A recent decision in England (Harmon CFEM Facades (UK) Ltd v House of Commons Corporate Officer 67 Con LR 1) confirms the legal principles that must be followed when conducting any tender - and which also demonstrates how costly it can be for any party who chooses to ignore those principles.

Portcullis House

In 1992, a decision was made to build a new Parliament Building for the House of Commons in Westminster, London. This building, to be known as Portcullis House, would provide offices for some 210 MPs and their staff, together with committee rooms and other accommodation. The brief to the architects was to design a building with a planned life of 200 years, which was to be a "show piece of British design". A special purchasing committee was established, and a tender let for what was anticipated to be a £250 million project - making it one of the most expensive buildings ever to be built in London.

One of the interested parties was the Harmon Group; a US based multi-national group of construction companies that operated through subsidiaries in Europe and America. A principal business of the Group was the design, manufacture, and installation of cladding systems for buildings. Companies within the Group had provided cladding for the Petronas Towers in Kuala Lumpur, the Opera at the Place de la Bastille, and the Bibliotheque Nationale in Paris, and for many buildings in the United States.

Tenders for the works contract for the fenestration were submitted in July 1995. Harmon incorporated into its tender one of the most expensive building cladding systems ever to be built, guaranteed to satisfy the owner's requirements for a facade that would be proof against terrorist attack or bomb blast. However, the contract was eventually awarded to another party representing both British and German interests, a company called Seele Alvis. Harmon's UK based tendering subsidiary went into liquidation. Its liquidators then decided to sue the Purchasing Committee for its failure to win the contract, the essence of their claim being that the Committee had breached the law relating to the tendering of public works contracts, including discriminating against Harmon in favour of the successful tenderer.

The tender process

Initial tenders had been submitted in July 1995, after interviews had earlier been conducted with each of the 4 companies invited to tender. Harmon's tender, for a fixed price of approximately £40 million, although significantly lower than the other three bids, was still double the amount budgeted for by the Purchasing Committee. A task force was set up to try and reduce the cost of the tenders. Further interviews were had with each tenderer, each of whom agreed to reveal its tender make up on an "open book" basis. Revised tenders were then obtained from each tenderer in relation to alternative revised design options. Harmon's was again the lowest tender on the fixed price option.

According to the original tender documents, tenderers had to accept and take a novation of certain contracts that had already been entered into with designated suppliers. In fact, at the time the tender closed, none of these contracts had been entered into. Seele Alvis was then allowed to negotiate directly with the suppliers and sub-contractors to obtain substantially different terms from them, and thus reduce their price, in circumstances where none of the other tenderers were informed of this development or allowed to adjust their prices. Seele Alvis also wrote to the Chairman of the Works Committee to point out that it was the only UK tenderer, and notes from task force meetings subsequently confirmed the existence of a preference on its part to "buy British" if possible.
During the course of this process, a total of four different series of tenders were obtained. Harmon's bid was the lower of the two serious contenders. Moreover, the last tender obtained from Harmon was being compared with a materially different proposal from Seele Alvis, in respect of which Harmon had not been asked to price.

Eventually the task force report recommended that the Seele Alvis tender be accepted even though it was clearly understood that it was not the most competitive tender. That recommendation was allegedly based on issues of technical superiority. The Court subsequently accepted the criticism made by Harmon's counsel that the original draft of that report was a "travesty of the truth" and that part of the tender process was a charade.

The importance of transparency, equality, and fairness

After a trial lasting many months, the Court found that Harmon's bid had failed because of two factors: a hidden agenda to award the contract to a British company (a "buy British" leaning); and a considerable number of other breaches and irregularities in the actual tender consideration process. Harmon was held to have been 90 percent likely to have won the contract were it not for these breaches, and was awarded damages to reflect their loss of chance.

The Court emphasised the importance of equal treatment of tenderers and of transparency of procedure. These were core principles underlying the tender process as a whole and could not be ignored (as they had been by the Purchasing Committee considering the tenderers). The Court further noted that a tenderer, if treated fairly, "would be told at the outset of the documents (a) here are the relevant criteria; and (b) they are arranged in descending order of importance".

Moreover, there was a further requirement that the criteria be objective, so as not to involve "an element of arbitrary choice". The Committee, having failed to set out criteria in descending order of importance, was bound in law to award the contract on the basis of cost alone. There could be no transparency or fairness if the contracting authority kept to itself the criteria or requirements and did not reveal them to tenderers, and European Community directives forbade a "buy British" preference, in any event. This element of unfairness was heightened when a tenderer was put to the effort and expense of submitting a tender in circumstances where they would have realised, had they been told the full story, that they had little chance of actually winning.

The Court held that the House of Commons should have invited Harmon to re-consider its position in light of circumstances known to the other tenderer. In particular, the failure to enter the contracts with suppliers and sub-contractors was a material alteration in the terms of the tender. To then negotiate with one tenderer only distorted the competitive tender process and discriminated against Harmon (whose position was close to the successful contractor).

Finally (if that wasn't enough) the Purchasing Committee then gave incorrect and misleading reasons for Harmon's failure to win the tender. Again, this was an example of failing to treat the tenderers fairly and openly. A tenderer should be entitled to know the reasons for its failure to win. This promotes the competitive tender process, by giving failed bidders an opportunity to improve their tender submissions in future.

What does it all mean?

The Harmon decision (which has now been appealed by the House of Commons) demonstrates that organisations putting contracts out for tender (and especially public procurement agencies) must be familiar with, and adhere to, certain basic procedural requirements and maintain an even-handed and fair approach to all tendering parties. Although the EC directives and some of the other regulations breached by the Purchasing Committee are not in force in New Zealand, local statutes such as the Fair Trading Act 1986 (and even the Commerce Act) may also impact on the letting of tenders in this country. Any contracting body who fails to afford equal treatment to tenderers and follow a transparent tendering procedure does so at their peril.

This is a general summary only and should not be taken as a substitute for specific advice.

Russell McVeagh, law firm
Web site: Russell McVeagh

March 2001