Virgin Trains’ challenge to prevent the Department for Transport (DfT) signing a contract stripping it of the West Coast Mainline franchise is unlikely to have escaped your attention this week.
The DfT’s decision to award the contract to FirstGroup has been met by fury by Virgin boss, Sir Richard Branson and has catalysed an unprecedented public and back-bench campaign calling for the Government to review a procurement decision. Over 150,000 members of the public have signed a petition to force a debate in Parliament on this issue.
Just hours before DfT was due to sign the contract Virgin launched a formal legal challenge in the High Court to prevent the DfT handing control to FirstGroup. Is the challenge a case of sour grapes? Should Virgin just accept that it lost on commercial grounds? Or, are there more serious issues at play here? This article explores Virgin’s right to challenge the Government’s decision and considers the merits of doing so.
Virgin’s cause for complaint
Virgin has questioned the basis of FirstGroup’s business plan (which promises an increase in passenger numbers and payment of £9.6 billion to the Treasury over 13 years) and claim that, on the basis of its experience, the bid can not be sustainable.
Virgin’s claim is for Judicial Review of DfT’s procurement process and the basis of assessment for this contract. Virgin’s complaint seems to be grounded in the belief that the DfT failed to properly assess the risks to taxpayers and customers in delivering FirstGroup’s bid over the contract period. Virgin contends that DfT failed to properly risk-adjust FirstGroup’s bid on evaluation, and that FirstGroup’s offer was riskier and not as deliverable as their own.
In particular, Virgin has raised issue with FirstGroup’s higher premium payments offered in the latter years of the franchise (which it argues enabled First Group’s offer to be larger overall), as well as the relatively low default fee offered (£235 million) which Virgin contends “goes nowhere near covering the level of risk”.
Commentary in the media also raises concerns regarding FirstGroup’s ability to generate the sort of revenues projected. History warns against the risk of taking on over-ambitious franchisees, where such contracts have been cut short due to financial difficulties experienced on the contract (as happened with GNER and National Express). Further concern is that it will be the consumer who suffers, with high payment pledges being realised through fares increases and decreasing service quality.
Whilst these points are valid cause for concern, are they grounds for formal legal challenge of the contract decision?
Legal basis for challenge?
Under Public Procurement law unsuccessful contractors can mount a formal challenge if they consider that the contracting authority has failed to run the procurement process transparently, or if the process has caused unfairness or inequality to them.
If an unsuccessful bidder has grounds for complaint and lodges a claim under the Public Procurement regime before commencement of the contract, the contract award will automatically be suspended until the issue is resolved. This is a useful strategic tool, and may allow an unsuccessful bidder opportunity to glean further information from the authority and provide breathing space to scrutinise the evaluation process, before the contract is awarded. In the best case scenario, the Court may overturn the authority’s decision in favour of the petitioning bidder. However this process will inevitably take time, come with substantial cost risk, and be commercially unpleasant.
Interestingly, Virgin’s challenge does not appear to be brought purely on Public Procurement grounds. Perhaps because the Procurement itself was fundamentally sound? If the bidding documentation clearly outlined the basis on which DfT were going to evaluate bidders and DfT followed the process then Virgin would struggle with a legal challenge in the Procurement regime.
If however, Virgin’s case is that the bidding process itself was flawed (as tougher financial conditions and risk assessment should have been factored into DfT’s evaluation process), then it could turn to the Judicial Review process – this appears to be the strategy that Virgin has opted for and it’s a bold move.
Whether or not a decision can or will be judicially reviewed will be assessed by the courts, however it will likely take into consideration the public importance of the review function and the consequences of the decision. At best, a Judicial Review will scrutinise the basis of the decision and appeal it, if successful.
If Virgin can show that this decision affects the legitimate expectations of the public (for instance, the expectation that the successful contractor could sustain the contract for the full term, without substantial fare increases/fall in service), then the courts may consider the decision is reviewable.
In Virgin’s corner is the now apparent public interest underpinning DfT’s decision. As well as the public petition, Labour has also publically called upon the Government to delay awarding the contract until the decision can be scrutinised; the Transport Select Committee and the Public Accounts Committee have stated their intention to review the decision following return from recess on 12 September 2012. This will no doubt assist Virgin at least initially in bringing its case.
However, following the initial step, Virgin may struggle to meet the high hurdles required to succeed in Judicial Review proceedings. Virgin would likely need to establish that the DfT’s decision is “so unreasonable that no reasonable authority could ever have come to it” and that the DfT took into account irrelevant matters and/or failed to consider relevant matters when reaching its decision. In practice this will be difficult for Virgin.
As an alternative ground, Virgin may be better placed to argue procedural unfairness. Whilst the DfT was not required to consult, Virgin may still have success in arguing that the consultation process was flawed and that it should have an essential element of fair process for the decision to have been scrutinised before award.
Whilst Virgin may be unlikely to succeed at Judicial Review, its decision to launch Judicial Review proceedings may be a strategic one. This approach may indeed buy Virgin ‘a stay of execution’ and prevent DfT awarding the contract to FirstGroup at least in the short term. At the very least, practically, the act of lodging the claim at Court may give Virgin sufficient time to allow Parliament to return from recess and consider its options.
As ever, there is a fine line in running such tactics. If unsuccessful in its Judicial Review claim, Virgin could, on a very public stage, face commercial embarrassment and an expensive bill to boot. However, if Virgin can persuade Parliament to review the decision and if Parliament considers FirstGroup’s business plan to be unsustainable, (provided its bid ‘beats’ all other tenderers involved) Virgin could secure a ‘win’ in circumstances where perhaps it had little legal basis to challenge.