Seven deadly sins of joint ventures under competition law
Joint ventures in the energy and resources sectors.
In this second update in a series of articles considering the insights that can be drawn from recent UK procurement case law for agencies preparing for the commencement of the Government Procurement (Judicial Review) Act 2018 (Cth) (GPJR Act), we consider proceedings which were, until recently, before the UK Technology and Construction Court.
Those proceedings1, which concerned a procurement process run by an English public sector healthcare agency, the NHS Surrey Downs Clinical Commissioning Group (Commissioning Group), considered an issue that sometimes faces Commonwealth agencies: how to proceed with a procurement when a group of organisations which have tendered as a consortium or as joint venture partners decide it’s time to split up.
The Claimant in the Surrey Downs proceedings was a member of a consortium originally selected by the Commissioning Group as the preferred tenderer in its procurement for adult and children’s community health services (Services). The Claimant was also the Commissioning Group’s incumbent supplier of the Services.
The circumstances giving rise to the proceedings were as follows:
The Claimant argued that:
For its part, the Commissioning Group claimed that:
it did, in fact, consider whether the Reduced Consortium had made a material alteration to its tender;
in its view, the alteration to exclude the Claimant from the Reduced Consortium’s tender was not material; and
the altered tender continued to comply with the conditions of tender, had passed the evaluation requirement in relation to capability and capacity, and had achieved the minimum required to meet the mandatory requirements of the tender.
The Technology and Construction Court, in a preliminary hearing held in late 2018, decided that there was potentially a case to answer. Although a full hearing was scheduled for February 2019, the parties agreed to settle prior to Christmas 2018.2
Situations similar to the relationship breakdown that was at the heart of the Surrey Downs proceedings can, and do, arise in the Commonwealth procurement context. Many of the goods and services for which the Commonwealth goes to market are goods and services that can only be supplied by groups of businesses operating via a prime / subcontract arrangement, joint venture and other arrangements.
While some agencies' request documentation specifically provides that those agencies’ will not contract with an entity that does not have independent legal existence at tender closing time, this does not avoid issues of the kind described in the Surrey Downs proceedings. A relationship breakdown may still occur, for example, between the members of a company established for the purpose of a joint venture. Although there may be an arrangement between the members which sets out what they are to contribute to the company, it may not be clear whether those resources will continue to be available to the company (and hence, to the Commonwealth agency procuring goods or services) following the breakdown.
When a tendering consortium breaks apart, there will usually be a question as to whether the remaining part of the consortium wishes to continue to offer to supply the relevant goods or services.
If they do, the question facing Commonwealth agencies will be how to proceed in a way that ensures equal treatment as between the remaining part of consortium and other tenderers that have participated in the procurement.
Agencies have, under paragraph 4.4 of the Commonwealth Procurement Rules (CPRs), an obligation to ensure procurements:
Paragraphs 5.1, 5.4 and 6.6 expand on these principles. In relation to non-discrimination, paragraphs 5.1 and 5.4 provide:
Competition is a key element of the Australian Government’s procurement framework. Effective competition requires non-discrimination and the use of the competitive procurement processes….
All potential suppliers to government must, subject to these CPRs, be treated equitably based on their commercial, legal, technical and financial abilities and not be discriminated against due to their size, degree of foreign affiliation or ownership, location or the origin of their goods and services….
These principles will assist to guide the manner in which agencies address the break-up of a tenderer consortium. The avenues available to an agency will also depend on matters such as:
In some cases, the request documentation may allow the agency to exclude the remaining part of the consortium from the process, on the basis that there has been a change in control or change in composition.
Sometimes, where the procurement has (as in the Surrey Downs case) reached the selection of preferred tenderer stage, the documentation may allow the agency to proceed to negotiate with the second ranked or alternative preferred tenderer (if there is one). It may also be open to the agency to re-open the evaluation process.
If the evaluation process is ongoing or is re-opened, the issue for the agency will be that the tender (as originally submitted) is unlikely, as a matter of fact, to reflect the experience and expertise of the remaining part of the consortium. Rather, it will reflect the experience and expertise of the original consortium. From an assessment perspective, this is an issue since the purpose of any re-evaluation is to identify whether the change in the consortium’s composition will have a material impact on responses set out in its tender as originally submitted. There are a couple of ways in which this issue might, on its face, be addressed. Each of these options carries risks, which we consider below.
Disregard material relating to former consortium member: It may sometimes appear possible, depending on the way in which expertise and experience is set out in the tender, for an agency to simply disregard material that seems to relate solely to a former consortium member. However, re-evaluation on that basis is fraught with risk; rarely is it possible to accurately identify who from a consortium has agreed to contribute what. If the evaluating agency wrongly attributes experience or expertise, the re-evaluation will be inaccurate and any subsequent ranking of tenders will be flawed.
Request amendment of tender: While request documentation will generally allow agencies to request clarification from tenderers to resolve ambiguity or inconsistency, it will not (consistent with the CPRs which require equality of treatment as between tenderers) allow a tenderer to “improve” or make substantive amendments to its tender. An agency cannot, therefore, request that the remaining consortium members submit an amended tender, reflecting the experience and expertise of the remaining consortium members. The Australian National Audit Office’s (ANAO’s) 2016 report into Offshore Processing Centres in Nauru and Papua New Guinea3 contains an example that illustrates this point: the report discusses, among other things, a procurement in which a preferred tenderer was permitted by the then Department of Immigration and Border Protection to make material changes to its original tender. The ANAO noted with approval comments made by the procurement’s probity adviser, which were that allowing the tenderer to make material changes “raised significant probity and process risks, including the risk that the department was not in a position to determine whether the changes continued to represent best overall value for money compared with other tenderers.”4 The ANAO also referred to agencies’ CPR and PGPA Act obligation to act ethically, ultimately recommending that the Department “take practical steps to ensure adherence to the requirements of the resource management framework when undertaking procurements including….the need for ethical conduct throughout the procurement to ensure consistent and fair treatment of suppliers”.5
Given the issues that are likely to arise from any attempt to re-evaluate tenders, the most pragmatic option may sometimes be for an agency to terminate the procurement and commence a fresh procurement for the relevant goods or services. This may particularly be the case where the technical solution offered by the remaining tenderers is considered inferior or as not satisfying the agency’s requirements. Termination of a procurement process - particularly a procurement process that has been lengthy or resource-intensive - is never easy, and an agency’s legal and probity advisers should be consulted prior to doing so. As the Surrey Downs case demonstrates however, termination may offer agencies the best opportunity to avoid a complaint and, if unresolved, the consequential risk of challenge under the GPJR Act.
Joint ventures in the energy and resources sectors.
How should boards respond to Hayne’s recommendations and observations?