Contract conditions – how unreasonable can you be?

In a comprehensive judgement, the High Court rejected a challenge by Stagecoach to the procurement of new franchises for the South Eastern, East Midlands and West Coast rail lines*.

The challenge was based around the allocation of pensions risks under the contract. The draft contract placed most of the future pensions risk on the train operating companies. At the time the Pensions Regulator was challenging the way that employer contributions were set in the Railway Pension Scheme. This was likely to lead to a need for significant additional pension contributions from the successful train operating companies but crucially the magnitude of those additional contributions was not at all clear. Whilst there is often uncertainty around contributions to defined benefit pension schemes, the scale and nature of these uncertainties were found to be very different to the uncertainties which existed before the Pensions Regulator’s intervention. It was accepted that these pensions risks were essentially unquantifiable. All the train operating companies complained about the level of pensions risk being imposed on them.

Stagecoach also decided not to submit a compliant bid. Instead, they submitted an alternative bid under which the Secretary of State for Transport would have shared some of the pensions risk. Unsurprisingly their bid was rejected as non-compliant.

This is similar to what happened in Turning Point v Norfolk County Council in 2012**. In that case, Turning Point unsuccessfully challenged the exclusion of their tender as non-compliant due to wording they had included to seek to limit TUPE risks. In fact, the Turning Point challenge was more justifiable because the complete absence of TUPE information made it impossible for bidders other than the incumbent to price the TUPE risks, thereby giving the incumbent an unfair advantage. In that case, though, the challenge to the lack of TUPE information was deemed to be out of time.

Since the 30-day usual time limit for procurement challenges does not apply to rail franchise procurements, the challenge to the pensions risk allocation in the Stagecoach case was “in time”. However, the judge decided that sufficient information had been provided to enable the pensions risk to be priced. In fact bidders other than the incumbent had submitted bids. Much of the judgement concerned whether the disqualification of Stagecoach’s bid was fair, transparent, proportionate, and properly explained. The judge said that it was.

The more interesting part of the judgement deals with the question whether the transfer of risk was unfair, non-transparent and disproportionate. The court said that,

“There is no known principle of EU or UK law that limits the size of risk that may be allocated to a contractor or supplier in a public procurement”.

The court also made the point that bidders were in as good a position as the Secretary of State to quantify (and therefore price) the pensions risk. It is therefore likely that the train operating companies that did submit compliant bids will have included a substantial risk premium in return for taking the pensions risks (although this is speculation, as the actual terms of the deal are confidential).

It is interesting to contrast the level of risk transfer the Secretary of State imposed on the train operating companies to that recommended by the Government in its updated Outsourcing Playbook (see our e-briefing on PPN 5/20***). This recommends that,

“Ensuring that risks sit with the party best able to manage them is central to the Government’s approach to delivering value for money and partnering with the private sector”

It goes on to state that,

“When a contract is publicly designated by a supplier as onerous, this should prompt a root cause analysis and a conversation with the supplier about the options available to address this.”

Ultimately, if the risk transfer is too great and the rewards of the contract do not justify the private sector taking on the proposed level of risk transfer, a contracting authority may find that they have no bidders for a contract.

As the judge stated in the Stagecoach case, there is no requirement on any bidder to tender for a public contract and the ultimate protection from being landed with unacceptable risks is to choose not to tender. There was no obligation on Stagecoach or the other train operating companies to submit to highway (or rather “railway”) robbery.

For more information

Please contact Andrew Millross.

* Stagecoach East Midlands Trains Ltd v Secretary of State for Transport [2020] England and Wales High Court 2020
** Turning Point Ltd v Norfolk County Council [2012] EWHC 2121
*** “Playing fair” – PPN 05/20 Government’s updates its Outsourcing Playbook 

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