This article is an excerpt from the 2021 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its November 2016 decision in Copymoore Ltd & ors -v- Commissioners of Public Works of Ireland, the High Court of Ireland upheld a framework agreement and rejected allegations that the arrangement was anti-competitive. The dispute dealt with a tendering process to create a framework agreement for monochrome and colour printers and multi-function devices. A losing bidder challenged the process, arguing that the corporate capacity requirements in the tender call were unnecessarily restrictive and that the framework arrangement would lock unsuccessful suppliers out of the market for a prolonged period. The Court rejected both grounds of complaint.
In considering whether the corporate capacity requirements, which were referred to as the “turnover rate”, were unnecessarily restrictive, the Court determined that the required €2 million–turnover rate was appropriate since each contract was valued between €22,000.00 and €26,000.00. The Court rejected the claim that this requirement was unnecessarily restrictive to competition, finding instead that it was legitimate, reasonable, and proportionate:
Are the Criteria Disproportionate and Discriminatory?
The applicants submit that the capacity levels set in the Request for Tenders must be relevant and proportionate to the circumstances of the contract. It is submitted that no evidence has been adduced concerning the assessment of the proportionality of the qualification criteria. Mr. Mulvey gave evidence that a figure of €2 million turnover as a qualification criteria was set having discussed the matter with his line manager who approved the figures upon which he relied. He was informed that the proposed turnover level was considered by his superiors to be proportionate. He did not calculate the value of any individual contract in the survey which he carried out. He did not have regard to the individual drawdown numbers when setting the €2 million turnover. The turnover criteria was “never going to be anything other than a percentage of the overall aggregated contract price”. The respondents submit that the proper value of the Framework is the value of all of the individual contracts that might be entered into within the Framework.
Mr. Massey gave evidence that an average spend in respect of an individual contract under the proposed Framework Agreement would be between €22,000.00 and €26,000.00. It was submitted by the applicants that the measure of turnover needed to be related to the conditions of the market and the likely level of purchases by individual customers rather than simply placing reliance on a blanket turnover figure. While it was accepted that the public sector might need some reassurance that the parties appointed could deliver under the Framework, a figure of €2 million as a threshold figure was disproportionate. He noted that the gross figure of €5 million over a period of two years would involve seven suppliers in respect of each Lot. If the successful tenderers had the opportunity to bid for business of up to €2.5 million per annum the seven entities who are successful in respect of each Lot would have an opportunity to bid for a proportionate amount of business. However, Mr. Massey stated that the turnover requirement should be attuned more closely to the level of business that any individual firm is likely to earn under the Framework.
I am satisfied however, that the spread of risk amongst seven tenderers gives comfort to the procurer in that it reduces the risk of damage arising if one or more of them are unable to deliver under the terms of the Framework in respect of the individual Lot. This was a legitimate, reasonable and proportionate reason for the qualification criteria set.
Turning to the issue of whether the framework arrangement would improperly lock unsuccessful suppliers out of the market and prevent, restrict, or distort competition, the Court considered the complainant’s evidence regarding the impact on suppliers who were cut out of the framework:
The parties sought to rely on the evidence Mr. Massey and Dr. Bacon in respect of the perceived effects, if any, of the Request for Tenders and Framework Agreement on competition in the relevant market. It is agreed that the relevant market was that for printers and multi-function devices within the State taking account that certain framework agreements also related to the associated market for consumables in respect of a number of the lots. The applicants sought to establish on the balance of probabilities that the Framework Agreement prevents, restricts or distorts competition. This general proposition is directed towards establishing that the contracting authority is in a dominant position in the market and/or that the framework agreement stands is anti-competitive.
Mr. Massey summarised his conclusions in respect of the framework agreement at para. 6.4 of his report of 18th March, 2013. In respect of these issues he was of the opinion that the framework agreement prevented, restricted or distorted competition in the market because:
i. It would exclude all suppliers of the relevant products apart from the successful bidders from supplying the products to all public sector purchasers for a minimum of two years and possibly up to four years, thereby greatly reducing competition to supply those customers;
ii. While the tender means that there is some competition for the market, the tender criteria greatly limited the number of undertakings that could bid for one or more of the framework lots so that the degree of competition for the market is severely curtailed so that any competition for the market is seriously restricted;
iii. The framework agreement is likely to foreclose the entire market for the duration of the agreement resulting in higher prices for higher private sector purchasers; and
iv. There is no obvious objective justification for the restrictions of competition included in the request for tenders and the framework agreement and no sufficient costs and efficiencies to offset the reduction of competition. In any event such benefits would not alter the fact that market foreclosure would result in higher prices to private sector customers and provide no offsetting benefits to such customers.
Mr. Massey contends that the framework agreement will have an adverse effect on competition in the entire market not just in respect of public sector purchases. He noted that the applicants indicated to him that sales to state agencies account for 40% and 80% of their sales. They will likely lose a large proportion of their current business and will be prevented from supplying such customers for the duration of the agreement. He maintains that all undertakings apart from the successful bidders will be limited to supplying between 20% and 60% of the market for the duration of the agreement. He states that by denying access to public sector customers to the vast majority of undertakings selling the relevant products the framework is likely to foreclose the entire market as many undertakings could not survive on the basis of sales to private sector customers alone. Market foreclosure would lead to significant lessening of competition in the overall market for the supply of the relevant equipment and reduce the number of competitors in the market while simultaneously creating a barrier to entry.
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Therefore, Mr. Massey believes that because the public sector accounts for a very large share of total sales that the framework agreement will result in the foreclosure of the entire market, public and private, with the consequent reduction of competition in the overall market.
The Court rejected this ground of challenge after concluding, based on other evidence provided by the government, that the contract, while large in value, only constituted a small fraction of the relevant market available to suppliers:
Dr. Bacon estimates that the public sector is likely to account for approximately 8% to 12% of total purchases of relevant products. He notes that the conclusion reached by Mr. Massey is based on information which had been supplied by the applicants that sales to the public sector accounted for between 40 and 80% of turnover in their businesses. On this basis a calculation was made by Mr. Massey that in effect all undertakings apart from the successful business bidders would be limited to supplying 20% and 60% of the market for the duration of the agreement. Dr. Bacon notes that other data in the Massey report and data related to the Request for Tenders did not support this conclusion.
An estimate of €75million per annum for the market for printers and multi function devices set out in Mr. Massey’s report did not include the value of servicing or sales of consumables. Dr. Bacon noted that this contrasted with the tender document estimate of €25million which refers to the total value of purchases including devices, servicing and consumables over two years. He noted that this information was supplied by the NPS. While his statement that all purchasers of office equipment to the public service were contacted and details of devices purchased in 2010 obtained is open to some criticism, he deduced nevertheless, that the collated information showed that expenditure on printers and multi function devices in that year was €5 to €6 million while the annual cost of services including consumables was in the region of €6million. He noted that the NPS estimated the total expenditure would therefore be approximately €25million across all five lots over two years. Using this data Dr. Bacon concluded that the public sector accounts for about 8% of the market made up of devices worth €6million per annum out of a total sales of €75million. Therefore 92% of the market would not be affected by framework agreements. Therefore he concluded that the inference regarding the importance of sales to the public sector was misleading and the conclusion contained in the Massey report that only firms that are successful in obtaining a framework agreement could survive was not supported by the data.
As this case illustrates, government procurement processes remain subject to challenges based on claims that their requirements, evaluation criteria, or scope of award are unnecessarily restrictive to competition. Purchasing institutions, particularly large institutions whose purchasing decisions may have disproportionate impacts on the market, should therefore tread carefully when scoping their contracts and shaping their evaluation criteria.
