The 2019 Rail Franchising Litigation – success for the Secretary of State and the Department for Transport

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Introduction

On 17 June 2020, Mr Justice Stuart-Smith handed down judgment in the 2019 Rail Franchising Litigation, one of the largest and most complex procurement and commercial judicial review claims litigated to date in the UK.

In his judgment, Stuart-Smith J dismissed, in comprehensive terms, the claims against the Secretary of State for Transport (SoS) and the Department for Transport (DfT). He found that decisions taken by the SoS and the DfT in April 2019 to disqualify several train operating companies (TOCs) from further involvement in three rail franchise procurement competitions, because they had proposed amendments seeking to transfer a materially greater proportion of the risk in relation to pension liabilities under the railways pension scheme to the Government, were lawful and had not breached EU law on proportionality, transparency and equal treatment.

DLA Piper acted for the SoS and the DfT in the proceedings and in particular in relation to the claims brought by Stagecoach in respect of its disqualification from the South Eastern competition.

In this article (the first in a series considering the judgment) we consider the Court's findings in general terms. In the second article, we will consider the Court's findings in relation to the duty of transparency. In subsequent articles, we will examine further points arising from the judgment including what lessons should be learned from the Court's decision.

Background to the litigation

As noted by Stuart-Smith J at the outset of his judgment, the basic problem which gave rise to the litigation could be stated simply and shortly:

"The Defendant Secretary of State was conducting three franchise procurement competitions during a period when there was considerable uncertainty about the scope of potential pension liabilities because of intervention by the Pensions Regulator (TPR)."

(Stuart-Smith J at para. [1])

The TPRs investigation into the railways pension scheme thus meant that during the period of the competitions the future funding position and associated funding costs of the scheme were uncertain. In response to this, the SoS decided to offer contract terms for each franchise which, subject to defined but limited protection, would place the risk of pension liabilities on the TOC which succeeded in securing the franchise. This mechanism was known as the Pensions Risk Sharing Mechanism (the PRSM).

The Claimants submitted bids that rejected the SoS's allocation of the risk of pension liabilities as set out in the PRSM and offered to contract on different terms, one where the SoS would bear more of these pension liabilities. The SoS was not prepared to contract on these terms and thus disqualified the Claimants from further involvement in their respective procurement competitions, notifying them of this in April 2019.

In response, the Claimants began procurement and judicial review proceedings alleging various breaches of the duties imposed under the Railways Regulation (Regulation 1370/2007 (the Regulation)) and under general EU law principles of proportionality, transparency and equal treatment.

After an expedited process, the pensions issues came on for trial over three weeks in January and February 2020. One of the Claimants (Arriva) settled during the week before the substantive hearing.

The Judge's findings

The Judge found in the Defendant's favour in respect of all pleaded issues. The claims were therefore dismissed, the reasons for which can be summarised as follows.

1. Breaches of the duties of transparency and fairness?

The Claimants argued that the Defendant's ITT terms concerning non-compliance and disqualification breached EU law requirements regarding the duty of transparency and fairness. The Judge rejected their arguments. Instead, he held that the terms of the ITT regarding amendments were clearly stated and admitted no misunderstanding. In particular, the terms governing the discretion to disqualify had to be interpreted in accordance with the general principles of EU and UK law and read in context so far as that would inform a reasonably well informed and normally diligent tenderer's understanding. Once that was done there was no lack of clarity or precision.

Relatedly, the Claimants posited that the DfT had breached its duties of transparency or fairness (under both EU law and the Regulation) by seeking to impose uncertain pension risks on franchisees. The Judge rejected this assertion: there was no principle of EU or domestic law that limited the size of a risk that could be allocated to one contracting party or another in a public procurement. He held that a contracting authority was afforded a wide margin of appreciation in relation to the allocation of public resources, including the level of state support or protection. This argument went to the heart of a procuring authority’s discretion to determine the scope of a procurement and the principle that if a bidder is unwilling to accept the allocation of risk or cost contemplated by a tender then their remedy is either to vote with their feet or to price their tender to take account of the risk/uncertainty.

2. Unlawful allocation of exogenous or uncontrollable risks?

The Claimants argued that the Defendant had breached its duties in respect of the Claimants' rights to freedom of establishment and freedom to provide services under TFEU by seeking to allocate pension risks to franchisees that were exogenous or outside their control. The Judge rejected this argument: there was no principle of EU or domestic law that prohibited the allocation of exogenous risks to bidders rather than the Government.

3. Unlawful decisions to disqualify unlawful?

The Claimants argued that the Defendant had acted unlawfully in its decisions to disqualify the Claimants. There were various parts to this argument, all of which were rejected by the Judge. In respect of the complaints regarding the Defendant's marking and evaluation criteria, the Court held that a contracting authority was generally not obliged to divulge its system of marking or its methodology of evaluation, and it had to have some leeway in how it carried out its task provided that it did not change the award criteria that it had established.

4. Failure to provide sufficient reasons?

The Claimants argued that the Defendant breached its duty of transparency by failing to provide clear reasons. The Judge rejected this complaint. Instead, he held that the reasons set out in the disqualification letters of 9 April 2019 were concise, clear and sufficient to enable the Claimants to know that they had been disqualified for serious non-compliance on pensions, which was the actual reason for disqualification.

5. Financial robustness tests and fairness?

The Claimants argued that the Defendant had breached its duties by failing to take proper account of the exposure to pension-related risk of pension-compliant bids, and by relying on additional reports. The Court rejected this complaint: there was no requirement of EU or domestic law that required a contracting authority to include a test of financial robustness in the criteria for acceptance of bids, but if it did, the requirements of the test had to be set out clearly and adhered to.

Conclusion

This litigation was resolved in the SoSs and the DfT's favour. However, the case is of wider importance for economic operators and contracting authorities more generally. In subsequent articles, we will consider this, amongst other matters.