Damages: Lessons from Harmon - White & Case

This article fi rst appeared in Construction Law (Butterworths LexisNexis)
Volume 14, Issue 9 November 2003 pp 29-31.
Damages: Lessons from
Harmon
Ellis Baker and Anthony Lavers
White & Case, London
Ellis Baker and Anthony Lavers of White &
Case continue their analysis of remedies
potentially available to contractors aggrieved
by breach of European procurement
rules. Damages may prove to be generous
runners up prizes, they suggest.
Key Points:
■ Article 2 of the EU Remedies Directives
sets out the remedies for breach of the
EU Procurement rules.
■ The awarding authority had been
operating a covert ‘buy British’ policy.
■ The judge made clear that he considered
that the remedies arose not just under
statute but in contract.
■ Neither the Remedies Directives nor
the UK regulations give detailed guidance
on how the claim for damages for lost
profi t should be calculated.
■ Awarding authorities have good reason
to be concerned about the extent of
their risk exposure.
■ Damages may constitute a generous
runners-up prize.
■ In the fi rst part of the article, the authors
considered non-fi nancial remedies,
principally the injunction.
11.05 | 01252
■ This part concentrates on fi nancial
remedies and specifi cally on the measure
of damages which might be claimed.
Background
Article 2 of the EU Remedies Directives
sets out the remedies which must be
provided by Member States for breach of
the EU Procurement rules. The remedies
provided for in Article 2 are specifi cally the
power to take interim measures, to quash
decision unlawfully taken and to award
damages to persons harmed by them.
The purpose here is to concentrate on
the third of these, namely damages,
and on the position on calculation of
damages since the high profi le litigation
on Portcullis House.
The case of Harmon CFEM Facades UK
Ltd v. The Corporate Offi ce of the House
of Commons [2000] 67 Con LR 1, offered
a classic example of how the remedy of
damages can be claimed by a disappointed
tenderer for breach of the rules and also
of the interaction between European
procurement law and English common
law. The Parliamentary Works Directorate
(PWD), the client, awarded a curtain walling/
fenestration contract to a British fi rm,
Seele Alvis, in connection with Portcullis
House, the new addition to Parliamentary
accommodation at Westminster. Harmon,
Ellis Baker
Partner
Anthony Lavers
Professional Support
Lawyer
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Damages: Lessons from Harmon
also British but subsidiary of a French company, had
submitted the lowest tender and believed that it
would be successful, Harmon requested the reason
for its failure, as it was entitled to do under the Public
Works Contract Regulations. The PWD informed
Harmon that the main criterion was overall value for
money. It transpired in the course of evidence that the
PWD had been operating a covert so called ‘buy British’
policy, whereas Harmon had been intending to use
principally French manufactured products. PWD had
not explained to Harmon that they intended to award
the contract on any other basis than the lowest tender.
They failed either to specify the alternative criterion of
‘most economically advantageous tender’ or to explain
its meaning. In fact, they committed a host of breaches
both of the European Procurement Regulations
and of the Commission’s 1994 Guidance specifi cally
on avoidance of ‘negotiations with candidates or
tenderers on fundamental aspects of contracts,
variations in which are likely to distort competition,
and in particular on prices’. This kind of preferential
contact between client and tenderer is known
as ‘fl irting’ and PWD’s fl irting enabled the ultimately
successful tenderers to re-price and tender to a
different specifi cation from Harmon.
HHJ Humphrey LLoyd QC in the Technology and
Construction Court, held PWD to be both in breach
of the Public Works Regulations and the Commission
Guidance and the law of contract and tort. The
PWD was held to have committed the tort of
misfeasance in public offi ce, in awarding a contract
in the knowledge that there had been a breach of
the requisite procedure.
The Judge made clear that he considered that the
remedies arose not just under statute but in contract.
The Canadian case of Emery Construction ltd v.
St. John’s Roman Catholic School Board [1996] 28
CLR (2d) 1, was cited as authority for the proposition
that ‘a contract may exist at common law against a
statutory background which might otherwise provide
the exclusive remedy … it is now clear in English law
that in the public sector where competitive tenders
are sought and responded to, a contract comes
into existence whereby the prospective employer
impliedly agrees to consider all tenderers fairly.’
(emphasis supplied).
The Harmon case offers an instructive insight as to
how the question of damages will be treated.
Harmon sought damages for:
(i) tender costs;
(ii) lost profi t; and
(iii) to refl ect PWD’s conduct (aggravated and
exemplary damages).
Tender Costs
Here there was a causation issue. In dealing with it,
the judge revealed the extent to which the English
law of contract would play a determinative role: ‘As
a matter of general approach I consider that where
compensation is sought by a tenderer for being
deprived of opportunity to be awarded the contract,
the approach should be to award damages on a
‘contractual’ basis, rather than on a ‘tortious’ basis,
although the remedy is a statutory remedy.’
Causation would be approached thus (in relation to
the failure to specify the award criteria): ‘if the criteria
had been specifi ed, Harmon would have known of
the basis and either would not have tendered or, if
it did tender, would have been entitled to expect
that its tender would have been considered on the
prescribed basis. In the former case, it would need to
establish that its tender either would have succeeded
or would have stood a good chance of succeeding.’
Harmon’s claim for tender costs was based upon
principles contained in the Remedies Directive:
‘where a claim is made for damages representing
the costs of preparing a bid or of participating in an
award procedure, in order to obtain reimbursement
of his costs, to prove that the contract would
have been awarded to him in the absence of
such infringement.
Article 2(7) of the Utilities Remedies Directive
includes the following:
‘where a claim is made for damages representing the
costs of preparing a bid or of participating in an award
procedure, the person making the claim shall be
required only to prove an infringement of community
law in the fi eld of procurement or national rules
implementing that law and that he would have had
a real chance of winning the contract and that, as a
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Damages: Lessons from Harmon
consequence of that infringement, that chance was
adversely affected’.
This is widely regarded as applying to all cases
under EU procurement regime and not only to those
covered by the Utilities Directive.
HH Judge LLoyd’s summary of the position was
that ‘Harmon is entitled to recover its tender costs,
taken by themselves, on the grounds that it ought
to have been awarded the contract and would then
have recovered. However, if this was incorrect and
PWD would have gone to a re-tendering process,
damages should be calculated by the ‘loss of a chance’
principle, under which Harmon’s chances of being
awarded the contract was assessed at 70 per cent.
Lost Profi ts
The Harmon case is also important because neither
the Remedies Directives nor the UK regulations give
detailed guidance on how the claim for damages
for lost profi t should be calculated. Harmon had
succeeded in establishing as a fact that the margin
for risk and profi t (which are usually diffi cult to
disaggregate) in its tender was between £4.5 million
and £5 million. A further factor favouring Harmon
which should be taken into account in calculating
damages was that Harmon (UK) was operating as
part of a company group structure: ‘As a matter
of principle, I see no reason why Harmon cannot
recover the intra group margin as part of its gross
margin, since in my view it is again necessary to
be realistic and commercial about activities incurred
within a group and those incurred as a result of
subcontracts placed outside a group … it was not
to be expected that the selected tenderer would not
have called upon other companies within the Group
to provide services and, indeed, capital for which
and upon which those other companies would be
entitled to show a return or profi t’.
Harmon was unsuccessful in arguing that its
liquidation should not be taken into account in
calculating damages for lost profi t: “if … it is
established that the fi nancial position of Harmon …
would have been such that it is probable that the
liquidator would have been unable to continue the
contract or to resist forfeiture, then clearly the amount
of profi t which would actually have been recovered
by Harmon had it been awarded the contract and
carried it out would necessarily be affected by it.’
Aggravated or Exemplary Damages
Harmon was not successful in recovering aggravated
or exemplary damages, which would only have been
ordered on the basis of the awarding body’s behaviour
and its impact: ‘it is a bad case but not exceptional.
The defendant’s conduct is not unconstitutional nor
do I consider that it is oppressive which is no more
than the effect of directed governmental power on an
individual. Harmon was not oppressed in that ordinary
sense of the word. To describe that has happened
as oppressive, or as the excessive or insolent use
of power … would mean that virtually every case of
misfeasance would attract exemplary damages.’
Harmon (No 2)
Before leaving the lessons of the Harmon litigation
it is worth referring to Harmon CFEM Facades
(UK) Ltd v. Corporate Offi cer of the House of
Commons (No 2) [2000] Con LR 21, where HHJ LLoyd
had to consider the calculation of an interim payment
of damages for tender costs and loss of profi t pending
the investigation of causation and quantum issues.
HH Judge LLoyd was not impressed by the
House of Commons’ argument that the face of
Harmon’s liquidation might make any money paid
to it irrecoverable: the client’s position is normally
adequately protected by CPR Rule 25.7(4) ‘the court
must not order an interim payment of more than a
reasonable proportion of the likely amount of the
fi nal judgment.’
He concluded that it was probable that Harmon
would not have gone into liquidation if it had been
awarded the contract. It would thus have made a
profi t of about £3.7 million and should receive an
interim award of one third of that. It should also be
compensated for the chance of getting a subsequent
related contract and profi t on it and for being
‘black balled’ by a main contractor to whom it was
subcontractor on other projects, harming its cash fl ow.
Harmon would also have benefi ted in the latter
stages of the project from the appreciation of the
£sterling against the French franc.
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Damages: Lessons from Harmon
On tender costs, Harmon should receive an interim
payment of 95 per cent of the lowest estimate
of those accepted by the House of Commons’
own expert.
Conclusion
The remedy of damages, at least to judge from the
Harmon experience, is broadly accommodating
to an unsuccessful tenderer who can make out
a breach of the rules and satisfy probability
requirements of causation. Indeed, awarding
authorities have good reason to be concerned
about the extent of their risk exposure when such
matters as intra group profi t, subsequent contracts,
relationships with contractors on other projects
and currency fl uctuations are factored into the
calculation of quantum.
While aggrieved tenderers might typically be expected
to prefer to prevent an award in breach and reprise the
tendering exercise, if this has been lost because of the
stage reached, damages may constitute not so much
a token consolation as a generous runners-up prize.
Ellis Baker, Partner and Head of Construction &
Engineering Practice Group and Anthony Lavers,
Barrister and Professional Support Lawyer,
White & Case, London
The information in this article is for educational
purposes only; it should not be construed as
legal advice.
Copyright © 2005 White & Case
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