2 Regulating Government Contracts

The purpose of this chapter is twofold. First, it will introduce the main ways in which government contracts are regulated in English law.¹ The focus will be on the interaction between different sources of law—common law, statute, and internal government guidance—and on the international commitments which now shape them. These rules will be examined in greater detail later in the book, but the overview reveals a number of important features of the English regime. It is relatively informal in nature, relying heavily on internal government guidance rather than statute. And it is strongly influenced by international and regional developments. Because these are designed to mesh with a detailed body of national law, they can sometimes fit rather awkwardly with the informal English approach. Importantly, the various different types of regulation have different agendas: EU law is concerned to open procurement markets to firms from other Member States; national law has a range of goals including propriety and value for money. These agendas often complement each other but can sometimes conflict.

The second purpose of this chapter is to give an overview of the way in which two other jurisdictions, the US and France, regulate government contracts. Although this book does not set out to compare English law to the rules in these two jurisdictions in a systematic way, it will draw on comparative insights where they are relevant and useful. The discussion will provide important background information for this process. The French law on government contracts is of interest because it is often regarded as the polar opposite of the English approach. This is because there is a much sharper public/private divide in France, with separate rules enforced by separate courts and procedures. French law offers useful insights because it is more focused on the unique features of the government as a contracting partner. However, its ‘publicness’ can be exaggerated—the French government can place ordinary private law contracts too. US law (focusing largely on federal law) is interesting because, although it has more in common with English law, it still offers important contrasts. It is a common law jurisdiction, but of course is not subject to Community law requirements. Government contracting is more formally regulated in some areas, notably in the early stages of planning a procurement. Both jurisdictions help to highlight important features of the approach of English law, as delineated in the first part of this chapter.

The legal framework for government contracts in England is a complex blend of internal government guidance, domestic law, and EU law requirements. Within each of these categories, there are further layers of complexity. Internal government guidance aims to provide officials with simple but comprehensive information about the contracting process. Some guidance therefore replicates legal requirements. For present purposes, what is important is guidance which does not have a legal basis but which is still, for all practical purposes, binding on officials. ‘Domestic’ law on government contracts refers to the common law and statute law applicable to government contracts other than that based on the requirements of EU law. In this category, we will find elements of contract law and elements of administrative law. Finally, EU law is particularly important during the contract award process. Of course, EU law forms part of domestic law, but it is useful in the present context to distinguish it from rules which are of domestic origin in order to elucidate its particular regulatory policies and techniques. EU law is, in turn, influenced by international law in the form of the GATT Government Procurement Agreement, so the two will be discussed together.

This section will begin by explaining why government guidance will feature heavily in this book, even though it is not ‘law’ in the strict sense. It will then examine the main goals or policies pursued by the government in guidance, before turning to an assessment of some of the mechanisms used to implement these goals or policies.

Government guidance does not fall within a formal definition of law. It is not enacted by Parliament, nor does it stem from authoritative judicial decisions. Nor does government guidance constitute delegated legislation: Parliament has not explicitly granted the government the power to draft and promulgate it. However, there are good reasons for adopting a functional definition of law that includes government guidance within its scope.

Although it is often useful to use the general term ‘government’ to cover all aspects of the executive branch, the government does not act as a single monolithic structure in practice. Some parts of the government have a clear role in regulating the activities of other parts of the government.² In central government, it is the spending departments which have the primary responsibility for placing and managing contracts. But their activities are closely monitored by the Treasury—because of its general role in supervising government expenditure—and by specialist bodies with the remit of supervising contracting in particular, such as the Office of Government Commerce (OGC). Similarly, local authorities’ contracting activities are supervised by central government departments with responsibility both for local government and for particular policy areas, such as social care. Guidance is central to the relationship between the government ‘regulators’ and the government ‘regulated’. It is the mechanism by which the regulators can express their expectations and demand compliance. Although it would be true to say, in a broad sense, that government is self-regulating with regard to its contracting activities, there is a clear separation in practice between those who set the rules and those who must comply with them.

Moreover, the guidance is generally regarded as ‘binding’ by those who are subject to it. In central government, it is well known that the Treasury exercises very considerable power over other government departments,³ because it determines their annual budgets.⁴ This power is carried through into more detailed sets of controls on particular issues, including contracting. Any departure from normal Treasury rules on assessing whether or not a contract represents good value for money would have to be explained and justified in the clearest possible terms. The difficulty of doing this means that, for the most part, departments will simply follow the guidance they are given. This is reinforced by the system of accounting officers within government departments.⁵ The Permanent Secretary within each department, and each agency chief executive, is usually appointed by the Treasury as the accounting officer within his or her area of responsibility. Although the usual roles still apply—the minister is answerable to Parliament and the accounting officer answers to the minister—the accounting officer has special responsibility for ensuring that the minister receives proper advice on the propriety and value for money of proposed expenditure. The accounting officer is likely to rely heavily on Treasury guidance when giving this advice.

Guidance also has a role to play in relation to local government, albeit to a lesser extent. Because local councillors are elected, and may therefore have a very different political agenda to that of central government, it is not surprising that greater use is made of formal legal mechanisms. The most obvious example of this is, of course, the compulsory competitive tendering legislation of the 1980s, to be discussed further below. Informal guidance would not have worked in this context because many local authorities were hostile to the policy.

However, even within a framework of legislation, there is still room for guidance in two senses. First, the Secretary of State is empowered by legislation to issue formal guidance or ‘circulars’.⁶ These are generally used to explain in greater detail how authorities are expected to discharge their statutory responsibilities. These can be expressed in rather less formal language than statutes or delegated legislation, but they are clearly binding. The empowering statute usually imposes procedural requirements, for example, that there be prior consultation with interested parties and that the guidance be published.⁷ Second, the Department for Communities and Local Government may issue more informal publications to assist local authorities, for example, by giving examples of good practice and innovation. Documents of this kind are not binding. Nevertheless, local authorities are scrutinized by the Audit Commission and drawing on government advice may help them to obtain a more favourable assessment.

The term ‘soft law’ is sometimes used in this context. It seeks to capture the informal but binding nature of government guidance. However, it is important to be clear about what is meant by ‘soft’. Guidance is ‘soft’ in that it is loosely worded and (unless it is a statutory circular) does not have any basis in law. But it is ‘law’ in the sense that it is regarded as binding by those to whom it applies. There is a risk that the phrase ‘soft law’ might give the impression that the rules are soft in the sense of optional or negotiable, but often this is not the case. Indeed, in practice, a civil servant would be most unlikely to draw clear distinctions between, for example, Treasury requirements and those of the PCR 2006.⁸

Having established the importance of guidance, we will now turn to the values underlying that guidance. The focus will be on Treasury and OGC guidance to central government in particular. This is because of its importance relative to other sources of regulation. Local government guidance is designed to supplement legislation and will be considered in that context. The main aim of Treasury and OGC guidance is to ensure that central government obtains value for money in its contracting activities.

The basic notion of value for money is a simple one. The government wishes to obtain goods or services to the specifications it requires, at the lowest possible price. Although cost is important, it is not the only consideration. The government's specifications are crucial. Goods which do not meet those specifications will not represent value for money, however cheap they are. To take a simple example, expensive widgets that will last for ten years may be better value for money than cheap but flimsy widgets that will only last for five years.

Although we are concerned here with the role of value for money as the overriding principle in government guidance on contracting, it is important to be aware of its underlying status as a legal obligation for the government.⁹ Any impropriety in the use of public funds could clearly be the subject of an application for judicial review, and might even have consequences in the criminal law. Since the World Development Movement case,¹⁰ it has been recognized that the notion of impropriety can include (in extreme cases) a failure on the part of the government to achieve value for money in its expenditure. Moreover, external bodies such as the National Audit Office are charged with ensuring that the government achieves value for money in all its activities.¹¹

In PFI contracts, the notion of ‘risk transfer’ also plays an important role.¹² This is the idea that the government should be able to shift some risks to private contractors in order to obtain better value for money for the public sector. Although ‘risk transfer’ is sometimes made to sound highly sophisticated, it is in fact a relatively simple idea which is fundamental to the way contracts work. All contracts allocate risks between the parties. For example, if the government contracts with a private firm to provide a hospital for a certain price, the contractor accepts the risk that the contract will cost more to perform. In extreme cases, the doctrine of frustration or a force majeure clause in the contract itself will operate to provide the parties with a fair solution for genuinely unforeseeable problems. But for the most part, the contractor will not be able to seek extra money from the government because, for example, the site turns out to be polluted or the cost of building materials suddenly increases.

Since all contracts allocate risks, the emphasis on risk transfer in government contracting is interesting. Various factors may help to explain this. One possible concern is that, in the past, public sector purchasers have tried to specify in considerable detail what the contractor had to do and how, instead of relying on the contractor's expertise. Another is that the government is vulnerable to additional financial demands from contractors because it does not want public services to be disrupted because a contractor has defaulted. However, more recent government guidance has focused on the important point that risk transfer is always subordinate to the goal of achieving value for money.¹³ Contractors obviously expect to be remunerated for the risks they accept. Sometimes, the price of a particular risk transfer may be too great, and it may be preferable for the public sector purchaser to accept the risk itself. The challenge of achieving optimal risk transfer is to identify which risks each party is best placed to bear.

Another important value in government contracts (and in many other contractual settings) is compliance. Having negotiated a deal which represents value for money, the government will want to ensure that the contractor meets its side of the bargain. As we shall see in chapter 7, this can prove more difficult than it sounds.¹⁴ In a long-term contract, the parties often build up close, trusting relationships in which they share problems and try to solve them together. It may be difficult for the government to decide when to abandon this approach and fall back on its legal rights under the contract. In complex public services the notion of ‘compliance’ can be difficult and often requires detailed assessment against a variety of different performance targets. Contract law can sometimes be unhelpful here because it is more focused on the value of each party's performance than on the quality of that performance. But even compliance is not an overriding consideration: the government may choose not to insist on compliance with the contract where some other course of action would constitute better value for money.

The government produces large quantities of information about contracts: guidance notes on specific issues, examples of good practice, broad policy documents, and so on. For present purposes we will concentrate on two main types of guidance: the OGC's Gateway™ review process; and standard form contracts.

The OGC's Gateway™ reviews help departments to manage the contracting process from the initial decision to procure goods or services through to the completion of the contract.¹⁵ The process is designed to ensure that departments obtain value for money. It developed out of the Gershon review of government procurement.¹⁶ Gershon recommended that major procurement projects should be subjected to independent reviews at various important stages in their ‘life-cycle’. This was designed to ensure that those responsible for the project would receive independent advice on the risks associated with the project before deciding to proceed to the next stage. The Gateway™ process is widely used within government. It is mandatory for central civil government procurement, and it is also used by the Ministry of Defence for defence procurement and by the Department of Health for procurement within the NHS. It is regarded as good practice in local government and is operated in that sector by 4ps.

The Gateway™ process works alongside departments’ internal procedures for procurement. It usually involves five stages. At the first stage, the Gateway reviewers examine the business case for the procurement.¹⁷ The business case is prepared within the department as the starting-point for procurement. It involves identifying the department's objectives and justifying the choice of procurement as a means of meeting those objectives. The review process is designed to provide reassurance that the business case has been properly researched.

After the first stage, officials within the department seek internal approval for their project and develop the business case in greater detail. The project is reviewed again at Gateway™ 2.¹⁸ Here the reviewers will examine the department's detailed strategy for conducting the procurement, checking (among other things) that the resources are available and that statutory requirements relating to the procurement process have been complied with. If the project is approved at this stage, the department will advertise the contract and choose a preferred bidder.

Before awarding the contract, the third Gateway™ review should take place.¹⁹ At this stage, the reviewers will check that appropriate procurement procedures were followed and that the department's preferred bid will meet its needs. The department then proceeds to award the contract.

Gateway™ 4 examines the project after the contractor has begun work but before the project becomes operational.²⁰ For example, in an IT contract this would occur after the contractor had developed the new software but before bringing it into service in the department. The assessment here focuses on whether the project is ready for service (whether the software has been tested, for example) and on the arrangements for its ongoing management, particularly once the procurement team have handed it over to operational managers.

Once the project is operational, the Gateway™ 5 review is used to examine whether it is delivering the promised benefits and adapting to any changes in circumstances.²¹ This review can be repeated at regular intervals where the project is long term.

The Gateway™ reviews are an important regulatory mechanism within government. They involve calling departments to account against a range of criteria judged by independent experts, with clear consequences if standards are not met. The Gateway™ reviewers are either independent of the relevant department, for high-risk projects, or internal to the department but independent of the project, for lower-risk projects. Since the reviewers themselves may be criticized for failing to spot the flaws in a project, there is an incentive for them to be stringent in their conduct of the reviews.

Although the standards or criteria for judging a project can be rather vague, they do give departments a good indication of the issues that they are required to address. The OGC's guidance sets out the questions reviewers are expected to ask together with the evidence departments ought to be able to supply. For example, at Gateway™ 4, reviewers need to ask whether the goods (for example, new computer systems) have been tested.²² The department should be able to supply test results which match the requirements in the contract, and to explain how any problems identified during testing will be solved. Finally, there are consequences if the reviewers are not satisfied. Each review gives a red, amber, or green light to the project. If the project is graded ‘red’, urgent remedial action must be taken before proceeding to the next stage. If it is graded ‘amber’, the project may continue to the next stage but the reviewers’ recommendations must be addressed before the next Gateway™ review. If it is graded ‘green’, it may proceed. It is difficult for a department to ignore a ‘red light’, in particular. If officials ignore the warnings, they are likely to be criticized by the department's own internal audit processes, and perhaps also by external watchdogs such as the NAO if the project as a whole runs into difficulties.

Of course, no reviewing process can guarantee that all projects will be successful. A project graded ‘green’ throughout might turn out to have hidden difficulties. And even if a department takes action after an unfavourable review, it may not succeed in putting the problems right. However, the OGC process is best viewed in terms of risk management. The aim is to identify as many risks as possible so that action can be taken to reduce or control them.

This guidance interacts with the formal law of government contracts in several different ways. First, it regulates the government's activities in areas not covered by the law. The decision to use contract for a particular activity is not governed by law, except in the minimal sense that the government must have the necessary legal powers.²³ Second, it helps to regulate the government's approach to its legal powers during the life of the contract. Reviews of the contract's performance (Gateway 5)might lead to the conclusion that the contract needs to be renegotiated or that the government needs to make greater use of its powers under the contract to deduct money from the contractor's payment for poor performance, for example.²⁴ Third, it helps to ensure that officials comply with the law by reminding them of the need to ensure that they have appropriate legal powers in the first instance, and that they have complied with the appropriate procurement procedures.²⁵ Litigation is one of the risks to be managed as part of the procurement process.

Another important type of government guidance on contracting consists of standard form contracts. The OGC provides standard form contracts for goods and for services, with a version for central government and a version for local government.²⁶ PUK hosts a standard form contract for IT services.²⁷For construction projects, the OGC recommends the use of NEC3, a set of standard form contracts which is in widespread use in the UK construction industry.²⁸ For PFI, the key document is HM Treasury's Standardisation of PFI Contracts (SoPC), which gives guidance on appropriate clauses for PFI contracts.²⁹ Departments may adapt these various documents to their particular needs: for example, the MoD issues a standard PFI contract which has additional clauses to deal with the security issues likely to arise in defence contracting.³⁰

The advantages of standard form contracts are well known. They reduce transaction costs for repeat players in a market because there is no need to draft a fresh contract on every occasion. From the perspective of those who regularly supply goods and services to the government, standard form contracts can be attractive because they simplify the process. Each contract will follow roughly the same pattern, so there is no need to examine new clauses on matters such as force majeure or dispute resolution, or to learn a new set of contract monitoring procedures. From the government's perspective, standard form contracts act as a useful regulatory mechanism. They enable the ‘regulatory’ bodies within government, such as the Treasury and the OGC, to dictate the main terms and conditions that departments should use in their contracts. Of course, departments might amend or disregard these terms, but this is unlikely. Departmental officials know that the standard-form contracts have been drafted by experts and that their use will save time. Moreover, any departure from them might expose the department to criticism if problems were to arise.

One important role for standard form contracts in government is to provide alternatives to the solutions to common problems offered by the general law. For example, if a dispute arises on a contract, the normal means of obtaining judgment and redress would be litigation. However, in order to avoid the costs (and publicity) associated with litigation, the standard form contracts provide for alternative dispute resolution (ADR).³¹ In general, this takes the form of a three-stage process. At the first stage, the parties themselves are required to negotiate in good faith in order to resolve the dispute. At the second stage, the dispute may be referred to an independent third party who may be described as a mediator (in the goods contract) or an adjudicator (in the PFI contract). If certain conditions are met, the dispute may be taken to formal arbitration at the third stage within the meaning of the Arbitration Act 1996.

Another way in which standard form contracts provide an alternative to the usual legal solution to a problem is when the law is changed to the contractor's disadvantage. This situation will be explored in more detail in chapter 6. Because of the rule against the fettering of discretion, changes of law are a risk to be borne by the contractor, but the standard PFI contract mitigates this position somewhat.³² General changes in the law which apply to everyone (a rise in the National Minimum Wage, for example) remain a risk for the contractor, but the authority may bear some of the costs where more specific changes in the law take place which apply only to the contractor or firms of a similar kind.

Another important role for standard form contracts is to provide for specifically ‘governmental’ issues which only arise because one party to the contract is the government. For example, clause E2.1 in the model goods contract requires the contractor to abide by the Official Secrets Acts.³³ Any breach gives the government a right to terminate the contract under clause E2.2.

Clause E4 makes detailed arrangements for dealing with the Freedom of Information Act 2000. It requires the contractor to ‘assist and cooperate with the Client (at the Contractor's expense) to enable the Client to comply’, although the accompanying guidance notes that it may sometimes be necessary to negotiate on the financial arrangements. The contractor must pass freedom of information requests on to the purchaser and must be able to supply the purchaser with information in order to comply with such requests within the timescales laid down in the Act. In clauses E4.4 and 4.6, the contractor must accept that the government may be required to disclose confidential information and may make disclosures without consulting the contractor.

Where the contractor is involved in the provision of public services, it may be necessary to use clause E9.2, which requires the contractor to afford access to the NAO for the purposes of auditing the government purchaser or preparing NAO reports on the government purchaser's activities.

Government guidance is a key mechanism through which government ‘regulators’, such as the Treasury and the OGC, can control the behaviour of the spending departments and other public bodies responsible for placing contracts. It is of considerable importance in understanding government contracting because it explains the overriding agenda of obtaining value for money from contractors and the main techniques used to achieve this. For those responsible for placing contracts, it is a major part of the ‘law’ of government contracts. It also gives an insight into how the government regards the formal law. This is particularly true of some aspects of the standard-form contracts.

It will be argued in later chapters that some of this guidance should be enshrined in legislation. This would give Parliament the opportunity to debate it and the additional publicity would give greater opportunities for interested parties (trade associations and service users, for example) to express their opinions. However, since (within central government at least) guidance is a highly effective regulatory tool, it is easy to see why the government does not regard it as necessary to take this route.

The next layer of regulation to be examined is what we will term ‘domestic’ law. EC law does, of course, form part of domestic law, but for explanatory purposes it is helpful to separate rules which are domestic in origin from rules which are European in origin. The ordinary common law of contract provides the basic legal framework for government contracts. It is overlaid by public law rules which deal with specifically governmental issues that might arise in contracts. Some of these are statutory in origin; others have been developed by the courts in judicial review. After the discussion of government guidance, it will come as no surprise to learn that there is virtually no use of statute to control central government contracting activity that is not European in origin. However, statute does play an important role in regulating local government, as we shall see.

Contract law provides the basic rules for the formation of government contracts: there must be offer, acceptance, and consideration. It governs the identification and enforcement of particular contract terms: for example, the rules on penalty clauses apply equally to government contracts as to others. Government contracts are subject to the rules on mistake, misrepresentation, and frustration. Issues of performance, breach, and remedies for breach are also dealt with in the usual way. There is, however, very little obvious evidence of the importance of contract law in the field of government contracting. A glance at the law reports reveals virtually no cases in which the ordinary rules of contract law are applied to the government. But this reflects the preference of the government, and often contractors themselves, for avoiding disputes or managing them through alternative dispute resolution, which helps to avoid the cost and adverse publicity associated with protracted litigation. The only real evidence for the relevance of contract law to government contracting lies in the content of the government's standard form contract documentation. As we saw above, this is clearly drafted against a background of common law rules.

It is often said that one of the distinguishing features of the English law of government contracts is that it does not exist—the ordinary private law of contract applies to government contracts as it does to other types of contract and public law has no role to play. However, this is not entirely accurate. Public law is surprisingly important. Chapter 3 will explain why this should be welcomed and developed further. This section will give a brief overview of the relevance of judicial review; the next section will consider statutory regulation of government contracting.

It is true that in some cases at least, the courts have taken the view that the contracting process should not normally be regulated through public law. For example, it has been held that judicial review of a contract award decision will only be available where there is a sufficient ‘public law element’ in the authority's contracting activities, a test which is inherently difficult to apply and often restrictive.³⁴ The same thinking can, arguably, be seen in recent decisions on the status of contractors under the Human Rights Act 1998 (HRA 1998). The courts have been reluctant to treat contractors as ‘hybrid’ public bodies unless they are closely involved in the performance of public duties.³⁵

However, there are counter-examples in which public law clearly applies to the government's contracting activities. Perhaps the most obvious example of this is in determining the government's capacity to enter into a particular contract in the first place.³⁶ Contracting powers may be derived from statute or from the common law. Many public authorities are constituted by statute and their contracting powers can be traced to their empowering legislation. But central government does not need to rely on statutory powers because it can invoke the Crown's inherent capacity to contract. As Turpin explains, ‘the Crown possesses a general capacity to make contracts which rests upon no statutory authority’.³⁷

Although the rules on capacity to contract are primarily facilitative, they also allow for the government's contracting activities to be controlled by the courts. Statutory contracting powers can be policed by the courts using the doctrine of ultra vires, and there may be some scope for judicial scrutiny of common law powers too, for example, using the doctrines of improper purposes or irrelevant considerations. Indeed, in some cases, the courts have made controversial use of the concept of relevancy in order to prevent public bodies, particularly local authorities, from using their contracting powers for political ends.³⁸ This was used on a number of occasions when authorities sought to avoid dealing with firms which were involved in South Africa during the apartheid era. This application of public law norms is in stark contrast to the approach of contract law, which would recognize the parties’ freedom to choose their contracting partners.

From this brief account, it can be seen that although the basic common law regime for government contracts is drawn from the ordinary private law of contract, it is overlaid in significant respects with norms drawn from public law which reflect the government's special features. These norms both control and facilitate government contracting.

In central government, as we have seen, internal guidance plays a major role in the governance of the contracting process. Statute law (other than that which is European in origin) is largely, though not exclusively, facilitative. The picture is rather different for local government. There is a greater role for statute law in promoting and regulating the contracting process. We will consider some examples of each.

A key example of a facilitative statute is the Deregulation and Contracting Out Act 1994. Where a government department wishes to use a private firm to perform some of its statutory functions, it faces a problem of delegation. The maxim delegatus non potest delegare captures the idea that when powers are delegated to a minister by Parliament, that minister is not permitted to further delegate those powers to others. An exception is, however, made in respect of delegation to civil servants under the Carltona principle.³⁹ Because the actions of civil servants are technically the actions of the minister, in the sense that the minister is accountable for them to Parliament and the courts, there is no objection to a minister's functions being carried out in practice by an appropriately qualified civil servant. The Deregulation and Contracting Out Act 1994, s 69(2), achieves the same result in respect of contractors:

If a Minister by order so provides, a function to which this section applies may be exercised by, or by employees of, such person (if any) as may be authorised in that behalf by the office-holder or Minister whose function it is.

A similar power to allow local authorities to delegate to contractors is contained in s 70. These facilitative powers have been used on numerous occasions and will be discussed in more detail in chapter 8.⁴⁰

The regime for local government contracting combines facilitative and controlling elements. Local authorities’ contracting powers form part of their wide-ranging general powers under the Local Government Act 1972, s 111(1):

… a local authority shall have power to do any thing (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions.

Under s 135 of the same Act, it is for local authorities themselves to delineate procedures for the exercise of their contracting powers through standing orders. Non-compliance with standing orders does not render a contract invalid.⁴¹ The Act requires local authorities to adopt competitive tendering procedures for larger value contracts:

Standing orders made by a local authority with respect to contracts for the supply of goods or materials or for the execution of works shall include provision for securing competition for such contracts and for regulating the manner in which tenders are invited, but may exempt from any such provision contracts for a price below that specified in standing orders and may authorise the authority to exempt any contract from any such provision when the authority are satisfied that the exemption is justified by special circumstances.⁴²

However, it does not dictate the details of these procedures and gives a substantial degree of discretion to local authorities as to their design and application.

The traditional notion of local government as a provider of public services was challenged by a different political vision in the 1980s. The Conservative government favoured policies of privatization and contractualization, reducing the government to an overseer or purchaser of public services. Many local authorities were hostile to these policies, but they were forced to comply with them through the compulsory competitive tendering (CCT) legislation, which required authorities to put certain services out to tender.

CCT was first introduced in the Local Government, Planning and Land Act 1980. This required authorities to restructure internally so that their in-house construction and maintenance teams (known as Direct Labour Organizations (DLOs)) had separate accounts and identities. It also imposed CCT in relation to contracts for maintenance work, known as ‘works contracts’. But it was not until the Local Government Act 1988 that CCT started to have a real impact on local authorities.

The 1988 Act made three major changes. First, it extended CCT to a wider range of services. These included refuse collection, cleaning, catering, and vehicle maintenance.⁴³ The Secretary of State was given power to add further services to the list by order.⁴⁴

Second, it imposed more detailed procedures on local authorities so that they had little freedom to resist competition. According to s 6 of the Act, a local authority could only award a contract to its DLO if the six conditions laid down in s 7 were met. The conditions included a requirement that the contract be advertised and that the DLO should submit a written bid. Perhaps the most significant condition was that in s 7(7), that the authority ‘did not act in a manner having the effect or intended or likely to have the effect of restricting, distorting or preventing competition’. This general obligation, coupled with the more detailed provisions in the remainder of s 7, helped to ensure that local authorities could not favour their own DLOs.

Third, the 1988 Act barred local authorities from using ‘non-commercial’ considerations in certain contracting decisions.⁴⁵ Thus, an authority could not exclude a potential bidder from consideration on the basis of factors such as the terms and conditions of employment of its workers, its conduct in industrial disputes, or its business interests in a particular country. This prevented a common practice (which had already been subject to challenge at common law⁴⁶) among some local authorities of using contracting powers to promote so-called ‘extraneous’ political goals such as trade unionism, or boycotts of apartheid-era South Africa. The use of such policies in contracting will be discussed in detail in chapter 9.⁴⁷

In line with its more general ‘third way’ politics, the Labour government's approach since 1997 has been to retain an emphasis on service delivery through contract, whilst at the same time removing some of the more extreme elements of CCT.⁴⁸ The Local Government Act 1999 placed local authorities under a duty to seek continuous improvements in the economy, efficiency, and effectiveness of the services they provide.⁴⁹ This is referred to as the duty to achieve ‘best value’. Initially, the approach was heavily focused on the achievement by councils of targets relating to the BVPIs (Best Value Performance Indicators) set by central government on various aspects of local government services.⁵⁰

The BVPIs were abolished in 2007⁵¹ and replaced with a system in which each local authority must agree a Local Area Agreement (LAA) with central government.⁵² The Local Strategic Partnership (LSP), which brings together other agencies operating in the local area, must also be involved in this process.⁵³ The LAA must contain a number of targets (up to 35, plus a set of education targets) for improving local services to be achieved over a three-year period.⁵⁴ These must be selected from a set of around 200 performance indicators determined by central government on which local authorities must report. Each local authority's performance will continue to be assessed by the Audit Commission through a process to be known as the Comprehensive Area Assessment (CAA). The Audit Commission views value for money as a ‘non-negotiable’ component of its assessment of local authorities.⁵⁵ Although contracts do not feature heavily in much of this literature, around 50 per cent of local government expenditure is spent in this way. Thus, the financial and performance context just described is intimately linked with the contracting process. It may no longer be compulsory to contract services out, but a local authority will often need to conduct a tendering process in order to demonstrate that it is providing services in the most cost-efficient way. This is reflected in recent research and guidance from both central government⁵⁶ and the Audit Commission⁵⁷ which emphasizes the importance of developing procurement skills in local authorities and creating more competitive markets for local government services.

Moreover, although s 17 of the Local Government Act 1988 remains in force, the Secretary of State is empowered under s 19 of the 1999 Act to remove any matters from the list of ‘non-commercial’ considerations. This opens up the possibility that local authorities may once again have the option of using their contracting powers to pursue their political goals. This power was exercised in 2001 to permit local authorities to take account of issues relating to terms and conditions of employment and the contractor's conduct in industrial disputes, in two sets of circumstances.⁵⁸ One is where some of the local authority's staff would be transferred to the contractor, and the other is where the authority considers it ‘necessary or expedient’ to consider employment matters as part of its best value duty. The latter might apply where, for example, the contractor was engaged in an industrial dispute which threatened its ability to complete the contract for which it was bidding.

The overall picture—even after the removal of CCT—is one in which central government takes a detailed interest in the contracting activities of local authorities. This reflects the fact that although some revenue is gathered at the local level, through the council tax, the vast majority of local government funding is provided by central government. Understandably, this leads to a desire to control the way in which the funding is used. However, there is an inevitable tension with local democracy which will resurface as the rules are considered in detail in later chapters.

The domestic law framework for government contracting takes as its basis the ordinary law of contract. However, this is overlaid with public law rules. Some aspects of the contracting process are subject to judicial review, although there is uncertainty about this, and various statutory provisions apply only to government contracts. In relation to central government, these statutes tend to be facilitative, whereas in local government the statutory framework has a more controlling character.

So far, we have focused on procurement guidance and law that is domestic in origin. This now interacts in significant ways with the European public procurement rules. These rules regulate the process of inviting bids and awarding the contract. Their aim is to ensure that governments open up their procurement markets to competition from firms in other EU Member States, and more recently, to firms in states which have signed up to the GATT Government Procurement Agreement. Their strategy for doing this is to require governments to adopt transparent procurement procedures and to control the criteria used in contract award decisions. It is important to remember that these rules do not seek to regulate every aspect of the contracting process: they are drafted on the assumption that national legal systems will continue to play an important regulatory role.

A major purpose of the EC has been, and still is, the creation of an internal market in which goods and services can be traded freely between Member States without any barriers based on nationality. Although much of the Community's activity in this area has focused on trade between private parties, government procurement has also been addressed. It is thought that the government procurement market within the Community is worth around 16 per cent of the Community's GDP.⁵⁹ But historically, procurement markets have been notoriously closed: governments used procurement to support their own national economies and were reluctant to award contracts to foreign firms.

There are some obvious economic arguments for opening up procurement markets to international competition.⁶⁰ For example, the more competitive the bidding process for a particular contract, the more likely it is that the government will obtain the best possible deal. The point of using competition in procurement is to motivate firms to distinguish themselves from their rivals by offering lower prices or better quality goods and services. The competition is likely to be more fierce if more firms are involved. Opening up the process to non-domestic firms may help to increase the number of bidders. In addition, although governments generally lose the ability to favour their own national firms under international procurement regimes, national firms may benefit from their government's participation in such regimes. This is because firms’ chances of winning contracts in other countries should improve.

However, international agreements on procurement can also be controversial, particularly among those who favour the use of procurement as a tool for implementing public policy. By forbidding governments to use procurement to favour national firms, such regimes limit their ability to subsidize national industries to tackle problems such as unemployment. Moreover, it is often the case that such regimes go beyond a simple prohibition of discrimination. They usually also seek to reduce governments’ discretion to take account of ‘non-commercial’ factors when awarding the contract. This regulatory technique is chosen because factors such as a firm's human rights record might be used, intentionally or unintentionally, as an indirect means of favouring national firms. But this has the wider effect of preventing governments from using procurement as a means of changing firms’ behaviour on issues such as human rights, employment, and environmental matters. As we shall see in chapter 9, the European public procurement regime has shifted to a less restrictive position on these matters in recent years.

Although the European public procurement regime has as its main aim the prevention of discrimination against non-national firms, it is important to note that the procedures it requires have other benefits. Advertising the contract helps to secure a large pool of bidders. Rules requiring all firms to be treated equally help to ensure fairness and to prevent officials from favouring their friends or firms they have worked with in the past. And restricting discretion in the contract award decision may assist in ensuring that value for money is the dominant consideration. For these reasons, most governments would probably adopt some version of these procedures even if they were not required to do so. This point is less apparent in English law because the procurement process is not so heavily regulated by law, though it is noticeable that the CCT legislation adopted some of these features. Government guidance clearly encourages the use of fair and transparent competitions even where the procurement rules themselves do not apply.

The statutory regime for public procurement is now contained in the PCR 2006, which implement two EC Directives: Directive 2004/18/EC on procedures for the award of public works, supply and services contracts; and Directive 89/665/EEC on remedies for the breach of procurement procedures.⁶¹ These Directives consolidate earlier Community law on the subject, and it is therefore helpful to give a brief account of the historical development of procurement regulation before explaining the current rules.⁶²

Discrimination by a government against a firm from another Member State is likely to be in breach of key articles of the EC Treaty on free movement of goods and services, and freedom of establishment.⁶³ For example, in Commission v Italy the ECJ examined a provision of Italian law that required firms bidding for data processing contracts in the public sector to have the Italian state as their majority shareholder.⁶⁴ Non-Italian firms were found to be less likely to be able to satisfy this condition, therefore it was held to be indirectly discriminatory and contrary to Articles 43 (establishment) and 49 (services). More detailed rules governing public procurement have been laid down in a series of Directives. The Treaty articles remain relevant because they continue to govern those procurements that are not caught by the Directives, but the Directives are now the main focus of attention.

The history of public procurement in the EC cannot be entirely divorced from the history of the internal market. Many of the early initiatives by the Commission to facilitate free movement between the Member States were applicable to procurement activities. The first Directive specifically regulating procurement was agreed in 1969. This addressed public supply contracts and sought to prohibit legal or administrative measures by Member States which either prohibited or discouraged the purchase of imported goods.⁶⁵ A further Directive agreed in 1971 sought to tackle discrimination in the award of public works contracts.⁶⁶ Again, it applied to measures which were indirectly discriminatory as well as those which were directly discriminatory.⁶⁷ These Directives can usefully be regarded as the first phase in the Community's regulation of procurement, focusing simply on the removal of discrimination against non-national firms.

The second phase of Community procurement regulation involved the more active promotion of openness in procurement markets. The mere removal of discriminatory measures, while clearly an important starting-point, had not been enough in practice to encourage firms to bid for government business outside their home state. This led to the enactment of Directive 71/305 on public works contracts and Directive 77/62 on public supplies contracts. It is important to note that the Directives were not harmonizing measures: they assumed that Member States had procurement procedures in place that could be adapted to comply with Community goals.⁶⁸ Moreover, their application was limited to high-value contracts, on the grounds that these were the contracts most likely to attract Community-wide interest.⁶⁹ The Directives adopted three main strategies. The first strategy was to require Member States to advertise the relevant contracts in the EC Official Journal.⁷⁰ The second was to tackle any ongoing discrimination in technical specifications,⁷¹ and the third was to inject an element of objectivity into authorities’ decisions on the disqualification of bidders and on the award of contracts, again as a safeguard against discrimination.⁷²

In the mid-1980s the Commission noted the ongoing failure of these Directives to achieve any real improvements in the openness of procurement markets.⁷³ In particular, there were high levels of non-compliance on the part of the Member States. This led to amendments to the two Directives in the shape of Directive 89/440 (works) and Directive 88/295 (supplies) which strengthened the provisions just described in various minor ways. Significant change came in the 1990s, when the works and supplies Directives were consolidated,⁷⁴ a Directive on services was enacted,⁷⁵ and new Directives on remedies were agreed.⁷⁶ One of the major obstacles to the success of the earlier measures was that although they required Member States to behave in particular ways during the procurement process, they were effectively unenforceable. The new Directives required Member States to give bidders an opportunity to challenge contracting authorities’ decisions, with the possibility of getting those decisions set aside or securing an award of damages.⁷⁷

A new directive on utilities procurement was also enacted at this time. This applied to bodies responsible for various services including the supply of gas, electricity, drinking water, and telecommunications, whether they were formally in the public sector or were private entities with special public powers.⁷⁸ The justification for regulating utilities procurement (as explained in the Preamble) was that utilities tended to favour national firms when awarding contracts, either because they were influenced by governments or because they were insulated from market forces. Nevertheless, the requirements in the new Directive were more flexible than those in the works, supplies, and services directives.⁷⁹

This brings us to the two current Directives, which were adopted in 2004.⁸⁰ The Commission appears to have had three broad aims in mind when developing the new legislative package.⁸¹ The first was simplification—there has never been a good reason for having entirely separate directives on works, supplies, and services, for example, and a single consolidating Directive was therefore desirable. The second was flexibility and modernization, to take account of new technological developments such as e-procurement and new types of contracting such as public/private partnerships. In the utilities sector, change was needed to limit the Directive's coverage in view of the fact that many utilities have now been removed from state control as a result of privatization and other liberalization measures. And the third aim was a clarification of the circumstances in which governments may use procurement for social or environmental purposes, an issue which has been the subject of an ongoing dispute between the Parliament and the Commission.

The Directives will be discussed in detail in chapter 5. For now, it is sufficient to give an example of the types of change they have sought to bring about. One key modernization is the introduction of a new contract award procedure called ‘competitive dialogue’.⁸² The old Directives provided for two procedures: restricted procedures, where only selected bidders could bid, and open procedures, where anyone could bid. These procedures were regarded as unduly formal in more complex procurements, such as PFI/PPP deals, because they did not (in general) allow for much dialogue between the parties during the procurement process. This created problems where it was difficult for the purchaser to explain its requirements clearly in a single bid document from the outset. The ‘competitive dialogue’ procedure can be used where the contract is ‘particularly complex’ in the sense that the purchaser cannot specify its financial, legal, or technical features in advance. The procedure allows the purchaser to eliminate some bidders at an early stage and to hold a dialogue with bidders about its exact requirements. However, the purchaser must then conduct a competition on the basis of final bids before awarding the contract. Further dialogue may then take place with the winning bidder provided that this does not involve major changes to the bid. Arrowsmith welcomes the reasoning underlying the new procedure but points to a number of areas in which it may not have succeeded in introducing sufficient flexibility for purchasers.⁸³

The PCR 2006 provide a comprehensive framework for procurement in England, Wales, and Northern Ireland. The bodies to which the Regulations apply are listed in reg 3, and the contracts to which they apply are defined in regs 5 to 8. Regulation 4 imposes basic obligations of transparency and non-discrimination.

The four possible procedures for the award of the contract are: open, restricted, negotiated, and competitive dialogue. Under the open procedure, the authority is simply required to advertise the contract in the Official Journal and to allow a reasonable period for the submission of bids.⁸⁴ It may only exclude bidders in certain limited circumstances, such as where they do not meet basic standards of technical competence set out in the notice. The restricted procedure is similar, but allows the authority to limit the number of bids it will consider (although usually it must consider at least five), provided that it uses objective criteria to exclude bidders and ensures that a genuine competition takes place.⁸⁵ The negotiated procedure allows the authority a greater scope for engaging in negotiations with bidders in order to match their bids to the authority's needs, subject to a general non-discrimination requirement.⁸⁶ The competitive dialogue procedure implements the new procedure introduced by the consolidating directive in which the purchaser may exclude bidders at the first stage, then negotiate with a smaller group, before holding a final competition in order to award the contract.⁸⁷

Common to all four procedures is the requirement that the contract be awarded either to the ‘most economically advantageous’ bid or to the cheapest bid.⁸⁸ The former allows factors such as ‘quality, … technical merit, aesthetic and functional characteristics, environmental characteristics, running costs, cost effectiveness, after sales service, technical assistance, delivery date and delivery period and period of completion’ to be taken into account alongside price.

Finally, the Regulations provide mechanisms for disappointed bidders to obtain information about the procedures followed by the authority and to challenge its decisions in court.⁸⁹

A final point to note about the procurement framework is that its benefits are not necessarily confined to firms established in the Member States of the EU. Procurement is also subject to international regulation under the WTO Government Procurement Agreement (GPA).⁹⁰ The GATT excludes procurement from its scope. The GPA is a separate plurilateral agreement, which means that (unlike the GATT itself) not all WTO members have ratified it. The GPA reflects the principle of reciprocity: in other words, signatory states owe GPA obligations only to firms established in other signatory states. The first GPA came into force in 1981, and after substantial revisions and expansions the current version came into force in 1996. Like the EU rules, the GPA requires purchasers to avoid all discrimination against foreign firms, and insists on transparent procedures in order to secure this goal. The EU is a signatory to the GPA, together with the Member States, including the UK.

Implementation of the GPA in English law is secured via implementation of the European public procurement rules. In other words, a purchaser ought to be able to assume that it has complied with the GPA if it has complied with the European rules.⁹¹ However, it is important for the purchaser to be aware of the circumstances in which the GPA applies. GPA obligations are only owed to firms from other signatory states, currently Canada, Hong Kong China, Iceland, Israel, Japan, Republic of Korea, Liechtenstein, Norway, Singapore, Switzerland, and the USA. Moreover, GPA obligations are only owed by those entities listed by the UK in the GPA schedule. This means that only those authorities listed in Sched 1 to the PCR 2006 are required to comply with the GPA. This list differs in some respects from the list of those authorities required to comply with the 2006 Regulations for firms from other EU Member States. Finally, there are different financial thresholds for supplies and services contracts, but not works contracts, under the GPA. Thus, in general terms, a contract must be worth 211,000 euro for European rules on supplies and services contracts to apply, but only 137,000 euro for the GPA to apply. Thus, contracting authorities in the GPA list must apply the 2006 Regulations to contracts above the lower threshold.

Overall, then, the process of procurement—inviting bids and selecting a winner—is heavily regulated by statutory provisions. These provisions reflect the UK's international and European obligations. It is evident that the procurement process involving a public sector purchaser is significantly different to that involving private parties. Rigid procedures must be followed and there is less room to take account of so-called ‘extraneous’ considerations in the decision-making process. Litigation is a possibility if the rules are not adhered to, something that would not generally be true of private contracting. Although the public procurement rules tend to be thought of as a subject in their own right, they can clearly be regarded as an important part of the ‘public law’ element of the legal framework for government contracts.

Although this book is not intended as a systematic comparative work, it will make reference to other jurisdictions (particularly France and the US) where appropriate. These two jurisdictions provide interesting contrasts. In France, as is well-known, there is a sharper distinction between public and private law. French public law has its own concept of a contract for use by the government with its own rules adapted to the public sector context. The US example shows how a country outside the European regime (although within the GATT GPA) deals with procurement issues. In the US there is greater regulation of government contracting, although the basic approach is similar to that of English law, relying as it does on the common law of contract as its foundation.

French law draws a much sharper public/private divide than English law does.⁹² There is a separate court system for public law cases, with the Conseil d'Etat at its head. Cases must be brought in the appropriate court and there is no equivalent of the procedural flexibility now found in English law. From a government contracts perspective, the most important difference is that French law has, in addition to its ordinary private law of contract, a separate system of contrats administratifs which are within the jurisdiction of the administrative courts and have their own distinctively public law rules.⁹³ Although French administrative law—like English administrative law—has been developed by the courts in case-law and is not codified (in contrast to French civil or criminal law), even this apparent similarity masks significant differences. For example, the Conseil d'Etat hands down very concise judgments and does not follow a strict system of precedent.

Before explaining the concept of the contrat administratif, it is important to note that the French government can also place ordinary private law contracts and need not always act through the public law route. The status of a contract is largely a matter for the courts to decide. Two main criteria are used,⁹⁴ which are alternatives. One indication of an administrative contract is that the contractor is closely involved in the provision of public services. For example, a concession to run a public transport system would clearly be an administrative contract whereas a contract to supply paperclips to the government would not qualify as such under this criterion. The other indication of an administrative contract depends upon its terms. If it contains ‘clauses exorbitantes du droit commun’, it will be a contrat administratif. These are clauses giving special powers to the government purchaser that would not normally be found in an ordinary commercial contract, for example, a power unilaterally to vary or rescind the contract. Of course, although the courts have the final say on the status of the contract, the government can draft its contracts with these criteria in mind. The government can place an ordinary private law contract if it avoids involving the contractor in public service provision and avoids taking special powers in the contract.

Brown and Bell identify légalité and responsabilité as the founding principles of French administrative law.⁹⁵ The government must act according to the law, and must compensate citizens who are injured by its actions. In relation to government contracts, a third important principle—the protection of the public interest—comes into play. Much of the law of administrative contracts seeks to strike a balance between protecting the public interest, and protecting the contractor's interests in line with the responsabilité principle.

Historically, French law has regulated the contract award process to a greater degree than has been the case in English law. For example, the contract must be advertised and bids invited. If these rules are not followed, the decision to enter into the contract can be quashed by the administrative court, but interestingly this does not affect the validity of the contract itself because French law treats the decision and the contract as separable.⁹⁶ This contrasts with the effect of a finding of ultra vires in English administrative law. French law has traditionally distinguished between procurement contracts, which must be awarded according to strict criteria, and concession contracts, which could be awarded at the authority's discretion. Under a concession contract, the government arranges for a private firm to provide a service to members of the public who pay to use it, such as bus transport in a particular area. However, the procedures for awarding contracts are, of course, now governed by the requirements of Community law.

Perhaps the most distinctive feature of the French law of the contrat administratif is the range of doctrines it contains to deal with situations in which one of the parties wishes to vary the contract.⁹⁷ The law acknowledges the need for flexibility in the public interest but seeks to ensure that the contractor is protected. French administrative law contains a general power to vary a contract to reflect the requirements of the public interest, provided that the contractor is reimbursed for its costs. For example, in Compagnie Générale des Eaux, the firm had an exclusive contract to supply water to a particular town.⁹⁸ When the town grew in size, the contract no longer met local needs. It was held that the local authority could invite the contractor to supply additional water at an appropriate price. If the firm refused, the local authority could invite bids from other firms for the additional work. Under this approach, the courts play a role in reviewing both the authority's decision to seek a contract variation and the price it is prepared to pay for the new arrangement.

Public authorities in France also have extensive powers to inspect the contractor's performance and to penalize the contractor for poor performance even if the contract does not provide for this.⁹⁹ This is in marked contrast to English law, where these matters would be provided for in the contract itself. The courts would not normally become involved and if they did, it would be to interpret the parties’ contract rather than to apply principles of administrative law.

The doctrine of fait du prince applies in the slightly different situation in which the public authority does not set out to vary the contract but instead takes other action, for example, the introduction of a new regulatory measure, which has an adverse impact on the contractor.¹⁰⁰ For example, in Société Civile des Néo-Polders, a firm was awarded the right to drain certain land near a particular town, but the town in question changed its land-use planning policy while the work was in progress.¹⁰¹ In this situation the government was allowed to terminate the contract but had to compensate the contractor under the doctrine of fait du prince. However, the doctrine only applies where the public body which is the author of the change is also the contracting partner, and it does not apply to changes in the law of universal application. This contrasts with the position in English law in which the government is free to make regulatory changes but is under no obligation in the general law to compensate the contractor,¹⁰² as a result of the rule against the fettering of discretion. In practice, a clause providing for the contract to be varied or terminated with compensation for the contractor is generally included in government contracts to mitigate the harshness of the general rule.

Finally, it may be the case that the contract becomes uneconomical to perform for reasons not attributable to the administration at all, such as high inflation or shortages of raw materials. In this situation, recourse may be had to the doctrine of imprévision.¹⁰³ Under this doctrine, the administrative court may decide to require the contractor to continue to perform the contract, but with appropriate variations so that the contractor's additional costs are met by the public authority. However, this doctrine only applies where the circumstances were unforeseeable¹⁰⁴ and it is now more common for French government contracts to make provision for supervening events. If the continued performance of the contract is not in the public interest, either party may invoke the private law doctrine of force majeure in order to bring the contract to an end. Although the English law doctrine of frustration can, of course, be used in relation to government contracts, there is no equivalent of imprévision, so the only way to allow a contract to continue under radically changed circumstances is if the parties can agree a variation themselves.

In many cases, contractors would receive surprisingly similar substantive treatment whether their contract is with a French public body or an English one.¹⁰⁵ There is considerable flexibility in both systems to vary the contract or to terminate it with compensation for the contractor if circumstances change since, in the long term, it will obviously not be in the best interests of any government to treat contractors unfairly. But the mechanisms for balancing contractors’ interests and the government's interests in the two systems are very different. In French law, the administrative courts play an important role in deciding whether or not it is in the public interest for a contract to continue and on what terms. In English law, the government uses clauses in the contract itself to provide for changes of circumstances. Much turns on the parties’ ability to negotiate a solution, and the presence of dispute resolution clauses in contracts makes it unlikely that the courts will become involved. The advantages and disadvantages of these contrasting approaches will be explored in more detail in later chapters.

The present discussion will focus on the regulation of government contracting at federal level in the US. Interestingly, the law's basic policy is roughly the same as that we attributed to French law: striking a balance between the public interest and the protection of contractors.¹⁰⁶ But US federal law uses very different mechanisms to achieve this goal. The main contrasts with English law are the preference for legal rules over informal guidance, and the use of formal contract award procedures long before they were required by international law for certain procurements.

Most federal procurement in the US is governed by one of two statutes: the Federal Property and Administrative Services Act of 1949, and the Armed Services Procurement Act of 1948. Both statutes have been amended over the years. The former covers the vast majority of executive agencies; the latter covers defence procurement. However, the main source of the detailed rules governing procurement is the Federal Acquisition Regulation (FAR) which applies to all government procurement activity.¹⁰⁷ The FAR is issued jointly by the Secretary of Defense, the administrator of NASA, and the administrator of General Services.¹⁰⁸ Each agency is entitled to issue its own supplement to the FAR, but only ‘to satisfy the specific needs of the agency’.¹⁰⁹ The Office of Federal Procurement Policy can strike down or amend supplements which go beyond these requirements.¹¹⁰ The existence of the supplements gives rise to a relatively complex system of procurement regulation.

One of the superficial similarities between US federal procurement and the English approach is that the contract award process is relatively heavily regulated. At the contract award stage, the executive agency must in general use one or other of two procedures: sealed bidding or competitive negotiation.¹¹¹ As its name suggests, sealed bidding involves advertising the government's requirements and inviting bids. The contract must be awarded to the lowest cost bid that meets the government's specification.¹¹² A version of sealed bidding has been in use since the early nineteenth century, and has at times been regarded as the best method of awarding a contract.¹¹³ However, the modern position acknowledges that sealed bidding is not appropriate for more complex contracts for non-standard goods or services where a degree of negotiation may be beneficial, and thus agencies may use competitive negotiation as an alternative.¹¹⁴ This is better thought of as an approach rather than a procedure, in that agencies themselves have considerable flexibility to adapt it to their needs. Its key features are that factors other than cost can be taken into account when awarding the contract, and that if necessary, the agency may select the most competitive bidders and negotiate with them before awarding the contract. These options are, of course, similar to those in place under the PCR 2006 in English law. However, there is an important difference in their source. Although both the UK and the US are now signatories to the GPA, and have thus made a plurilateral commitment to competitive and non-discriminatory procurement, the US has made use of competition for a much longer period as a requirement of domestic law. In the UK, competition has long been regarded as good practice but it was not mandated as a matter of law (except in local government) until this was required by the European procurement regime.

Another superficial similarity between the two countries’ approaches relates to the extensive reliance on the ordinary common law of contract, particularly once the contract has been awarded. This takes two forms. First, many contract law doctrines are pressed into service in government contract disputes. For example, there is considerable case-law in the US on the effect of mistake on a government contract.¹¹⁵ Although there has been much less litigation in English law on the point, there is no doubt that a doctrine such as mistake would apply to government contracts in the normal way. Second, in both countries, considerable use is made of standard form contract clauses. These cover matters such as the effect of changes in circumstances on the contract and government powers to terminate. However, there is a significant difference in that in the US, these clauses are contained in the FAR itself, and are not simply a matter of internal government guidance, as they are in English law.¹¹⁶

Indeed, perhaps one of the most significant differences between US and English law is the greater degree of formality in the US system. This can be illustrated with reference to the FAR's detailed provisions on decisions to contract out and mechanisms for planning a procurement. These would be dealt with as policy matters in the English setting. The FAR requires agencies to determine whether their functions are ‘inherently governmental’ or not.¹¹⁷ For those which are not, there is a requirement to calculate the cost of in-house performance and to contract the requirement out if it would be cheaper to do so.¹¹⁸ Although there was a similar legal requirement in English law under the CCT legislation, the choice between in-house and private provision is now a decision for local authorities and departments to make in the light of budgetary requirements.

Similarly, the early stages of the procurement process—which would be dealt with as policy matters in England—are governed by the FAR in the US. For each procurement, the agency must formulate a statement of needs and an acquisition plan.¹¹⁹ The plan must identify the essential specifications to which the goods or services to be procured must conform. It must also identify a series of ‘milestones’ or dates by which key elements of the procurement process must be completed. In addition, the agency must conduct market research to determine what sources of supply exist for the goods or services it is seeking. Failure to comply with these requirements can expose the agency to a complaint from a disappointed bidder or other interested party, with the possibility that the agency might be ordered to terminate the contract and begin the procurement process again. In England, these various requirements exist—most obviously in the OGC's Gateway™ review process—but this is a matter of guidance only.¹²⁰ There is a high level of compliance with this guidance, because authorities fear the consequences of ignoring it: criticism from auditors, questions in Parliament, and so on. But the possibility of a complaint by a third party about the government's internal planning process is a remote one.

Another important difference in the US system is the greater tendency to use procurement for political goals. Although this has been a feature of English law and policy at various times in history, it is more common in the US, perhaps reflecting the greater influence of pressure groups over the political process. Various different policies are in place.¹²¹ For example, government contracts may place obligations on contractors in respect of sex and race discrimination which go beyond what is required by legislation.¹²² In particular, contractors could be required to adopt affirmative action policies. More recently, agencies have been placed under a statutory obligation to buy information technology which is accessible to people with disabilities wherever possible, as a means of encouraging firms to design accessible products.

Legislation also provides for a certain proportion of government contracts to be ‘set aside’ for small businesses owned by women or ethnic minorities.¹²³ The conditions attaching to these programmes are complex and they have been scaled back in recent years.

In addition, some use has been made of government contracting to discourage firms from involvement in other states with poor human rights records.¹²⁴ The most notable examples of this are the Sullivan and MacBride principles dealing with apartheid-era South Africa and Northern Ireland during the Troubles respectively. Despite the greater prevalence of these various uses of contract, they are highly controversial, politically and often also legally (in terms of their constitutionality). They are a significant area of debate for US government contracts scholars.

It is noticeable that there is much more litigation surrounding government contracting in the US than there is in the UK. Contract award controversies may be heard by the agency itself or by the General Accounting Office. Additionally, disappointed bidders may opt to litigate in the Court of Federal Claims or in the relevant District Court. Once the contract has been awarded, the contractor may complain to the agency if problems arise. If the contractor is unhappy with the agency's decision, it may choose to pursue the matter either before the agency board of contract appeals or before the US Court of Federal Claims. In all these situations, there is generally an opportunity for the agency itself to resolve the problem, but it is still relatively easy for a case to get to court. In English law, contract award controversies are dealt with in court under the 2006 Regulations, but disputes during the life of the contract are generally kept out of court through the use of standard form alternative dispute resolution clauses in contracts. This difference may be due to the much larger size of the US procurement market, although perhaps it also reflects cultural differences: the UK government tends to regard litigation as a sign of failure, whereas in the US this does not appear to be the case.

This overview of the regulatory framework for government contracting in English law has brought out a number of significant features, particularly when compared with France and the US. First, there is an important regional and international dimension to the regulatory regime. Nowadays, governments acknowledge the benefits of opening up global procurement markets even if this might involve accepting constraints on the choices they can make. However, the European rules and the GPA focus on ‘procurement’ strictly defined as the contract award process. They do not affect other aspects of the law relating to government contracting.

Second, the English system displays a strong preference for ‘informal’ regulation through internal government guidance, and for alternative dispute resolution. This contrasts with the extensive role of the FAR (a form of delegated legislation) in the US as a source of rules for agencies to comply with and standard-form clauses for them to invoke, and with the greater volume of litigation in the US.

Third, although English law does not make use of a specifically public law form of contracting as French law does, public law does play a significant role in the regulation of the government's contracting activities. The aim of this book is to analyse and develop this public law dimension in greater depth. But before we can do this, we must address recent critiques of the very concept of public law, and it is to these that chapter 3 will turn.