American Cyanamid: Procurement Saviour or Dinosaur?

It was suggested in a previous article that public sector procurement within the UK could be in for a rather turbulent 2011. With an increasing propensity for challenging public procurement exercises, greater scrutiny through the imposition of transparency requirements and ever decreasing budgets, it certainly won't be an easy future.

Public sector bodies will have taken, at least, some comfort from two judgements that closed 2010. Indigo Services (UK) Limited v The Colchester Institute Corporation [2010] EWHC 3237 (QB) and Exel Europe Limited v University Hospitals Coventry and Warwickshire NHS Trust [2010] EWCH 3332 (TCC) both concerned the application of 47G and 47H of the Public Contracts (Amendments) Regulations 2009 (the Remedies Regulations) which amended the Public Contracts Regulations 2006.

The "Remedies Regulations" came into force on 20 December 2009 and implement European Directive 2007/66/EC (the Directive).

The 2006 Regulations introduced a statutory "standstill" period to be observed by public sector procuring bodies once they had decided who would get the contract following a procurement exercise, so that they could not enter into that contract for a minimum period of 10 days after all of the bidders had been notified of the decision. The Directive set out a number of perceived weaknesses with the system and the "Remedies Regulations" which followed were introduced to address those perceived weaknesses.

Regulation 47G provides that, where proceedings are started in respect of a contracting authority's decision to award a contract, and that contract has not yet been entered into, then the starting of those proceedings requires the contracting authority to refrain from entering into that contract.

There is an automatic suspension of the conclusion of the contract merely by the issuing of a claim, if that is done during the "standstill period". The contracting authority then has to apply for a court to lift that automatic suspension pursuant to regulation 47H of the Regulations. This was the position facing the courts in both of the above cases, albeit dealing with substantially different facts. The courts, in both cases did bring the automatic suspension to an end and in both cases they relied upon principles laid down in the 1975 case of American Cyanamid Co v Ethicon [1975] AC396.

The American Cyanamid principles, as they became known, require a number of factors to be taken into consideration when the court is asked to make (or lift) an interim injunction that prevents one party from continuing a course of action. Broadly, those considerations are; a) the merits or strength of argument, b) the adequacy of damages, c) the balance of convenience and d) the prejudicial impact of maintaining the status quo.

The court in Exel, in particular, took the opportunity to examine the application of American Cyanamid principles in relation to the procurement regulations with Mr Justice Akenhead, having reviewed the relevant regulations, concluding that; What in practice it means is that the Court should go about the Cyanamid exercise in the way in which courts in this country have done for many years.

The Regulations, of course, make no mention of American Cyanamid but it is nonetheless a plausible justification. It does, however, beg the question whether the courts were correct to apply the American Cyanamid principles to the public procurement remedies regulations? Can it really be the case that such interpretation truly does reflect the intention of the Directive?

Both judgements seemed to place particular emphasis on the balance of convenience, or prejudicial impact principles with Deputy High Court Judge David Donaldson QC in Indigo citing a previous passage from Lord Hoffman, that; "the court should take which ever course seems likely to cause the least irremediable prejudice to one party or the other". Certainly, in Indigo, the irremediable prejudice argument seemed to outweigh even the conclusion that damages would not be intrinsically an adequate remedy.

Reliance upon the irremediable prejudice seems to have been pivotal in both judgements and it is such reliance upon that one aspect of American Cyanamid that makes its application to the remedies regulations so questionable.

I cannot think of a single procurement exercise that I have either been involved with personally, or read about where the irremediable prejudice argument would not win the day and result in the "automatic suspension" being lifted. Isn't that how procurement exercises work? They are timed so that the new contract comes into effect as the current contract is coming to a close. That's the reason for the procurement. When is an order to continue the suspension, thus preventing the procuring body from entering into the contract not going to cause irremediable prejudice to the procuring body and general public?

For a variety of reasons it remains the case that many public sector procuring bodies still do not allow sufficient time for their procurement exercises. Invariably, when the time comes to award a new contract to an incoming provider there is no contingency in place that will cater for any further delay. If they cannot proceed, the procuring body will almost certainly be faced with irremediable prejudice. If American Cyanamid is allowed to prevail, do the remedies regulations actually change anything? Is not the procuring body, effectively, being rewarded for its own tardiness?

The crucial question remains whether the remedies regulations, as introduced into the UK and interpreted by the courts actually do reflect the true spirit and intention of what the European Directive was trying to achieve. It could be that these two opening salvos were, perhaps, not the best examples with which to test the application of the regulations. Doubtless, there will be other opportunities in the near future and other arguments advanced that will probe further the correct approach to the interpretation of the regulations.

In any event, we do at least have the certainty of a review at European Commission level in the not too distant future. The Directive included an article that provides for a review by the Commission on the implementation and effectiveness of the Directive to be reported to the European Parliament no later than 20 December 2012. At least by then, if not before we should be in a better position to find out whether American Cyanamid will be seen as the procurement saviour or procurement dinosaur.

Allan J. Donovan 2011

Allandon Services Limited