Damages: Lessons from Harmon - White & Case
Damages: Lessons from Harmon - White & Case Damages: Lessons from Harmon - White & Case
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 2
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. 3
<strong>Damages</strong>: <strong>Lessons</strong> <strong>from</strong> <strong>Harmon</strong><br />
also British but subsidiary of a French company, had<br />
submitted the lowest tender and believed that it<br />
would be successful, <strong>Harmon</strong> requested the reason<br />
for its failure, as it was entitled to do under the Public<br />
Works Contract Regulations. The PWD informed<br />
<strong>Harmon</strong> that the main criterion was overall value for<br />
money. It transpired in the course of evidence that the<br />
PWD had been operating a covert so called ‘buy British’<br />
policy, whereas <strong>Harmon</strong> had been intending to use<br />
principally French manufactured products. PWD had<br />
not explained to <strong>Harmon</strong> that they intended to award<br />
the contract on any other basis than the lowest tender.<br />
They failed either to specify the alternative criterion of<br />
‘most economically advantageous tender’ or to explain<br />
its meaning. In fact, they committed a host of breaches<br />
both of the European Procurement Regulations<br />
and of the Commission’s 1994 Guidance specifi cally<br />
on avoidance of ‘negotiations with candidates or<br />
tenderers on fundamental aspects of contracts,<br />
variations in which are likely to distort competition,<br />
and in particular on prices’. This kind of preferential<br />
contact between client and tenderer is known<br />
as ‘fl irting’ and PWD’s fl irting enabled the ultimately<br />
successful tenderers to re-price and tender to a<br />
different specifi cation <strong>from</strong> <strong>Harmon</strong>.<br />
HHJ Humphrey LLoyd QC in the Technology and<br />
Construction Court, held PWD to be both in breach<br />
of the Public Works Regulations and the Commission<br />
Guidance and the law of contract and tort. The<br />
PWD was held to have committed the tort of<br />
misfeasance in public offi ce, in awarding a contract<br />
in the knowledge that there had been a breach of<br />
the requisite procedure.<br />
The Judge made clear that he considered that the<br />
remedies arose not just under statute but in contract.<br />
The Canadian case of Emery Construction ltd v.<br />
St. John’s Roman Catholic School Board [1996] 28<br />
CLR (2d) 1, was cited as authority for the proposition<br />
that ‘a contract may exist at common law against a<br />
statutory background which might otherwise provide<br />
the exclusive remedy … it is now clear in English law<br />
that in the public sector where competitive tenders<br />
are sought and responded to, a contract comes<br />
into existence whereby the prospective employer<br />
impliedly agrees to consider all tenderers fairly.’<br />
(emphasis supplied).<br />
The <strong>Harmon</strong> case offers an instructive insight as to<br />
how the question of damages will be treated.<br />
<strong>Harmon</strong> sought damages for:<br />
(i) tender costs;<br />
(ii) lost profi t; and<br />
(iii) to refl ect PWD’s conduct (aggravated and<br />
exemplary damages).<br />
Tender Costs<br />
Here there was a causation issue. In dealing with it,<br />
the judge revealed the extent to which the English<br />
law of contract would play a determinative role: ‘As<br />
a matter of general approach I consider that where<br />
compensation is sought by a tenderer for being<br />
deprived of opportunity to be awarded the contract,<br />
the approach should be to award damages on a<br />
‘contractual’ basis, rather than on a ‘tortious’ basis,<br />
although the remedy is a statutory remedy.’<br />
Causation would be approached thus (in relation to<br />
the failure to specify the award criteria): ‘if the criteria<br />
had been specifi ed, <strong>Harmon</strong> would have known of<br />
the basis and either would not have tendered or, if<br />
it did tender, would have been entitled to expect<br />
that its tender would have been considered on the<br />
prescribed basis. In the former case, it would need to<br />
establish that its tender either would have succeeded<br />
or would have stood a good chance of succeeding.’<br />
<strong>Harmon</strong>’s claim for tender costs was based upon<br />
principles contained in the Remedies Directive:<br />
‘where a claim is made for damages representing<br />
the costs of preparing a bid or of participating in an<br />
award procedure, in order to obtain reimbursement<br />
of his costs, to prove that the contract would<br />
have been awarded to him in the absence of<br />
such infringement.<br />
Article 2(7) of the Utilities Remedies Directive<br />
includes the following:<br />
‘where a claim is made for damages representing the<br />
costs of preparing a bid or of participating in an award<br />
procedure, the person making the claim shall be<br />
required only to prove an infringement of community<br />
law in the fi eld of procurement or national rules<br />
implementing that law and that he would have had<br />
a real chance of winning the contract and that, as a<br />
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