Running to only three pages, the decision in Lightways (Contractors) Limited against Inverclyde Council may not be long, but it packs a punch. The reason being that it is the first case in the UK courts in which the remedy of ineffectiveness available under the Public Procurement Regulations has been invoked.
The facts of the case are relatively unremarkable with a contract for street lighting services being awarded to an LLP within the same group as a company which had previously been appointed to a framework agreement which the Council was able to make use of. The Council contended that the contract had been awarded to the LLP in error and that that error could easily be fixed by a novation of the contract to the framework provider (who had been through the scrutiny of the public tendering procedure). The courts, however, took a different view. Lord Tyre concluded that the contract had been awarded to a non-framework provider without being advertised and, as a result, a breach of the Procurement Regulations had occurred.
The remedy of ineffectiveness is only available in a limited number of circumstances (and the courts are not entitled to grant an order in all breaches of the Regulations), but contract award without prior advertisement is one of them. The effect of the decision is to declare the contract (prospectively) ineffective. This is different from declaring it null and void from the outset, and means that performance of all future rights and obligations must cease. That, of course, can leave a contractual nightmare where some obligations have already been performed and may require to be paid for, whilst future obligations just fall away.
The case is likely to result in more attention being paid to the potential remedy and potentially the need to agree a separate contract at the outset which sets out the parties' intentions, should the main contract later be declared ineffective. These obligations could cover the usual exit management obligations such as supply of TUPE information and transfer of Intellectual Property Licences, but may also go further and provide for compensation payments being made to the exiting provider who may, by that time, have committed substantial resources to the contract and entered into supply chain agreements.
Where an ineffectiveness order is granted, the Court is also obliged to fine the contracting authority. At the moment the level of the fine in this case has not been fixed, but it is obviously a concern for authorities in times of austerity, especially taken together with potential compensation payments to the exiting provider as well as potential damages to the challenger.
Inverclyde Council were granted leave to appeal and, for now, the ineffective contract limps on until that appeal has been dealt with.
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