Autumn 2006 Projects Bulletin - K&L Gates...Projects Bulletin 2 AUTUMN 2006 adopting PPP techniques. The financing relies on the fact that there is a network of existing publicly owned

Welcome to the Autumn Edition ofthe Projects Bulletin.

US PPP have been somehow slow to

develop but we are now seeing

increasing activity in this sector. You

will find more on this potentially

substantial market in this bulletin, as

well as news on recovery of PFI bid

costs (page 6), the implications of avian

‘flu on contracts entered into under

FIDIC red book (page 4), standstill

period in public procurement and the

Rapiscan case (page 10) and planning

considerations on amendments to PFI

projects (page 11).

LAWYERS TO THE PROJECTS INDUSTRY

www.klng.com

Autumn 2006

Projects Bulletin

InternationalPPP accelerates in the United States

For a number of reasons, Public Private

Partnerships ("PPP") as understood in

the UK and in other European markets

such as Ireland, the Netherlands and

Germany, have been slow to develop in

the US. However in the last couple of

years there has been increasing activity

in that market and we are beginning to

see the growth of what could be a very

substantial PPP sector.

Fragmentation in themarketOne of the factors making the

development of PPP techniques

difficult in the US is the fragmented

nature of the governmental and legal

structure. In the UK when the

Thatcher Government decided to

introduce PFI it was relatively easy for

central Government to ensure that all

central Government departments

adopted the financing technique - this

was achieved by restricting other

opportunities for authorities to obtain

the necessary financial support for

capital expenditure. In the case of local

authorities, they were encouraged to use

PFI by a mixture of carrot (the

availability of PFI credits from central

Government) and stick (the lack of any

other source of Government support for

the necessary spending).

In the United States on the other hand

each individual state has its own elected

politicians and parliamentary structure;

its own judicial system; and its own

procurement legislation. Although there

are numerous federal agencies, most of

them situated in or around Washington,

they do not have the same ability to

bring about the wholesale adoption of a

new approach to procurement, even if

that was something they wanted to

promote.

Accordingly progress towards PPP

structures in the US has been patchy,

with some states appearing to embrace

the concept with a degree of enthusiasm

and others showing considerable

hostility. It is noteworthy that approval

of the Indiana Toll Road project,

referred to below, only managed to

secure a very narrow majority in the

Indiana Congress, which split on party

lines, despite the fact that it was actively

promoted by the Governor.

Another reason for the comparative

fragmentation of the market is that there

is no such thing as a national health

service or a unified public school system

- it is hard to envisage a programme such

as LIFT or Building Schools for the

Future being "rolled out nationally" in

the US.

Recent road projectsProgress to date has occurred mainly in

the road sector. Here the structure

adopted is very different from that used

in the UK, or most other markets

Contents

PPP accelerates in the US 1

Bird flu and the FIDIC Red Book 4

Birmingham healthcare PFI project 6

Recovery of bid costs 6

EU proposals for increased 7confidence in public procurement rules

Rapiscan and the standstill 10period

Amendments to PFI projects 11and planning considerations

Who to contact 12

Projects Bulletin

2 AUTUMN 2006

adopting PPP techniques. The

financing relies on the fact that there is a

network of existing publicly owned

tolled highways in the US, where users

are already accustomed to paying cash

tolls. Invariably the public authority,

which could be a state government or

city council, is short of cash for the on-

going maintenance and operation of the

road and is unwilling for political reasons

to increase the cash tolls payable by

motorists. Traditionally the funding for

maintaining public sector roads has

come from the "gas tax" but with

gasoline prices spiralling upwards there

is no room for increases in gas taxes.

In a number of recent projects, a private

sector consortium has agreed to "buy"

the road from the relevant public

authority for a fixed period of time (75 or

99 years is normal) by making a large

capital payment on day 1. This leaves

the public authority in possession of a

large amount of cash (always attractive

to politicians), which can be used for its

road programme generally or on other

projects which are necessary in that

particular locality. The consortium

operates the road and is required to

make improvements in terms of

modernising the toll collection system;

the consortium secures its return by

collecting the cash tolls over the life of

the concession. The consortium is

permitted to raise the tolls and from the

point of view of the municipality or state

government it is politically more

advantageous to have a private sector

operator raise tolls than for the

municipality to do so. Most projects

have some degree of regulation in the

contract limiting the extent to which the

operator may push up the toll rates.

Toll roads with high usage by out of

state users (i.e. cross state highways) are

easier to impose higher tolls on, since

the burden is borne by users who do not

vote locally.

Recent deals with this structure include:

� Chicago Skyway ProjectThe eight mile Chicago Skyway has

been leased for 99 years to a

consortium led by Cintra and

Macquarie. The upfront payment

was $1.8 billion. The private sector

operator has installed an electronic

toll system which is proving popular

with users and reportedly in the last

six months of 2005 traffic volumes

rose by 5% and revenue increased by

33%.

� Indiana Toll Road ProjectA 75 year lease has been granted to a

consortium led by Cintra and

Macquarie. The upfront payment is

$3.8 billion. The Indiana Toll Road

does not currently have an electronic

toll collection system but the private

sector operator will introduce one.

According to the Governor, Mitch

Daniels, it is currently costing the

public sector 34 cents to collect each

15 cent toll!

� Trans Texas CorridorThis is an innovative scheme under

which a package of potential projects

will be scoped, specified and

implemented. A consortium led by

Cintra and Zachry (a Texas based

contractor) are leading the

advisory/implementation team.

� Pocahontas Parkway ProjectA lease of this nine mile road in

Virginia was sold to Transurban, an

Australian toll road operator, for USD

611 million.

� NationwideIt has been estimated that the toll

roads and bridges in the US have a

combined annual revenue exceeding

USD 6 billion.

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AUTUMN 2006 3

Other sectorsOutside the road sector, there has been

some work done studying the possibility

of using PPP techniques for the

development of new hospitals in

Louisiana. This is stimulated by the

fact that Louisiana, unusually for

American states, has a state-wide

network of hospitals designed to provide

a fallback for those citizens who are

unable to access privately funded

hospitals. The state of Louisiana is now

considering using PPP financing to

update these hospitals and the lead

project is the University Hospital in

Baton Rouge.

There are also projects for light rail and

metro, such as the project currently

being bid to extend the Bay Area Rapid

Transit ("BART") out to Oakland

Airport in California. Chicago is

promoting a form of PPP, linked to

commercial property development

opportunities, to develop a rail link

between downtown Chicago and

O'Hare Airport.

Most of the running has to date been

made by companies originating from

outside the United States, since they

have experience of PPP in other

countries. Macquarie and Cintra have

been very successful in winning

highway projects and their success is

causing domestic US contractors and

finance houses to take this market

seriously. We can expect to see a

growing presence of US domestic

contractors joining bid teams for PPP

deals.

What about a unitarycharge structure?The UK structure, incorporating a

monthly unitary charge, has not really

featured so far in the US. However this

structure offers a number of advantages

for public sector awarding authorities

which they do not gain from the current

US structure. For example, where a

large capital sum is received up-front, it

may be difficult to impose suitable

checks and balances on the use of the

cash. It is not out of the question that

an incoming administration, perhaps

composed of a different political make-

up, may squander the cash which has

been carefully set aside by the original

administration. Also there is less ability

to impose controls on the operator when

all the consideration has passed from the

operator to the awarding authority on

day one.

Under the unitary charge mechanism,

where payments are made monthly by

the awarding authority to the operator,

there is the opportunity each month to

make deductions for unavailability or

poor performance and this in itself

provides a control mechanism for the

public sector client throughout the life

of the concession.

From our discussions with various

public sector authorities in the US, it is

clear that a number of them are now

looking hard at the unitary charge

mechanism and one of the reasons

behind this is the ability to impose a

degree of control throughout the life of

the contract through the deductions

mechanism. This in itself makes the

transaction easier to sell to taxpayers.

Moreover the unitary charge is the most

obvious structure where a new road

needs to be constructed, as opposed to

transferring a road with existing cash

tolls.

Future developmentsWith eleven offices in the United States,

we are actively engaged in promoting

PPP in a number of states. Looking into

our crystal ball for the next year our

predictions are as follows:

� Increasingly, domestic US institutions

(building contractors, banks) will

participate in, or lead, bidding

consortia. To date most of the

running has been made by non-US

entities.

� More projects will adopt a unitary

charge mechanism, which in itself

will lead to a change in the financing

structure.

� We will see an increase in the number

of federal or national pilot

programmes, such as the Penta P

programme being developed by the

Federal Transit Administration.

For further information please contact

Christopher Causer.

Projects Bulletin

4 AUTUMN 2006

Bird Flu and the FIDIC red bookPandemic ScenarioAside from the quality of the finished

works, an Employer's chief concern in

any project is for the works to be

completed on time and to budget.

Pandemic influenza (flu) poses a threat

to both of these goals. This article

focuses on one of the most popular

forms of engineering contract, the

FIDIC Red Book Conditions of

Contract for Works of Civil Engineering

Construction, fourth edition,

incorporating amendments 1988 and

1992 ("the Red Book"). Imagine a

scenario where a Contractor is engaged

under the Red Book and has

commenced work on site. A pandemic

then occurs and the Contractor stops

work, or is instructed to stop in order to

protect the Employer's

process/manufacturing capacity.

What is the risk?Pandemic flu occurs where a strain of

flu arises which is so different from

those already in existence that the

global population has no resistance to it.

Such a strain of flu will spread more

quickly and infect more people than

ordinary flu. Fear of pandemic flu is

high at the moment because of the risk

that the bird flu virus H5N1 will mutate

into a form which can be transferred

from human to human. In the event of

a flu pandemic, the UK government

expects 25% of the population to

become ill and is warning businesses to

allow for staff absences of 15%. A

vaccine will not be available until at

least 4 to 6 months after the first

outbreak in the UK. Even if anti-viral

drugs are available at the start of the

outbreak (and prove effective) they will

not provide a cure, only ease the

symptoms. The worst case scenario is

that half the population falls ill and over

700,000 people die.

Loss and expenseThe Red Book specifies certain events

as "Employer's Risks" (Clause 20.4). If

such events occur the Contractor is

entitled to its loss and expense in

rectifying the damage caused. A

pandemic is not specifically listed as an

Employer's Risk. Clause 20.4(h) refers

to “any operation of the forces of nature

against which an experienced contractor

could not reasonably have been

expected to take precautions”, but it is

unlikely that this phrase will cover

pandemics as its more literal

interpretation is by reference to natural

phenomena such as extreme weather

events, earthquakes, volcanic eruptions

etc. The Red Book also specifies

certain events as "Special Risks" for

which the Contractor bears no liability

(Clause 65). A pandemic is not a

Special Risk.

Given that pandemics do not fall into

the category of either Employer's or

Special Risks, the Contractor does not

have an automatic right to claim loss

and expense arising from the

occurrence of a pandemic.

DelayClause 44.1 sets out the events in which

the Contractor can claim an extension of

time for completion of the Works.

Delay caused by pandemics is not

specifically referred to but is probably

caught by clause 44.1(e), which refers to

"other special circumstances which may

occur [emphasis added] other than

through a default of or breach of

contract by the Contractor or for which

he is responsible".

This means that the Contractor will be

able to claim an extension of time if the

Works are delayed by a pandemic.

Protection ofmanufacturingWhere the Employer halts the Works in

order to protect its manufacturing

ability, it will do so by asking the

Engineer to suspend the Works, as he is

entitled to do under Clause 40.1.

Under Clause 40.1, where a suspension

is ordered to protect the Works, there is

no cost consequence to the Employer.

However, a suspension which is ordered

to protect the Employer's

manufacturing ability cannot be said to

be necessary for the safety of the Works

themselves. In this case the Contractor

will be entitled to an extension of time

and loss/expense under clause 40.2.

Clause 40.3 deals with suspensions

which continue for over 84 days. If the

Works are suspended for more than 84

days, then the Contractor can notify the

Employer that the contract will be

terminated if the Works are not

resumed within a further 28 days.

Such a termination will be treated as an

event of default by the Employer,

meaning that the Contractor will be

entitled to payment of all outstanding

sums due to it, payment for any goods it

has already ordered and any loss or

damage arising out of the termination.

This could include its loss of profit and

other indirect or consequential losses.

Where the suspension relates to part of

the Works only, the contract will not be

terminated but the suspended works

will be treated as if they have been

omitted from the Works by the

Employer, with the Contract Price

being adjusted accordingly.

Release fromperformanceUnder Clause 66.1 the parties are

released from performance "if any

circumstance outside the control of the

www.klng.com

AUTUMN 2006 5

parties arises… which renders it

impossible or unlawful for either or

both parties to fulfil his or their

contractual obligations…". Where the

Engineer does not order a suspension

under Clause 40.1 but work is

prevented by the outbreak of a

pandemic, the Contractor might seek to

rely on this clause to extricate itself

from the contract. However, in order to

take advantage of this clause the

Contractor would have to show that the

pandemic made it impossible for it to

complete the Works or it was unlawful

to continue working, e.g. for health and

safety reasons, not just that it delayed

the works. In the event of the

Contractor being released from its

obligations under Clause 66.1, it would

only be entitled to payments due to

date and payments for goods already

ordered. It would not be entitled to

payment for any other losses arising

from termination.

Possible amendmentsto the Red BookIt is unlikely that contractors will accept

any significant change to the overall

risk allocation adopted by the Red

Book. It seems fair that delay caused

by an uncontrollable event such as a

pandemic should entitle the Contractor

to an extension of time. Equally, it is

fair that any loss and expense should

not be passed on to the Employer.

However, the Employer's need to

protect its manufacturing ability can be

catered for without significantly altering

this balance. Clause 40.2(d) could be

expanded to include suspensions

ordered to protect the Employer's

manufacturing ability as well as those

necessary to protect the Works. The

following wording would achieve this:

"Unless such suspension is:……(d)

necessary for the proper execution of

the Works or for the safety of the Works

or any part thereof or to protect and/or

maintain in operation the Employer's

manufacturing capability at any location

adjoining or in the vicinity of the Site

(save to the extent that such necessity

arises from any act or default by the

Engineer or Employer or from any of

the risks defined in Sub-Clause 20.4).

Sub-Clause 40.2 shall apply." [Proposed

new wording appears in italics].

The effect of this amendment is that

the Contractor will retain its right to an

extension of time under Clause 44.1,

but will not be able to claim

loss/expense or terminate the contract

under Clause 40.3 if the suspension

lasts for over 84 days. Given that the

government predicts that a flu

pandemic would come in one or more

waves, each lasting around 15 weeks,

employers might also consider

specifying a period longer than 84 days

(12 weeks). Part II of the Red Book

contains optional clauses which the

parties can choose to add to the

contract.

Optional clauses for Clause 34 include

the following: “In the event of any

outbreak of illness of an epidemic

nature, the Contractor shall comply

with and carry out such regulations,

orders and requirements as may be

made by the Government, or the local

medical or sanitary authorities, for the

purpose of dealing with and overcoming

the same.” This clause should be

incorporated into the contract. Whilst it

does not change the entitlement of the

Contractor in the event of a suspension

being ordered by the Engineer, this

clause clarifies the Contractor's

obligations regarding its own staff and

labour.

ConclusionIt is possible for employers to protect

against the risk of pandemic flu without

altering the basic risk allocation of the

Red Book. Employers can do so by

ensuring that any rights of termination

for prolonged suspension allow

sufficient time for a pandemic to pass.

Also, specific provisions can be inserted

into contracts requiring the Contractor

to take steps to minimise the risk to the

Works.

Key points� Delay caused to the Contractor by a

pandemic can be claimed as an

extension of time. However, the

Contractor cannot claim its

loss/expense.

� If the Employer suspends the Works

to protect its manufacturing ability,

the Contractor will be entitled to an

extension of time and loss/expense.

If the suspension continues for more

than 84 days, then the Contractor

can, after giving notice, terminate the

contract and is entitled to payment

for any loss or damage it incurs.

� If a pandemic renders performance of

the Works impossible or unlawful,

then the Contractor can terminate

the contract. However, a mere

delay caused by a pandemic is not

enough; performance has to be

impossible or unlawful.

� There are amendments which can be

made to the Red Book to cater for

pandemic risk without radically

altering the risk allocation between

Contractor and Employer.

For further information please contact

Yassir Mahmood.

Projects Bulletin

6 AUTUMN 2006

£553m major healthcare PFI project signed byBalfour Beatty Construction and Haden Young

Recovery of bid costs

A team from Kirkpatrick & Lockhart

Nicholson Graham led by projects

partner Christopher Causer advised a

joint venture composed of Balfour

Beatty Construction Limited and

Haden Young Limited on the £553

million PFI construction contract for

the design and construction of new

hospitals in Birmingham. Financial

close was reached on 14 June 2006.

The second largest bond deal after

Bart's, the Birmingham project is

financed by EIB and a bond issue

guaranteed by FGIC. The new

hospitals, based at the Queen Elizabeth

Hospitals site in Birmingham, will be

the second largest PFI healthcare

facility after Bart's. Once operational in

2010, it will provide 1,213 new beds, a

108-bed specialist psychiatric hospital

and teaching facility and a separate 32-

bed mental health local facility.

The project is challenging as it is spread

over two sites, with a very complex and

intricate allocation of property between

landowners. It involves two trusts, one

being a foundation trust, and requires

works on the trusts' retained estate. The

construction work has been under way

since last summer, including demolition

of existing Victorian healthcare

buildings and the removal of hogweed

and Japanese knotweed.

The Kirkpatrick & Lockhart Nicholson

Graham LLP team led by Christopher

Causer (partner - head of projects

group) and projects associate Sophie

Charveron included Steven Cox

(partner - property), Kevin Greene

(partner - construction), Jonathan

Lawrence (partner - banking),

Sebastian Charles (partner - planning

and environment), Yassir Mahmood

(associate - projects) and Eleanor

Smith (associate - property).

For further information please contact

Sophie Charveron.

The industry has long been concerned

with the cost (and time) of closing deals

and the recent hiatus in the health

service PFI/PPP has caused real

hardship to bidders. For those that are

not given the green light, with large

amounts at stake, bidders will want to

know the prospects of recovering those

costs.

Sir Malcolm Bates, in his first review of

the PFI process in 1997, recommended

that "where a decision is made not to

proceed with a project and that decision

is not related to the viability of tenders

received, contractors' bidding costs

should be refunded".

Although this recommendation has no

legal force, it is assumed that all

responsible government organisations

(central and local) will follow it.

What options does a bidder have to

recover its costs in the event the Bates'

recommendation does not apply, or an

Authority will not abide by it, or there is

no preferred bidder's letter dealing with

costs? There are four areas worth

considering.

Restitution/UnjustEnrichmentFor a claim to be successful the other

party must normally have received a

benefit. This may be the case, for

example, where planning permission

has been obtained and the Authority

can take the benefit. There is also

some support for the argument that a

party can receive a benefit where it

requests services even though those

services could be described as

preparatory to performance -

Countrywide Communication Limited

v ICL Pathway Limited [2000] CLC.

EstoppelEstoppel is a rule of law which prevents

a party alleging a fact in support of its

claim if it has previously by word or

conduct represented the contrary to the

other party. Estoppel is said to be "a

shield and not a sword". However, as

Brandon LJ stated in Amalgamated

Investment & Property Co Ltd v Texas

Commercial International Bank Ltd

[1982] QB, "While a party cannot found

a cause of action on an estoppel, he

may, as a result of being able to rely on

an estoppel, succeed on a cause of

action on which, without being able to

rely on that estoppel, he would

necessarily have failed".

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AUTUMN 2006 7

Projects Bulletin

Misrepresentation /Negligent MisstatementEconomic loss is only recoverable in tort

if there is a negligent misstatement by

one party where a duty of care existed

and the other party relied on and was

entitled to rely on the statement.

A duty of care would not generally exist

in a tender situation and the invitation

to negotiate generally contains

disclaimer provisions. However, the

PFI process is such that it is not beyond

legal principles that in certain situations

such a duty might arise. In such

circumstances, deliberately withholding

information or indeed providing false

information may well give rise to a

cause of action.

EU proposals for increased confidence in publicprocurement rules

Implied ContractualPromiseHaving invited bids and chosen a

preferred bidder knowing that

significant costs will be incurred in

working up the scheme, there are fertile

grounds for arguing that there is an

implied contractual promise that the

Authority will act in accordance with

the parties' reasonable expectations, at

least not dissimilar to the Bates

guidelines.

ConclusionHaving an express contractual right in

the preferred bidder letter is the only

sure way of recovering bid costs in the

event of cancellation of a project.

Following the current trouble in the

Fairer and moreefficient remediesAs announced in our previous issue,

after simplifying the rules applicable to

the procurement of public contracts,

the EU Commission now turns its

attention to the remedies available in

case of breach of these rules. Many of

you encountered difficulties when

using the existing remedies to

challenge unlawful awards of public

contracts. The biggest difficulty was

that, until the Public Contracts

Regulations 2006 ("Regulations") were

adopted on 31 January 2006, the only

remedy available to unsuccessful

bidders after a contract award was

damages. Public contracts awarded in

breach of the procurement rules could

not be set aside, cancelled or declared

void, so claims had to be brought to

court before the contract was awarded

(with the exception of collusion and

bad faith).

Frequently, some contracting

authorities were tempted to engage in a

race to sign the contract as soon as

possible, in order to make it

irreversible. As in the UK, the decision

to award a public contract and the

execution of the contract are usually

contemporaneous. In Alcatel and

Others (C-81/98 [1999] ECR 1-7671),

the ECJ held that it is unacceptable for

contracting authorities to rush to

execute a public contract following a

known or alleged infringement of the

procurement rules, as a measure to

secure the preferred bidder.

Since the Regulations came into force,

a claimant is now entitled to require a

court to suspend a contract until the

NHS bidders will also now want to

consider negotiating compensation for

additional funding of the bid costs

where the scheme is delayed through

no fault of their own.

Failing any such express contractual

right, the Bates recommendation may

allow recovery of bid costs "ex gratia"

where a project is cancelled.

If neither of these apply the

circumstances of the deal may give rise

to a cause of action for the recovery of

some, if not all, of the wasted bid

costs.

For further information please contact

Trevor Nicholls.

Projects Bulletin

8 AUTUMN 2006

judges decide on the breach of

procurement law claim. The only

condition is to submit the claim within

10 days of the award decision, during

which period (the "standstill period")

the contracting authority is not allowed

to execute the contract.

Whilst mandatory standstill periods are

already implemented in some Member

States, they are not widespread in the

EU. This means that an English

contractor bidding for a public works

contract in another Member State may

find it more difficult to bring a claim

against an illegal award of contract if

different practices and rules apply

elsewhere.

Acknowledging these difficulties, the

EU organised an extensive consultation

on the functioning of the current

remedies in the classical and utilities

sectors. The EU Commission then

published a proposal for reform of the

current Remedies Directive making

standstill periods compulsory, on 4 May

2006.

Authorities must givereasons for non-selectionUnder the current Regulations, it is

only on the request of an unsuccessful

bidder that contracting authorities must

give the reason why its bid failed to

meet the award criteria (Regulation

32(4) and (9)). Any economic operator

that has either applied to be selected in

a tender or submitted a tender is

entitled to bring a claim for

infringement of public procurement

rules.

It may become compulsory for all

contracting authorities in the EU to

provide reasons for non-selection to all

bidders if the reform is adopted. Where

a contracting authority receives a

request from an unsuccessful bidder

asking for the reasons why its bid was

not successful, the authority would

have to reply at least three days before

the end of the standstill. Will this

greatly improve the economic

operators' confidence in public

procurement rules and encourage

authorities to comply with the

procurement rules more readily?

Pre-contractualnotification andautomatic suspensionA claimant must inform the contracting

authority of the alleged breach and its

intention to submit a claim. In the UK,

proceedings must be brought within

three months from when the ground for

the claim arose (Regulation 47(7)). The

High Court has the necessary power to

review alleged claims before full

proceedings are brought. A serious

weakness of the current remedies is the

absence of a period of time to review

award decisions before the contract is

executed.

Contracting authorities may be granted

an immunity from challenge and

suspension when the "general interest

of non-commercial and economic

nature" requires it (for instance where

urgent works must be carried out to

school buildings before the school year

begins).

It is disappointing that the Commission

did not address the issue of long,

protracted negotiations for complex

projects such as PFI contracts, and does

not define at what point in a tender

process the award decision is

communicated. According to the OGC

guidance on the standstill period, the

earliest point in time that an award

decision can be communicated to all

tenderers in a negotiated award or a

competitive dialogue is when the

contracting authority "ceases dialogue

or discussions with other bidder(s) and

announces the appointment of the

preferred bidder" (OGC guidance note

on the ten-day mandatory standstill

period, March 2006). It is at this point

that the standstill period commences

under English law.

Ten-day standstillperiodContracting authorities and preferred

bidders have to wait at least 10 calendar

days from the communication of the

award decision before executing the

contract (Regulation 32(3)). The

Commission suggests extending the

obligation to enforce standstill periods

to all Member States.

The standstill period would be:

� applicable to all categories of public

contracts;

� short: ten calendar days (7 calendar

days for urgency, call-offs from

framework agreements and dynamic

purchasing); and

� not applicable in circumstances of

extreme urgency.

There would be discretionary

derogations for:

� framework agreements concluded

with a single economic operator;

� call-offs without competition;

� open procedure awarded to single

bidder; and

� restricted or negotiated procedure

where tenders are excluded for a

reason other than failing to meet the

contract award criteria.

SanctionsContracts awarded in breach of the pre-

contractual notification obligation or

the standstill period would be invalid

i.e. without any contractual effect. The

invalid contract could however still

have certain effects as between the

www.klng.com

AUTUMN 2006 9

parties or in relation to third parties, up

to a period of six months from the

conclusion of the contract. This may

cover circumstances such as where

orders for materials must be made as

early as possible or until a replacement

contractor is selected under a new

award procedure.

Derogations would be available when

the national review board or courts find

that "overriding reasons based on

general interest of non-economic

nature" require that the effects of a

contract already executed are not

challenged, despite an infringement of

procurement rules. Should the proposal

go ahead, the risk is that excessive use

of such derogations may render the

reform worthless, as it would allow

illegally awarded contracts to remain as

they stand.

Is it likely that thisreform will take place?The Commission's proposal is now

with the European Parliament and the

Council of Ministers, awaiting their

"co-decision" (in other words,

consensus). The reform would

consolidate the first steps put into

place by the Classical Directive 2004

for better and more effective rules.

The compulsory standstill period aims

at preventing contracting authorities

from racing to execute public contracts

immediately after the award decision.

Some will deplore that the proposal

does not go far enough and does not

impose an obligation on contracting

authorities to notify participants of

other decisions made during the

procedure, such as the decision not to

select them.

In our view, this reform should

encourage contracting authorities to

award contracts in compliance with the

procedures and, more importantly, it

should give potential bidders and

lenders more confidence in the fairness

and effectiveness of the procurement

rules.

For further information please contact

Sophie Charveron.

Projects Bulletin

10 AUTUMN 2006

The Public Contracts Regulations

2006, which came into force on 31

January 2006, created a mandatory ten-

day "standstill" period between a

contract award and the conclusion of a

contract with the successful tenderer.

The decision in the case of Rapiscan

Systems Limited v HM Revenue and

Customs [2006] EWHC 2067 (QB)

shows that unsuccessful bidders have a

right to delay the contracting authority

from entering into the contract pending

a full and proper debriefing.

The caseHMRC put out a tender for the supply

of scanners to scan large vehicles when

they enter the UK, advertised in July

2005 under the 1995 Public Supply

Contracts Regulations. HMRC also

adopted certain aspects of the new

Public Contracts Regulations 2006,

including a standstill period. The

contract award was decided on 14 July

2006 and Rapiscan was unsuccessful in

its bid. HMRC planned to execute the

contract on 26 July 2006 and provide

information to unsuccessful bidders at a

debrief meeting on 1 August 2006.

Rapiscan requested information

regarding the award decision and

pending receipt of that information, it

sought to extend the standstill period

by a few more days and defer the

execution of the contract. HMRC

refused the extension and gave

information on the reasons why

Rapiscan's tender was not successful on

21 July 2006. Rapiscan brought

proceedings before the High Court to

prevent the execution of the contract

from going ahead. HMRC replied that

it had no obligation to provide

information because Rapiscan's request

had no procedural basis in the

Regulations. It argued that if Rapiscan

was entitled to request further

information, its case had been

answered by a letter of 21 July 2006.

The judgment found in favour of

Rapiscan only seven days after

Rapiscan had requested further

information and only six days after

receiving a response from HMRC.

The judgmentThe Judge held that Rapiscan's

concern that the award procedure had

not been carried out as set out in the

tender documentation was valid and

the criteria marking mechanism was

unclear. Further information was

needed to clarify the criteria. She

rejected HMRC's claim that they had

clarified the position by a letter dated

21 July 2006. Reasons for a contract

award must be provided to a tenderer

within 15 days of a request. However

the requirement to ensure transparency

is overriding and when there is still

time to set aside a contract award, the

ten day standstill period can be

applied. HMRC should have extended

the standstill period as the contract was

not urgent and Rapiscan had indicated

that further information might avoid

proceedings. Dobbs J held an

injunction would be ordered if

undertakings were not offered by

HMRC.

Lessons to learn Bidders unsure as to why they were

unsuccessful should write to the

authority immediately, clearly stating

information and clarification sought.

If not clarified within the ten-day

standstill period, the tenderer can apply

to court to restrain the conclusion of the

contract.

Contracting authorities must endeavour

to answer clearly and as fully as possible

to requests for reasons from

unsuccessful bidders received within a

standstill period. Their response should

give clear reasons for the decision not to

award the contract to that bidder.

Contracting authorities can also extend

the standstill period when appropriate.

They should be aware that any lack of

transparency will persuade the courts to

order that the execution of the contract

is retrained.

For further information please contact

Christopher Causer or

Sophie Charveron.

Rapiscan and the standstill periodRapiscan Systems Limited v HM Revenue and Customs 2006EWHC 2067 (QB)

www.klng.com

AUTUMN 2006 11

It has been hitting the headlines that

several high profile PFI projects have,

as financial close approaches, been

forced to reconsider the original scope

and scale of the project due to financial

or "affordability" pressures. For

example dropping buildings from the

project or reducing the scale of what is

built may be proposed to save costs.

Often, this review occurs after planning

permission for the project has been

granted. When such decisions are

being made it is crucial to be aware of

the planning and hence cost and

timescale implications.

If the result is that a new planning

resubmission is needed, or that the

proposal becomes susceptible to a

third party judicial challenge, then the

consequences are serious. A third party

challenge to a planning permission may

be brought by local objectors, or even

potentially disappointed bidders for the

project. Even if unsuccessful a

considerable delay may arise, and that

risk alone may necessitate re-starting

the planning process. Re-starting the

planning process may itself contain

risks of delay, for example if planning

policy has changed since the time of

the first application, or local

circumstances have altered, affecting

the need for the project. Below are just

a few of the issues that need to be

considered when making decisions

about changes to PFI schemes.

Minor amendmentsThe first issue is the question of

whether the changes proposed can be

agreed as "minor amendments" to the

original scheme, or whether what is

proposed is sufficiently different that a

new planning application will need to

be made. It has been the practice of

local planning authorities to allow "non-

material" amendments to a permitted

development without obtaining fresh

planning permission. If the change to

the project is a minor amendment, the

sponsor may go ahead and make the

change without consulting the Local

Planning Authority ("LPA"). However

on a large project, the sponsor may opt

to seek a letter from the LPA that the

change contemplated can be viewed as

a minor amendment.

Any project should be cautious in

relying on such a letter following the

decision of the Court in Reprotech

(Pebsham Ltd) v East Sussex CC

[2002] 4 ALL ER 58. In Reprotech

the Court ruled that although the

opinions of planning officers are

helpful, the only way a Developer can

get a binding determination as to

whether planning permission is

required, is to make a formal planning

application.

Developers, in light of the recent

increase in third party challenges to

planning permissions, must be certain

that what is contemplated really is a

non-material change as the informal

indication of the LPA cannot be relied

upon as binding in the event of third

party challenge. If an amendment is

material, in practice, not all LPAs will

require a full application involving the

resubmission of all plans.

Implementation of aproject in partIf a sponsor deletes certain elements he

may be able to argue that the scheme is

being implemented in accordance with

the original planning permission in

part, rather than being amended.

Amendments to PFI projects andplanning considerations

Whilst all planning permissions are

subject to an implied time limit in

which development must be

commenced, there is no time limit

implied for completion of a

development, unless provided.

Therefore, if a project sponsor chooses

to build out only part of the scheme, it

could argue that it is not in breach of

planning.

The planning permission will cease to

have effect after a period of not less

than 12 months from the date the

notice is issued. This means that the

building work must be completed in

that time, or run the risk of the partially

completed development potentially

becoming unauthorised. In such

circumstances the LPA may decide to

take enforcement action requiring the

developer to remove the partially

completed structure and make good the

site.

However, in practice, the risk of a

completion notice being served is

probably small as they are very rarely

used and can be appealed. The more

likely alternative if there is no

condition relating to completion, is for

the LPA to take enforcement action

within 4 years for a development not

being in accordance with approved

plans. Both issues are a concern,

especially if the project has become

contentious.

Environmental ImpactAssessmentIn making a decision as to whether an

amendment to the scheme is " minor "

or "material", one other consideration of

particular importance, is the effect the

amendment will have on the

Projects Bulletin

12 AUTUMN 2006

Environmental Statement ("ES")

submitted with the original

application, in accordance with the

requirements of the Town and

Country Planning (Environmental

Impact Assessment) (England and

Wales) Regulations 1999 ("the

Regulations"). Environmental Impact

Assessment ("EIA") is the process by

which environmental issues are taken

into account during the planning

process, i.e. by requiring applicants to

produce an ES to describe the likely

significant effects of the development

in question on the environment and

proposed mitigation measures.

The ES is circulated to statutory

consultation bodies and made available

to the public for comment. Not all

developments are subject to EIA. The

Regulations apply to large-scale

developments where there is obvious

potential for environmental damage.

Almost all of the types of project for

which PFI will be used will require

EIA. Planning permission cannot be

granted unless the decision-making

body has not only taken into account

the specified information about the

environmental effects of the proposal,

but has also stated in its decision that it

has done so. Permission can be

quashed if this requirement has not

been met. A project may have gone

through an EIA process on the basis

that a building comprised in part of the

scheme would be built to screen a row

of nearby houses from visual and noise

impacts of the main development. If

the scheme is altered to drop this

building, the visual and noise impacts

may need to be considered afresh

through changes to the original ES.

EIA issues are one of the hot spots for

third party challenge in planning,

causing significant delays to the

projects in question. It could mean

restarting the planning powers with all

the potential for delay that entails,

especially if, since the original

permission was granted, there have

been changes in local circumstances,

including the need for the project or a

change in planning policy, which since

the Planning Compulsory Purchase Act

2004, is more fluid than ever before.

For further information please contact

Sebastian Charles

Who to Contact

For further information contact the following

Christopher Causer [email protected] T: +44 (0)20 7360 8147

Stuart Borrie [email protected] T: +44 (0)20 7360 8155

Trevor Nicholls [email protected] T: +44 (0)20 7360 8177

Kevin Greene [email protected] T: +44 (0)20 7360 8188

David Race [email protected] T: +44 (0)20 7360 8106

Sebastian Charles [email protected] T: +44 (0)20 7360 8205

Kirkpatrick & Lockhart

Nicholson Graham LLP

110 Cannon Street

London EC4N 6AR

www.klng.com

T: +44 (0)20 7648 9000

F: +44 (0)20 7648 9001

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