Faraday ruling sets new precedent on public contract award cancellations

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faraday development ltd, public contract awards
©Ian Chris Graham

Successful challenges to public contract awards could be more likely following the Court of Appeal ruling in Faraday Development Ltd v West Berkshire Council last year, according to CLS Risk Solutions

CLS Risk Solutions warns that the risk of cancelling public contract awards could be more likely following the Court of Appeal ruling in Faraday Development Ltd v West Berkshire Council

CLS has seen a ten-fold rise in enquiries for public procurement indemnity insurance since the ruling.

Procurement law requires public bodies (such as government and schools) to follow strict procedures when awarding qualifying public contracts. Sometimes, a public body’s award of a contract may entitle a third party to seek a ‘declaration of ineffectiveness’, which effectively cancels the contract. 

The procurement legislation contains steps to mitigate the risk of a declaration of ineffectiveness, including the publication of a valid voluntary transparency notice (VTN) and contract award notice (CAN). 

Until the decision in Faraday, no English court had ever awarded a declaration of ineffectiveness. 

The decision has knocked confidence, not only by declaring the contract awarded by West Berkshire Council ineffective, but also finding that the VTN published by the council to be insufficiently clear and not detailed enough. 

In the judgement, the court signalled the need for greater scrutiny of public bodies’ justifications for departing from procurement legislation.

Public procurement indemnity insurance

Public procurement indemnity insurance protects developers against the consequences of a successful challenge to the award of a contract. As a result of the ruling, legal advice is now to insure the risk.

Developers now assess the period they might be at risk to be the 6 month time-frame for a challenge to be brought, as opposed to the shorter standstill period that follows publication of a VTN or CAN. 

This 6 month ‘at-risk’ period could put successful bidders in danger of facing abortive costs and becoming liable for contractual penalties. 

Chris Gwynn, lead underwriter for public law risks at CLS Risk Solutions, comments: “The Faraday case has set a precedent for the award of declarations of ineffectiveness in England and Wales and created much uncertainty for all those parties involved in awards and carrying out of public contracts.  

“This is prompting a cautious approach from contractors, funders, and their advisers, which is stalling contractual negotiation and jeopardising projects. 

“All of this is resulting in a much greater demand for Public Procurement Indemnity Insurance. CLS are leaders in the market for creating bespoke solutions for legal risks affecting property. 

“Public procurement indemnity insurance is typically arranged via brokers or lawyers, who now have a significant opportunity to support developers, and provide the necessary comfort for stakeholders to allow a development to proceed.”

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