Regulation 102 – Penalties in addition to, or instead of, ineffectiveness

Commentary

Regulation 102 PCR2015 determines the penalties that the Court must impose in addition to, or instead of, the ineffectiveness of a contract awarded in violation of any of the grounds set out in Regulation 99 PCR2015, which are fundamentally limited to a shortening of the duration of the contract and/or the payment of civil financial penalties by the contracting authority. Regulation 102 defines the situations whereby the Court may (or has to) apply penalties to the contracting authority for the breach of its duties which lead (or could have led) to a declaration of ineffectiveness. It is important to stress that the Court has no discretion to decide not to impose any of these penalties, given that Regulation 98(2)(b) PCR2015 requires it to impose some penalty when the conditions of Regulation 102 are met–which cover two different cases.

Firstly, the Court must impose the payment of civil penalties where it declares the ineffectiveness of the contract Regulation 102(1) PCR2015. This penalty of paragraph 1 constitutes a penalty in addition to ineffectiveness. Paragraphs 7 to 10 establish that the value of the penalty is to be paid to the Consolidated Fund, although the “route” of the payment depends on the contracting authority involved. The actual Consolidated Fund also depends on the authorities involved, as in Northern Ireland the payments are made into the Consolidated Fund of Northern Ireland. Wales, however, appears not to have a consolidated fund so it would seem that a Welsh contracting authority would have to send the civil financial penalty to the one operated by Central Government.

Secondly, the Court must impose penalties even if it does not declare the ineffectiveness of the contract because either (a) it is satisfied that any of the grounds for ineffectiveness applies but does not make a declaration of ineffectiveness because Regulation 100 requires it not to do so; or (b) the Court is satisfied that the contract has been entered into in breach of any requirement imposed by Regulations 87, 95 or 96(1)(b) and does not make a declaration of ineffectiveness, whether because none was sought or because the Court is not satisfied that any of the grounds for ineffectiveness applies (Regulation 102(2) PCR2015.

In these cases, the Court must order at least one, and may order both, of the following penalties: (a) that the duration of the contract be shortened to the extent specified in the order, in which case, “duration of the contract” refers only to its prospective duration as from the time when the Court makes the order( Regulation 102(16) PCR2015); or/and (b) that the contracting authority pay a civil financial penalty. That is, if any of the two situations mentioned above occur, the Court must either order the shortening of the contract or a financial penalty and can even order both.

If the Court imposes the payment of a civil financial penalty in either of these cases, in determining its amount, the overriding consideration is that the penalties must be effective, proportionate and dissuasive (Regulation 102(4) PCR2015); for a comparative view of the level of such penalties in other EU jurisdictions, see the report published by the Commission on “Economic efficiency and legal effectiveness of review and remedies procedures for public contracts” (April 2015)].

Regulation 102 PCR2015 establishes two additional general rules. Firstly, in determining the appropriate order, it is made explicit that the Court must take account of all the relevant factors, including the seriousness of the relevant breach of the duty owed in accordance with Regulation 89 or 90; the behaviour of the contracting authority; and, where the order is to be made without a declaration of ineffectiveness, the extent to which the contract remains in force Regulation 102(5) PCR2015. Moreover, it is also established that, where more than one economic operator starts proceedings in relation to the same contract, the determination of the  effective, proportionate and dissuasive character applies to the totality of penalties imposed in respect of the contract (Regulation 102(6) PCR2015; ie a sort of ne bis in idem).

Civil financial penalties

Regulation 102(7) to (11) establishes specific the rules concerning the payment of civil financial penalties and, in particular, whom the penalties are payable to. This may be of interest to public lawyers. However, from a public procurement perspective, this does not deserve any further comments.

Contract shortening

More interestingly, Regulation 102(12) to (16) establish specific rules for the shortening of the contract that cannot be declared ineffective. The regime is quite similar to the rules governing the consequences of a declaration of ineffectiveness under Regulation 101 PCR2015. In that regard, the Court may make any order that it thinks appropriate for addressing the consequences of the shortening of the duration of the contract (Regulation 102(12)) and such an order may, for example, address issues of restitution and compensation as between those parties to the contract who are parties to the proceedings so as to achieve an outcome which the Court considers to be just in all the circumstances (Regulation 102(13)).

The Court may take any order to restore any imbalances created by the contract shortening. For example, it should deal with issues such as restitution and even compensation for the parties aggrieved (ie, contractor). It is not clear if this balancing out of competing interests also includes sub-contractors as the Regulation refers clearly on paragraph 13 to “parties to the contract.” We see this issue coming about particularly on works contracts. By definition sub-contractors are not parties to the main contract, although in scenarios where direct payments are made, they may have a claim that they actually are.

Regulation 102(14) foresees the possibility for the parties to have previously regulated contractually the consequences of an order shortening the contract and, consequently, Regulation 102(15) determines that, in those circumstances, the Court must not exercise its power to regulate the shortening of the contract in any way which is inconsistent with those provisions, unless and to the extent that the Court considers them incompatible with the primary order to shorten the contract. The same issue of (in)existence of compensation for loss or damage resulting from the shortening of the contract arises as in relation to effectiveness, so the comments made in relation to Regulation 101 PCR2015 to the effect of excluding any such compensation apply here as well.

Last modified: December 6, 2016 by Pedro Telles

102.—(1) Where the Court makes a declaration of ineffectiveness, it must also order that the contracting authority pay a civil financial penalty of the amount specified in the order.

(2) Paragraph (3) applies where—

(a)in proceedings for a declaration of ineffectiveness, the Court is satisfied that any of the grounds for ineffectiveness applies but does not make a declaration of ineffectiveness because regulation 100 requires it not to do so; or

(b)in any proceedings, the Court is satisfied that the contract has been entered into in breach of any requirement imposed by regulation 87, 95 or 96(1)(b), and does not make a declaration of ineffectiveness (whether because none was sought or because the Court is not satisfied that any of the grounds for ineffectiveness applies).

(3) In those circumstances, the Court must order at least one, and may order both, of the following penalties:—

(a)that the duration of the contract be shortened to the extent specified in the order;

(b)that the contracting authority pay a civil financial penalty of the amount specified in the order.

(4) When the Court is considering what order to make under paragraph (1) or (3), the overriding consideration is that the penalties must be effective, proportionate and dissuasive.

(5) In determining the appropriate order, the Court must take account of all the relevant factors, including—

(a)the seriousness of the relevant breach of the duty owed in accordance with regulation 89 or 90;

(b)the behaviour of the contracting authority;

(c)where the order is to be made under paragraph (3), the extent to which the contract remains in force.

(6) Where more than one economic operator starts proceedings in relation to the same contract, paragraph (4) applies to the totality of penalties imposed in respect of the contract.

Civil financial penalties

(7) Subject to paragraph (8), where a contracting authority is ordered by the High Court of England and Wales to pay a civil financial penalty under this regulation—

(a)the Court’s order must state that the penalty is payable to the Minister for the Cabinet Office;

(b)the Court must send a copy of the order to the Minister;

(c)the contracting authority must pay the penalty to the Minister; and

(d)the Minister must, on receipt of the penalty, pay it into the Consolidated Fund.

(8) Where the Minister for the Cabinet Office, or the Cabinet Office, is ordered to pay a civil financial penalty under this Chapter—

(a)paragraph (7) does not apply; and

(b)the Minister for the Cabinet Office must pay the penalty into the Consolidated Fund.

(9) Subject to paragraph (10), where a contracting authority is ordered by the High Court of Northern Ireland to pay a civil financial penalty under this regulation—

(a)the Court’s order must state that the penalty is payable to the Department of Finance and Personnel;

(b)the Court must send a copy of the order to the Department;

(c)the contracting authority must pay the penalty to the Department; and

(d)the Department must, when it receives the penalty, pay it into the Consolidated Fund of Northern Ireland.

(10) Where the Department of Finance and Personnel is ordered to pay a civil financial penalty under this Chapter—

(a)paragraph (9) does not apply; and

(b)the Department must pay the penalty into the Consolidated Fund of Northern Ireland.

(11) Where a contracting authority is a non-Crown body—

(a)any payment due under paragraph (7) may be enforced by the Minister for the Cabinet Office as a judgment debt due to the Minister; and

(b)any payment due under paragraph (9) may be enforced by the Department of Finance and Personnel as a judgment debt due to it.

Contract shortening

(12) When making an order under paragraph (3)(a), or at any time after doing so, the Court may make any order that it thinks appropriate for addressing the consequences of the shortening of the duration of the contract.

(13) Such an order may, for example, address issues of restitution and compensation as between those parties to the contract who are parties to the proceedings so as to achieve an outcome which the Court considers to be just in all the circumstances.

(14) Paragraph (15) applies where the parties to the contract have, at any time before the order under paragraph (3)(a) is made, agreed by contract any provisions for the purpose of regulating their mutual rights and obligations in the event of such an order being made.

(15) In those circumstances, the Court must not exercise its power to make an order under paragraph (12) in any way which is inconsistent with those provisions, unless and to the extent that the Court considers that those provisions are incompatible with the primary order that is being made, or has been made, under paragraph (3)(a).

(16) In paragraph (3)(a), “duration of the contract” refers only to its prospective duration as from the time when the Court makes the order.