By Paul Emanuelli

This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.

In its July 2018 decision in SRLC Limited v. The National Health Service Commissioning Board (NHS England), the Technology and Construction Court of the England and Wales High Court dismissed a legal challenge brought by a losing incumbent health sector bidder after finding that it had submitted artificially high prices in order to challenge its competitor’s pricing under the “abnormally low” provisions of the relevant statutory rules. The case dealt with a “call-off” second-stage invitational tendering process for the provision of clinical waste services. That second-stage process was conducted under a pre-established framework agreement that covered all of England.

The NHS planned to conduct six waves of second-stage electronic reverse auctions for the award of specific contracts to prequalified suppliers under the framework agreement. The complainant challenged the outcome of one of these processes, arguing that the government had inappropriately awarded to an abnormally low bid submitted by a competing bidder. The challenge of the process had the effect of stopping the contract award under the statutory standstill protocols, which in turn had the effect of causing the NHS to stop any further second-stage electronic reverse auctions until the dispute was resolved.

As the Court explained, while the framework agreements set ceiling prices for the required services, the electronic reverse auctions allowed the prequalified suppliers to bid lower in order to win the specific assignments:

In this way, the Framework Agreement prices acted as an upper ceiling on what that bidder could charge for a particular item, but if it had bid a lower rate (or to be more accurate, a lump sum made up of a lower rate) in the auction because that item was in the representative basket, it could only charge that lower rate if it won the contract for that Wave.

The Court then explained the background context that led to SRLC Limited’s legal challenge:

The management personnel of each bidder would be required to make fast decisions, and the bidding would usually be what was termed in the evidence as “quite aggressive”. Eventually the lowest figure would be reached that any of the participating bidders were prepared to bid for the representative basket of services. In this auction for Wave 6, the final bid by HES was £310,000. The next lowest bidder was £313,000, from Sharpsmart. SRLC submitted only one bid early in the auction, of £479,999, and then stopped bidding.

The Court also set out the following relevant provisions regarding abnormally low bids from The Public Contracts Regulations 2015:

69.- Abnormally low tenders
  1. Contracting authorities shall require tenderers to explain the price or costs proposed in the tender where tenders appear to be abnormally low in relation to the works, supplies or services.
  2. The explanations given in accordance with paragraph (1) may in particular relate to-
    a.    the economics of the manufacturing process, of the services provided or of the construction method;
    b.    the technical solutions chosen or any exceptionally favourable conditions available to the tenderer for the supply of the products or services or for the execution of work;
    c.     the originality of the work, supplies or services proposed by the tenderer;
    d.     compliance with applicable obligations referred to in regulation 56(2)
    e.     compliance with obligations referred to in regulation 71;
    f.      the possibility of the tenderer obtaining State aid.
  3. The contracting authority shall assess the information provided by consulting the tenderer.
  4. The contracting authority may only reject the tender where the evidence supplied does not satisfactorily account for the low level of price or costs proposed, taking into account the elements referred to in paragraph (2).
  5. The contracting authority shall reject the tender where it has established that the tender is abnormally low because it does not comply with applicable obligations referred to in regulation 56(2).

The Court noted that SRLC Limited had won prior rounds of second-stage competitions under the electronic reverse auction format, but had then deliberately bid high in the challenged process in order to exaggerate the price differential with the low bidder to support a claim that the low bidder was “abnormally low”. As the Court found, this was part of the complainant’s strategy to disrupt the use of electronic reverse auctions in order to preserve its high profit margins:

During the disclosure process in the litigation, SRLC was required to disclose copies of the slides (or power point presentation material) used for this meeting. These showed that SRLC was concerned that future auctions would be held by NHSE after the end of year 1, and this would result in even lower prices, and a continuing or greater impact upon its business. In other words, even though SRLC had been successful in some of the Waves, there was a risk it would have to compete again. This was something that SRLC was anxious to avoid.
In order to deal with the general situation, SRLC considered its options in this strategy meeting. One slide stated under the heading “Influencing strategies to date” different lines of text, and one of them was:
“We are waiting for a compelling event to happen.
We need to create a compelling event.”
Ms Dransfield said that this was a reference to “getting NHS England to have sensible discussions with us around, as I’ve described, the risks to the market and the infrastructure, and how are we going to do that.” I reject that “sensible discussions” with NHSE was what was meant in the slides for this meeting by the term “a compelling event”. “We need to create a compelling event” would not, in normal English, mean “we need to have sensible discussions”. I find that the expression, in this case, “we need to create a compelling event” meant that SRLC decided to initiate a dispute, including potential litigation. SRLC decided no longer to participate in the e auctions on a normal commercial basis, namely bidding against the other bidders in order to win the contract if its lowest price was sufficient for it to emerge the winner. “Compelling event” meant something notable, such as litigation, or something else that would lead to NHSE abandoning its auction strategy. SRLC decided to disrupt and delay the auction process, sow as much doubt and/or confusion in the ranks of NHSE as possible, and if necessary to initiate a legal dispute with NHSE over the e auction process in order to achieve two things. These two things were adoption of a different method by NHSE to place these contracts; and through that new method, the second thing, namely less competition on price. This would restore SRLC’s economic returns to a level closer to the ones before.
As Ms Dransfield put it “We had been through five Waves, we had lost some business and seen some impact to our numbers.” SRLC wanted the business back, and they wanted their “numbers” back to pre-auction levels. Continuing competition through the auction process would not achieve this.
She expressed the lower prices and the auction process as a risk to SRLC’s business – which it may have been – and also a “risk to the market”. This demonstrates two things. Firstly, that SRLC equates its own commercial interests with the market. It is wrong to do so. It is no part of NHSE’s function to fund SRLC’s business, and SRLC’s profitability. Secondly, it is not a risk to the market if NHSE decided to adopt a strategy to reduce the very high margins being achieved by any of the providers (including but not only SRLC) and to pay a far lower figure achieved through a competitive e auction process. The Regulations, and the Directive, do not have as one of their aims protection of the business of incumbent suppliers, or their gross profit margins.

The Court determined that SRLC Limited’s premeditated “abnormally low bid” challenge was part of the complainant’s attempt to preserve a 25 percent minimum profit margin on the services, something that was threatened by the government’s plan to continue using electronic reverse auctions:

SRLC knew that, absent some seismic or compelling event, NHSE was set upon a course of continuing the e-auctions and having such competitions for the services of the whole of England. This was something that SRLC had decided could not be risked. The potential loss of the substantial margins enjoyed by SRLC had to be avoided.
There were other options or potential courses of action identified in the slides. These included “flooding the market”, refusing to continue to provide the services once the incumbent contracts ended, and generally making life difficult for the NHSE. Ms Dransfield explained that the slides were “deliberately provocative” and were to stimulate discussion with her colleagues, who were sometimes too focused on operations and not sufficiently cognisant of strategy. There is no doubt that Ms Dransfield was prepared to contemplate strategic decisions that would cause damage to NHSE – as shown by the “hurt the NHS” comment – but also that she put SRLC’s economic interests at the very top of her list of priorities. She cannot be criticised for doing this in a business sense; she is after all a director of SRLC. However, it does mean that a great deal of the SRLC complaints to NHSE have to be seen in this context.
SRLC sent NHSE a letter dated 17 March 2017, part of which was under a heading “TUPE/COSOP confusion”. In this letter, SRLC made a number of allegations or complaints about how TUPE was being dealt with in the auction process. The letter stated:
“It [ie TUPE] appears to be one of the factors driving the cavalier bidding behaviour that has been seen in e Auctions to date. It may explain why in some e Auctions NHS England has received what have appeared to be abnormally low tenders.”
This demonstrates that SRLC, rather oddly, was complaining about abnormally low tenders even though SRLC itself had succeeded on a number of e Auctions, and even though the bidding in Wave 6 had not even taken place. It is not an issue in these proceedings whether any of the bids for Waves 1 to 5 were, or appeared to be, abnormally low. Certainly the unsuccessful bidders for those Waves did not issue proceedings arguing that they were at the time, and SRLC was not complaining of abnormally low tenders in any of them, including the Waves in which it had succeeded. Further, so far as Wave 6 was concerned, SRLC could not know what level would be achieved in that auction. It was however “setting the scene” in advance for a complaint of an abnormally low tender, regardless of what the winning bid in fact was. It is also not the case that there was, in reality, any confusion about TUPE. SRLC was attempting to create some.
Ms Dransfield’s evidence on the change of strategy by SRLC for Wave 6 – the question had to be put a number of times before she would answer it – was eventually as follows:
“MR WILLIAMS:  Having participated actively in the previous five Waves, and indeed won many of the lots, including reducing your prices up to 50 per cent, why is it that all of a sudden, on the eve of the Wave 6 call-off, you suddenly start complaining about abnormally low tenders?
A.  I don’t know.”
The real reason that SRLC did so was, I find, that it was setting the scene to litigate regardless of the outcome of the auction. This was part of its overall strategy. It knew that NHSE would continue with this approach to procurement of the services, absent some sort of seismic or compelling event. It therefore sought to create or manufacture one. It would know the regulatory mechanism within which NHSE had to operate; these are contained in the PCR 2015. As a Framework Agreement had already been entered into with each of the bidders, the only way it had at its disposal to try to interfere with the award of a contract to a winning bidder was by complaining that such a bid was abnormally low. No further evaluation of tenders would take place, now that the Framework Agreements were entered into. The only feature of the auctions was the price bidders were prepared to bid. The only way of attacking such a process was by complaining the bids were abnormally low tenders. This is therefore what SRLC prepared to do.
SRLC decided to establish what Ms Dransfield described as a “minimum 25 per cent margin” for its own bid, and this was done only for Wave 6. The auctions for Waves 1 to 5 had been accomplished prior to the meeting of 15 March 2017. This approach of fixing a minimum margin had not been SRLC’s strategy for these earlier Waves. It was also accepted in evidence by SRLC that this change of strategy (or change of approach) was not something of which NHSE could have been aware. It was, in my judgment, an artificial way of preparing the ground for SRLC’s bid to be so much higher than the winning (or other similar) bid or bids, so that an argument could be mounted that the winning (or other similar) bid was abnormally low, by comparison with the bid of SRLC. It is a strategy to which SRLC has adhered in this litigation.

The Court rejected SRLC Limited’s assertion that the 25 percent profit margin bid was a competitive price that represented its lowest possible sustainable price:

The following points are notable about this letter. Firstly, it asserts that the “lowest possible sustainable price” was the one bid by SRLC in the auction. That assertion is put into context by the knowledge, now available to the court, that this price included a margin of 25%. That is, with respect to SRLC, a generous margin, somewhat above cost. It is not generous only when it is considered against SRLC’s far higher, historic margin of 52% for this region, or 49% as a national average. Secondly, the assertion of “abnormally low” is made against that SRLC benchmark figure. Even if, which I do not accept, the lowest sustainable price for SRLC was the one with the minimum margin of 25%, that does not mean that this was the lowest sustainable price for SRLC for a wide range of other commercial factors. The reference to the Framework pricing is irrelevant. The whole purpose of the auction process was to see how much lower than those prices the bidders were prepared to bid, competitively.

While the Court found that the statutory provisions relating to “abnormally low bids” prescribed rules for regulating the government’s conduct in situations where it chose to challenge pricing on the basis that it appeared abnormally low, it determined that those provisions did not create a duty to review low bids on the request of losing bidders to determine whether the winning bids were abnormally low:

Abnormally low tenders
The duty upon contracting authorities in respect of abnormally low tenders is now contained in regulation 69(1) of the 2015 Regulations, which implements Article 69(1) of the Directive. This states as follows:
“(1) Contracting authorities shall require tenderers to explain the price or costs proposed in the tender where tenders appear to be abnormally low in relation to the work, supplies or services”. (emphasis added)
There then follow a number of specific duties which arise if and when the contracting authority considers that a tender may be abnormally low and decides to investigate it by requesting an explanation from the tenderer concerned.
NHSE submits that the duty under Regulation 69(1) only arises, however, when two conditions are fulfilled. Firstly, when it appears to the contracting authority that a tender appears to be abnormally low and if that is met, when it is considering rejecting that tender for that reason. The authority upon which NHSE relies is the judgment of Flaux J (as he then was) in J. Varney & Sons Waste Management Ltd-v-Hertfordshire County Council [2010] EWHC 1404 (QB), which itself referred to the earlier decision of Arnold J in Morrison Facilities Services Ltd.-v-Norwich City Council [2010] EWHC 487 (Ch).
In J. Varney & Sons, Flaux J held at [156] to [159]:
“[It was] submitted that Arnold J. has misread the Directive as imposing an obligation to investigate “suspect” tenders generally, when it did not, save in cases where the authority was proposing to reject the tender in question. I agree with that submission. In my judgment, despite the difference of wording, there is no difference in substance between the provisions of the Directive and those of the Regulations. The thrust of both provisions is that an authority cannot reject a tender which is abnormally low unless it does certain things in terms of investigating that tender. For present purposes, there is no difference between saying that you shall do certain things before an entitlement to reject arises and saying that you may reject the tender provided you have done certain things.
Either way, there is nothing in either provision to support the contention that there is a general duty owed by the authority to investigate so-called “suspect” tenders which appear abnormally low. Nothing in the European Court decisions to which Arnold J. refers dictates a different conclusion. Having heard full argument on the point at trial I am quite satisfied that neither the Directive nor the Regulations imposes a duty to investigate so-called suspect tenders generally.
It follows that, on the correct interpretation of both the Directive and the Regulation (save in the case of Fourways where the Council did consider the tender abnormally low and was contemplating rejecting the tender at least in part if not totally), the Council was not under a duty generally to investigate so-called “suspect” tenders in circumstances where the Council had no intention of rejecting those tenders. In my judgement, this aspect of Varney’s complaint that the Council was in breach of duty in failing to investigate the tenders other than Fourways falls at the first hurdle.
Furthermore, I consider that there is another fundamental obstacle to Varney’s case that the Council was in breach of duty in failing to investigate the other tenders. Although regulation 30(6) talks in the abstract of an offer which is abnormally low, the Directive refers to tenders which “appear to be abnormally low”, which makes sense as a reference to what “appears” to the relevant authority. In the circumstances, it seems to me that the duty for which Varney contends could only arise where the Council either knows or suspects that the tender in question is abnormally low. Leaving Fourways out of account, it is quite clear on the evidence of Mr. Shaw and Mr. King (which I accept) that neither of them actually knew or suspected that the other tenders were abnormally low.”

In summary, the Court found that the “abnormally low tender” provisions gave the government the right, but not the duty, to investigate low bids and reject them if there was valid concern that the price was not viable:

I consider that there is no basis for imposing a general duty to investigate such tenders in all cases. If, in any particular competition, the contracting authority considers that a particular tender has the appearance of being abnormally low, and the contracting authority considers that the tender should be rejected for that reason, there is a duty upon the contracting authority to require the tenderer to explain its prices. Absent a satisfactory explanation, it is obliged to reject that tender as expressly stated in Article 69, namely non-compliance with certain legislation in the specified fields of environmental and social legislation. Otherwise, it is entitled to reject it if the evidence does not satisfactorily account for the low level of price, but it is not required to do so.

The Court also confirmed that while there was no definition for what constituted an abnormally low bid, the pricing would have to be “below the range of anything which might legitimately be considered to be normal in the context of the particular procurement”. The Court then criticized the complainant’s attempt to thwart the competitive bidding process under the electronic reverse auction by fixing its pricing at an artificially high figure as part of its plan to challenge the process:

I would go further in this case and say that the whole attack by SRLC bid would not have been markedly dissimilar from those of its two competitors. SRLC took a conscious decision not to bid on a commercial basis to win the contract for Wave 6, but fix its margin at an artificially high figure of 25%, and try to engineer a situation where the other bids were far lower than its own, in order to justify an attack on the outcome of the auction using the “abnormally low tender” approach.
These proceedings have had the effect of suspending the award of the Wave 6 call-off contract, with the consequent continuing supply of the services by SRLC on the rather more profitable basis of a 52% margin. This state of affairs has continued for over one year, and longer than otherwise would have been the case due to the lack of availability of one of SRLC’s witnesses for the trial on 30 April 2018. It has also had the consequential effect upon NHSE that it suspended all of its Call-Off contract auctions for Waves 7 and onwards. Whether this was a consideration in SRLC creating what it termed in its own strategy meeting of March 2017 a “compelling event” is not known. It will however have been a commercial side-effect beneficial to SRLC, whether by accident or design.

The Court ultimately rejected the challenge, finding that the complaint was an attempt to protect profit margins. As the Court concluded, it was those high profit margins that originally led to the government establishing its framework agreement and using electronic reverse auctions in the first place:

In any event, the main thrust of SRLC’s attack on the NHSE procurement process was that the winning bid by HES, and the next best bid of Sharpsmart, were abnormally low tenders. This attack was, in large part if not exclusively, based on how much lower these bids were than SRLC’s own bid. That was proposed as a benchmark. That bid could only, on SRLC’s case, be seen as competitive because the gross profit margin included within it was so much lower than its existing gross profit margin. Further, the very sizeable gross profit margin currently being achieved by SRLC on the incumbent contract is integral to its whole strategy of bidding (or more accurately, not bidding competitively) in the Wave 6 auction, and attempting to persuade or prevent NHSE from holding such auctions. The existing gross profit margin of both SRLC and other incumbents is what drove NHSE to initiate the Framework Agreement and the auction process for services across England in the first place. SRLC’s existing margin as incumbent cannot in any way assist its competitors in future auctions for these or other services.

As this case illustrates, purchasing institutions can realize significant potential costs savings by using electronic reverse auctions. While the use of these formats may attract supplier complaints, this should not be taken as evidence that there is something wrong with the use of those formats. In appropriate situations, and using appropriate procedures, electronic reverse auctions can result in significant cost savings to purchasing institutions. As evidenced by this challenge, electronic reverse auctions can be an effective way to cut down costs in areas adversely impacted by unnecessarily high supplier profit margins.