This article is an excerpt from the 2021 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
Whether the purchasing institution is dealing with a low bid award or a high score assessment, pricing is typically a critical factor in contract award decisions. However, the submission of abnormally low pricing can give rise to significant legal issues. While purchasing institutions may be concerned that a bidder will not be able to perform for its stated price, they should proceed with caution before rejecting a bid because its price was too low since, as the following cases illustrate, rejecting bids for abnormally low pricing can subject the purchasing institution to legal challenge.
In its May 2002 decision in SIAC Construction Ltd. v. Mayo County Council, the Supreme Court of Ireland dismissed a legal challenge after finding no manifest error in the County Council’s decision to reject an abnormally low bid. The case dealt with a major sewerage works at Ballinrobe, Ireland. The Court ruled that it was within the Council’s authority to reject the low bid due to concerns that the pricing was unbalanced. The Court also held that it would have been improper to seek a clarification in the situation since that would have amounted to unfairly allowing the complainant to rebid in contravention of applicable Irish and European procurement rules.
In defence of its decision to reject the bid over concerns that it was “unbalanced”, the County asserted that the contractor’s bid contained artificially low costs for certain portions of the work but inflated costs for other parts of the work, which could allow the contractor to secure higher performance payments in post-award scope changes involving the higher-priced categories. The Court concluded that the County had acted within its margin of discretion when it decided to reject the low bid, finding that the decision to reject was not made in an unfettered manner, but was based on a proper consideration of transparent and objective criteria. The Court also rejected the complainant’s argument that the County should have provided an opportunity to clarify its pricing before rejecting the bid, ruling that such a clarification would have amounted to giving the complainant an opportunity to rebid in contravention of applicable procurement rules.
In its May 2008 decision in Belfass SPRL v. Council of the European Union, the European Court of Justice overruled the rejection of an abnormally low bid after the bidder was automatically rejected without being given the opportunity to address its bid offer. The dispute dealt with a tender call for the provision of cleaning and maintenance services in two buildings occupied by the General Secretariat of the Council in Brussels. Among other things, the specifications provided that the average hourly rate in each tender should not be lower than the average hourly rate fixed by the Belgian General Cleaners’ Union. The Court determined that the complainant was improperly rejected because of what appeared to be an excessively low number of total hours to perform the work, but the Council had denied the complainant the opportunity to address that issue and instead automatically rejected the bid. The Court ruled that the automatic rejection was procedurally incorrect and was therefore annulled.
In its November 2014 decision in Computer Resources International (Luxembourg) SA v. European Commission, the European Court of Justice upheld the rejection of an abnormally low bid. The case dealt with a call for tenders by the European Union for new framework agreements for computer services for software development and maintenance, consultancy, and assistance for different types of information technology applications. The Luxembourg-based bidder was given the opportunity to substantiate its pricing since its rates were too low for Luxembourg-based staff to provide the services. However, its bid claimed that it would be using staff “in driving distance” from Luxembourg and never stated that it would be using staff from Romania. The Court agreed with the European Union that this information was inadmissible as a post-bid explanation for its abnormally low bid since this would constitute a material change to the original bid, which was silent to the use of Romanian staff. The rejection of the abnormally low bid was therefore upheld.
In its January 2016 decision in Agriconsulting Europe SA v. European Commission, the European Court of Justice dismissed a rejected bidder’s lost profit claim after finding that European Commission properly rejected the complainant’s bid as abnormally low. The case dealt with a European Commission tendering procedure for a network facility for the European Innovation Partnership. Only two bidders obtained the minimum scores necessary to be short-listed for the price evaluation stage. The complainant’s price was EUR 1,320,112.63, while its competitor’s price was EUR 2,316,124.83. Concerns arose over the low bidder’s pricing, particularly in the area of “additional tasks”.
As the Court noted, the “record of the meeting of the evaluation committee held on 20 November 2012 shows that the applicant was ranked in first place and that, since the committee had concerns about the abnormally low nature of the tender, it decided to request information from the applicant concerning the prices for the additional tasks.” The Court also noted that “the Commission informed the applicant that the evaluation committee had found the prices stated for the additional tasks to be abnormally low” and that the Commission had “asked the applicant for detailed explanations on the calculation of the prices offered for additional tasks 1 to 21 and 25, stating that the tender could be rejected if the explanations proved unconvincing.”
The evaluation committee ultimately decided to reject that low bid after finding that the bidder planned to overlap staff between the main tasks and additional tasks, which was in contravention of the tender call specifications. This resulted in the evaluators adjusting the bidder’s technical score so that it no longer met the minimum scoring threshold. The evaluation committee therefore recommended an award to the competing bidder. The low bidder challenged this decision and claimed lost profits as a remedy for what it claimed to be the improper rejection of its bid. The Court ultimately dismissed the claim, finding that the rejection of the low bid for abnormally low pricing was justified and not a breach of applicable tendering rules.
In its June 2016 decision in F P McCann Ltd v. The Department for Regional Development, Northern Ireland’s High Court of Justice, Chancery Division, awarded lost profits to a complainant after finding that the government improperly rejected its bid as abnormally low. The dispute dealt with a tendering process for a highway construction project between Belfast and Larne. The Court determined that in the situation it was lawful for the purchasing authority to seek clarification over the complainant’s proposed pricing. However, in considering the evidence, the Court raised a series of concerns over how that decision-making process was administered in relation to the government’s assessment of whether the complainant had submitted an “abnormally low tender”.
The first concern was that the government took irrelevant considerations into account when assessing the complainant’s pricing. The Court concluded that the board took factors into consideration that were outside of the scope of the evaluation criteria, including the consideration of the size of the complainant’s management team, when it made its decision to reject the bid as abnormally low.
Secondly, the Court found that the complainant was not provided an adequate opportunity to respond to the concerns over pricing. Even though the applicable statutory provisions maintained that a purchasing authority “must” request “in writing an explanation of the offer or of those parts which it considers contribute to the offer being abnormally low”, the Court found that the government failed to seek clarification over the core management team pricing even though that factor contributed to the board’s decision to reject the bid as abnormally low.
Thirdly, the Court found that the government “failed to comply with its obligation to verify the offer or parts of the offer which were allegedly abnormally low.” Rather, the Court found that the government’s attempt to seek clarifications on pricing from the complainant were rushed and incomplete and that the government had failed to clearly identify its pricing concerns to enable the complainant to provide a clear response to those concerns. The failure to provide that opportunity was a breach of applicable procedural rules set out in the statutory framework for dealing with abnormally low tenders.
Finally, the Court expressed concerns over the accuracy of the pricing information provided to the board, finding that it was provided without adequate context so as to exaggerate the variation of pricing between the complainant and its competitors. Since these flaws prejudiced the complainant’s rights to a fair evaluation, the lack of due process rendered the decision to reject the bid legally invalid even though there appeared to be valid concerns about the complainant’s pricing. Since, in the circumstances, it was no longer possible to order a re-evaluation, the Court awarded the complainant damages for the lost contracting opportunity. As this case illustrates, government evaluation decisions must meet proper due process standards in order to be defensible against subsequent legal challenges.
In its July 2018 decision in SRCL Limited v. The National Health Service Commissioning Board (NHS England), the Technology and Construction Court of the English 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 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 Court noted that SRCL 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. The Court determined that SRCL 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. The Court rejected SRCL Limited’s assertion that the 25 percent profit margin bid was a competitive price that represented its lowest possible sustainable price.
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. 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. 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”.
As these cases illustrate, while a purchasing institution may not be under a duty to reject an abnormally low bid, its right to do so will be subject to potential legal challenge so any such decisions should be made only after following appropriate procedures and, where appropriate, seeking further price clarifications to asses the viability of the offered pricing before determining that it is abnormally low.
