Rail Franchise Litigation: Department for Transport did not Breach EU Law

The High Court has handed down judgment in the long-running rail franchise litigation brought against the Department for Transport by a number of railway operators including Virgin Trains, West Coast Trains, Stagecoach and Arriva (although the latter settled on the eve of the trial).

The claims arose out of three tenders for the South Eastern, East Midlands and West Coast railway franchises, which were conducted by the DfT between 2017 and 2019. Prior to the commencement of the tender, the Pension Regulator had begun an investigation into the Railways Pension Scheme, the effect of which was that there was uncertainty over the funding and future costs of the scheme. As a result, the DfT included within the tender contract terms which would transfer the majority of the risk as to future pension liabilities onto the successful franchisees.

The tender rules stated that bidders should not propose any amendments to the contract terms, and that any proposed amendments would result in bids being deemed non-compliant. The rules then included a discretion, commonly found in tenders, for the DfT to disqualify bidders in the event of non-compliance.

The claimant rail operators were not prepared to contract on the terms put forward by DfT as to the pension liabilities, but submitted bids which proposed alternative terms, even though this was against the rules of the tender. The DfT did not accept the proposed amendments. and decided to disqualify all the claimants’ bids from the competition.

Rail franchise contracts are excluded from the Public Contracts Regulations 2016, but a 2007 EU Regulation on Passenger Transport Services by Rail and Road imposes certain requirements as to fairness and transparency, and the claimants claimed that the DfT was in breach of these as well as general EU principles of transparency, proportionality and equal treatment.

The High Court found that there was no breach of the 2007 Regulation as to fairness and transparency, or general EU principles. Firstly, it decided that the DfT had not breached these principles in seeking to transfer the pension risks to the franchisees in the first place – nothing in EU or UK law prevents the transfer of risk from contracting authority to bidder, and authorities have a wide discretion to determine how risk and public finances should be balanced. The decision to allocate the majority of the risk to franchisees was one which the DfT was entitled to take, and although the size of the potential pensions liability was uncertain, bidders could assess and price the risk, as they could with any other risk.

Secondly, the court decided that there was no breach of fairness or transparency in the Invitation to Tender (ITT). The terms of the ITT had been clear that no amendments to the contract were permitted. The DfT had a wide discretion for dealing with non-compliance, but the court said reasonably well informed and normally diligent bidders should understand that such a discretion could only be exercised in a rational proportionate manner, and it was not necessary for the ITT to spell out exactly when non-compliance would lead to a bid being disqualified.

Finally, the court decided that the DfT’s decision to exercise its discretion so as to disqualify the claimants’ bids was lawful. Although the ITT provided for alternatives to disqualification (including disregarding the non-compliance or inviting bidders to re-submit their bids), there was a high risk of challenge by other bidders, if the DfT did not disqualify the claimants. In the circumstances, the DfT was entitled to avoid that risk by disqualifying.

Although this case concerned regulations which are specific to the railways sector, it also has more general application to challenges brought under the Public Contracts Regulations 2016. Bidders should take note of the need to ensure compliance with all terms set out in the ITT; the contracting authority’s wide discretion to impose unfavourable contract terms on bidders; and the similarly wide discretion afforded to contracting authorities to disqualify bids which do not comply with the rules.