In its June 2020 decision in Stagecoach East Midlands Trains Ltd. v. The Secretary of State for Transport, the England and Wales High Court of Justice ruled that the government validly rejected a condition bid. The dispute dealt with a tendering process for the award of railway operation franchise agreements. One of the bidders took issue with the proposed contractual terms, which allocated pension liability risks onto the operators, and attempted to shift those risks back to the government by submitting a conditional bid. That bid was rejected as non-compliant. The rejected bidder initiated legal proceedings to challenge its disqualification and to also challenge the pension liability provisions in the tendered contract.
As the Court summarized, the complainant asserted that the scale of the unknown pension risk undermined the transparency of the competitive process:
While acknowledging that bidders were able to obtain expert advice to assist them in quantifying and thereby pricing in their potential exposure, and that all bidders were in a similar position as all received the same terms and information against which to bid, the Claimants submit that the scale of uncertainty about pension risks breached the requirement that all tenderers should know what the contract would require of them and meant that there was a lack of transparency about the “value” of the contract because the uncertainty about pensions costs meant that there was no transparency about the contractor’s remuneration.
However, the government argued that under the procurement rules, government institutions enjoy a wide discretion in how they decide to allocate risk in their tendered contracts:
Allocation of risk is one of the key functions of any ITT. Acceptance of risk is in the nature of service concession contracts: see [24] ff above. Allocation of risk and public resources is an area where a Defendant contracting authority has a wide margin of appreciation: see [20] above. The Claimants again rely upon the Law Society decision; but again it is necessary to bear in mind the distinction between a discretion to rewrite the terms of the contract, which is unacceptable because it gives rise to a lack of certainty of terms, and a discretion which goes to the implementing of terms that are otherwise sufficiently certain, which will be subject to the general principles of EU and UK law that I have identified and which is in principle generally acceptable.
The Court also summarized why neither party wanted to assume the risks associated with pension liabilities:
The evidence shows that both the Government and the TOCs had good reasons for wishing that the other should shoulder the risks arising out of the railway’s private pension scheme. Franchisees would prefer not to be subject to potential liabilities, for obvious commercial reasons. The Government has policy reasons associated with incentivising reform and avoiding the disbursement of public funds on a private pension scheme. Leaving aside the question of uncertainty of outturn, neither side’s wishes or reasons triggered any known principle of EU or UK law that required the Defendant to accept that risk rather than imposing it on the franchisee, as had always been the case. Subject to the questions raised in Issue 4, there is no principle of EU or UK law that limits the size of a risk that may be allocated to one contracting party or another in a public procurement.
Nor can I accept that uncertainty of outcome engaged the principle of transparency so as to render the imposition of the risk upon the franchisees unlawful. First, as I have said earlier in this judgment, uncertainty of outcome is the essence of risk; and bidders have to deal with commercial risk in any substantial procurement. Their ultimate protection is always to decline to bid, as it was in this case. There is no principle of EU or UK law that a procurement must be so structured that every potential bidder can or will bid or even that a particular subset of potential bidders can or will bid: see Concordia Bus Finland Oy Ba [2002] ECR I-07213 at [85]. If all were to decline to bid, that would be an intensely unsatisfactory outcome, but it would not mean or even suggest that the terms being offered were unlawful, either for reasons of transparency or otherwise. Second, this was a risk that could be estimated and priced as any other, as Mr Paterson rightly acknowledged. It is to be expected and normal that different bidders would reach different estimates of any risk and the fact that scarily large worst-case numbers could be generated does not affect the question of principle.
The Court ultimately concluded that the government did not breach any applicable procurement rules by transferring the risk of pension liabilities onto bidders, even if that meant that some prospective bidders chose not to bid on the opportunity:
Refocusing to view the process through a public law prism, where a public authority, as here, settles on a complicated package of rights and obligations and invites bidding in a competitive procurement, the grounds on which the court will interfere on the basis that the package is unlawful, assuming that the process is transparent and fair, are limited. This is because of the underlying point that it is for a contracting authority to determine the nature and extent of the contracts into which it wishes to enter. There is no self-contained principle of EU or UK public law that prohibits the allocation of large risks (whether certain or not) to bidding parties. The ultimate protection for bidders is that they are not obliged to bid and, if they do, need only bid if they conclude that the balance of risks and rewards that goes to make up their bid is commercially acceptable to them. Obviously, to some extent, every burden that is allocated to a bidder will make the package less attractive and may affect the willingness of prospective bidders to bid at all or, if they are prepared to do so, the price at which they will bid. Thus a package such as set out in these ITTs and draft Franchise Signature Agreements may not have been the optimum solution for achieving value for money and may not have appealed to all prospective franchisees; but those considerations do not demonstrate or even suggest that the packages fell outside the wide margin of appreciation allowed to a contracting authority to stipulate how it proposes to allocate public resources. Similarly, the Department’s fears that some bidders would find the risk unacceptable and walk away might be real and might, in the event, have been realised; but that does not of itself demonstrate that such an allocation was unlawful.
The judgment also noted that the courts should not interfere in these risk allocation decisions unless they constitute a “manifest error” committed by the government institution:
It follows that, in the absence of the PRSM, I would reject the submission that the principle of proportionality required the stricter approach that would be appropriate where a measure interfered with a fundamental freedom guaranteed by the EU Treaties. The test would therefore be whether the allocation of the pension risk to the franchisees, given the wide margin of appreciation that would apply, was proved to be “manifest error”. The Claimants do not advance a case on this basis, their case being that the allocation of risk with the PRSM failed to achieve the policy objective of protecting the bidders from risks that were disproportionate and uncertain and that they could not control.
After upholding the government’s risk allocation decision, the Court concluded that the government had the right to reject the complainant’s conditional bid. As this case illustrates, while prospective suppliers may have the right to take issue with the ground rules contained within a solicitation during the pre-bid stage of the tendering process, once they decide to bid, they must attorn to the terms of that process. Bidders are not entitled to negotiate over the ground rules by submitting conditional bids since under the procurement rules those conditional bids constitute non-compliant counter-offers that are legally incapable of acceptance.
