmon had made losses on almost every contract it had entered into. The judge will have to determine whether Apogee would have abandoned this along with other projects. If so, the loss of profit claim may disappear.

The judge decided against Harmon that it was not entitled to recover aggravated and exemplary damages. Although aggravated damages conceivably might have been awarded, the judge decided that the case was a "bad one, but not exceptional".

Ramifications of decision

If the basis of selecting tenders is anything other than the lowest-price basis, detailed criteria need to be spelled out in pre-tender documentation. It will not be sufficient simply to say that the basis is "overall value for money" or even "most economically advantageous". If public authorities do not spell out the criteria, unsuccessful tenderers may argue that the tendering procedure was not fair or transparent. It is certainly possible that all unsuccessful tenderers on a given project where the criteria were not properly spelled out will be able to issue for abortive tender costs on the basis that they would not have wasted money on tendering if they had known what the real criteria were.

The Public Works Contracts Regulations 1991 are of broad effect, relating to all contracting authorities that plan to let public works contracts. These regulations apply not simply to tenderers from different EU countries but also tenderers from the same country. Thus they are applicable even if all the tenderers are British.

The case illustrates the all-pervasive application of a substantial amount of European legislation. Some regulations apply not only to public works projects but also to a broader class of works. It may be that in commercial terms the Harmon decision will have little effect, in the sense that even unsuccessful tenderers will often wish to remain on good terms with potential employers. However, this consideration does not apply when companies are struggling to survive – the temptation to sue may prove more alluring if it enables unsuccessful tenderers to secure compensation without doing the job.