Teleperformance v Secretary of State for the Home Department: The perils of being a third party in public procurement

Two recent cases have highlighted the risks associated with being involved with a bid for a public contract without being the name on the front of the tender.

Whether working as part of a group of companies, setting up an SPV or even just a sub-contracting arrangement, we consider the implications for bidders and associated third parties, and what steps can be taken to defend your interests.

First, in July 2023, came Lord Justice Coulson’s preliminary judgment in IGT v Gambling Commission [2023] EWHC 1961 (TCC) – for a more detailed look at the nuances of that decision, see our recent blog post here. In short, sub-contractors and parent companies of unsuccessful bidders do not have standing to challenge a procurement decision, even if they stand to lose money as a result.

Then, on 6 October 2023, Justice Constable gave a preliminary judgment in Teleperformance Contact Ltd v Secretary of State for the Home Department [2023] EWHC 2481 (TCC), lifting the automatic suspension on the contracting authority entering the disputed contract. This blog will give a brief summary of this decision, then will turn to the question of how best to protect the interests of sub-contractors and group companies when bidding for public contracts.

The Teleperformance decision

When a procurement decision is challenged, an automatic suspension is put in place, preventing the contracting authority from entering into the contract (per regulation 95(1) of The Public Contracts Regulations 2015 – regulation 89 if you’re in Scotland). This is because once the contract is signed, the court (in most circumstances – leaving ineffectiveness orders to one side) does not have the power to set aside the contract, leaving the claimant with a payment for damages as the only available remedy.

When considering whether to lift this automatic suspension (allowing the contracting authority to sign the contract before the substantive challenge to its award has been heard), one of the factors that the court will consider is whether damages would be an adequate remedy for the claimant.

In this case, the claimant, Teleperformance Contact Ltd (“TCL”) was challenging the decision of the defendant, Secretary of State for the Home Department (“SSHD”) to award four out of five contracts for provision of visa application centres in various global regions to their competitor.  TCL sought to argue that if they did not win these contracts, they would have to close some existing centres, which would mean losing presence in those regions, weakening their prospects in bidding for future contracts, and having to make staff redundant in the process. The problem was that these centres were not operated by TCL, but by other companies within the Teleperformance group.

Justice Constable concluded that it was not appropriate to consider losses suffered by the Teleperformance group as a whole, but only losses suffered by TCL. The fact that TCL was part of a group with the companies who would have to close centres, and that the losses would ultimately affect the same parent company, was not relevant. In fact, he stated that the decision to structure the business as a network of companies was why these losses could not be considered. Relying on the judgment of Sir Anthony Edwards-Stuart in Circle Nottingham Ltd v NHS Rushcliffe Clinical Commissioning Group [2019] EWHC 1315 (TCC), he took the view that “such arrangements [with regards to the structure of a group of companies] come with advantages and disadvantages... One disadvantage may be that losses which otherwise would have been sustained within the claiming business are sustained by a third party entity with no right of action and to whom no duty is owed.”

Group companies could not be considered where it would strengthen the case for keeping the automatic suspension in place. They were, however, taken into consideration where they weakened that case. Justice Constable referred to the Northern Irish case of Eircom UK Ltd v Department for Finance [2018] NIQB 75, in which the bidder being a member of a large group was counted against them in the quantification of their losses. They were not “a small fish swimming through hostile waters”, but part of a big group of companies, so they could cope with the consequences of the automatic suspension being lifted. Counsel for TCL argued that this was to allow SSHD “to have their cake and eat it: to rely upon the fact of the wider group to undermine TCL's case on adequacy of damages, whilst at the same time saying that losses caused to the wider group are irrelevant as a matter of principle.” But in this case, the cake was in fact both had and eaten.

As a result of this, the combined effect of the IGT and Teleperformance judgments is that:

• third parties (whether group companies or sub-contractors) do not have standing to claim for damages; and
• the fact that damages are not available to third parties cannot be considered when assessing the adequacy of damages as a remedy.

This makes it very difficult to see how third parties can benefit from either possible remedy: an award of damages or the setting aside of the contract award.

What’s a third party to do?

This all raises the question – how can businesses defend their interests in a public procurement if they are not the primary bidder? What is a group company or a sub-contractor to do?

The way we see it, there are two possible ways to maintain recourse to remedies under procurement regulations. These options may not always be workable, but if a sub-contractor is likely to have a substantial role in the performance of a contract, and could lose a lot of money if the tender isn’t successful, we would recommend thinking about them carefully.

1. Joint tender

   The issue of third party rights can be avoided by avoiding being a third party. This might be done by constituting a joint venture or tendering as a consortium with all consortium members named in the tender - rather than one member being the “lead bidder” and therefore (in all probability) the prime contractor. At the tendering stage, this needn’t take any particular legal form (see, e.g., Regulation 19(3) of the Public Contracts Regulations 2015), but ensures that each member of the consortium or group of bidders has standing to challenge the award of the contract if necessary.

   It is worth flagging here that a joint tender with a “lead bidder” approach is itself a form of group bid. It is, however, not clear how involved any non-lead member of the consortium would have to be to avoid being a “subcontractor” for the purposes of IGT and Teleperformance. The safest approach would – we think - be to bid as a horizontal, non-hierarchical consortium where there is no distinguishing between a lead bidder and other members. This preserves all bidders’ rights if they then want to challenge the award of the contract. Of course, if the contracting authority was then to award the contract to that consortium, they could then require that that group takes a particular legal form (per regulation 19(6) of the Public Contracts Regulations 2015) – which could include a prime/sub-contractor approach (where, for example, the contracting authority prefers the simplicity of a single contractual relationship, leaving the consortium arrangements to be worked out in the background). Crucially, however, that would be after contract-award, and so the sub-contractors would not need to be concerned about their standing to challenge the procurement.

   Another option is establishing a new entity – a special purpose vehicle – to act as the bidder, the SPV composed of consortium members. This, potentially, simplifies the “group bidder” arrangements but, again, proceed with caution!

   The Teleperformance case serves as a helpful reminder that parent companies (which are what members of an SPV are if the SPV is a legal entity in its own right) may themselves be third parties “with no right of action and to whom no duty is owed”. On this point, counsel for TCL did argue that the IGT judgment left the door “ajar” to an argument that companies setting up an SPV may have separate standing to bring a claim in their own right. Justice Constable neither accepted nor rejected this point. So, while the door may be ajar, the safest option would be to assume that the claim would have to be brought by the SPV itself in this instance.

2. Pre-tender contract

If you are to be a sub-contractor, you may wish to enter into a contractual relationship with the primary bidder which governs how each party will act during the tender process (and any subsequent legal challenge if necessary). This could include giving the sub-contractor the right to compel the primary bidder to challenge an award.

However, Teleperformance also demonstrates a problem with this approach. If a hypothetical sub-contractor was able to compel a primary bidder to take action, they would not be entitled to an award of damages – leaving them to hope that the contract award is set aside, and their primary bidder is successful or that the primary bidder agrees to share a portion of their damages award with them. Teleperformance highlights how difficult it is to keep the automatic suspension in place – particularly for the sub-contractor, whose losses will not be considered when it comes to assessing the adequacy of damages as a remedy.

Crucially – these options both need to be thought about before tendering for a public contract. If companies are regularly involved with such bids as a third party, they may want to consider the risk that they are bearing – and the remedies that may not be available to them.