Download PDF

Conflicts, Collusion, Conceptual Confusion: Integri Consultants Limited v Midlothian Council

November 2021

Introduction

In this case, Integri raised an action against Midlothian Council for payment of sums due under contracts for services. This judgment of the Scottish Court of Session, delivered on 20 October 2021, effectively dealt with an application to strike out part of the Defendant’s case.  The Court essentially considered two questions – (1) whether by lodging defences and contesting the jurisdiction of a previous Court, Midlothian Council had now effectively “approbated” (or ratified) the contracts so that it was barred from contesting the validity of the contracts in this action and (2) whether the Council’s allegations of collusion in the tendering process were sufficiently specific so as to give proper notice of fraud.

The judgment is interesting because it dealt with a situation where an individual had previously worked for a public authority and had gone to work for a private organisation which had then tendered for work opportunities with that organisation.  Such situations arise not infrequently in practice and can give rise to complications in ensuring equal treatment and avoidance of conflicts of interest when those private sector entities are involved in regulated tender processes.

Background

In 2019, Midlothian Council sought tenders for development and commercial management services in relation to commercial, development and construction projects. The appointment was structured so that the successful tenderer would be engaged on a contract for a fixed term (the “Term Contract”) and thereafter would be appointed on call-off contracts as required. The Term Contract stated that any dispute would be determined by a single arbitrator. The call-off contracts provided that all disputes would be subject to the exclusive jurisdiction of the Court of Session.

Integri raised an action for payment against the Council in Edinburgh Sheriff Court. Midlothian Council lodged two main defences, the first being that the action should be determined by arbitration and the second being that the Sheriff Court did not have the jurisdiction to determine the dispute and so the action should be dismissed.  The Sheriff Court action did not proceed further and instead Integri brought this action in the Court of Session.

Judgment

Approbation and Reprobation

Integri submitted that the Council had relied upon and therefore approbated the validity of the Term Contract and call off contracts in the Sheriff Court action and were therefore barred from reprobating their validity in the Court of Session action. The Scottish doctrine of approbation and reprobation provides that a party may not both accept and reject a contract.[1]

It argued that Midlothian Council had clearly and unequivocally relied upon the validity and effect of the contract by pleading it in their defence without it being accompanied by any “esto” qualification or reservation (e.g. “esto the contract is valid, which is denied”). Midlothian Council submitted that pleading it in their defence did not amount to approbation of the underlying factual position and in any event, in the circumstances of this case, the approbation and reprobation was not engaged.

The Court agreed with Midlothian Council that the doctrine did not apply in the facts or circumstances of the current case. Firstly, there was no inconsistency between the Council’s position in the Sheriff Court case and its position in the Court of Session action. In the Sheriff Court, the Council had not accepted that the contracts were valid but rather had attempted to assert the right to contest validity in the correct forum. When contesting jurisdiction, the Court held that it is not necessary for parties to plead an esto case on the merits as it would defeat the point of a prorogation of jurisdiction clause or arbitration clause if the parties had to enter into extensive pleadings on the merits in a forum which had no jurisdiction to decide on the merits.  The Court further found that in any event, the facts and the circumstances of the case did not meet the high test for approbation, which requires that ‘the approbatory acts must be so strong and express’.[2]

Collusion

In its submissions, the Council made allegations that the award of the term contract was obtained by Integri on an improper and collusive basis and on the basis of misrepresentations that they had tendered properly and without any conflicts of interest. This was primarily on the basis that one of the principals of Integri had been employed by the Council as a quantity surveyor and another had also been providing services to the Council through another company.  The Council argued that the relationship between that individual and certain senior Council officers had led to an understanding that the tender process would favour the claimant.  Furthermore, these Integri employees had been involved in drafting the documents used by the Council in the procurement process and had access to internal information relating to the tender process (including unrestricted access to the Council’s computer systems), all of which gave Integri an improper advantage and were not properly disclosed in the tender process.

It argued that no payment was therefore due to Integri as the contract that had been awarded was invalid ab initio under the common law (as an unlawful contract).  The claimant also took issue with that assertion, stating that the correct process if there were an undisclosed conflict would be to terminate the Term Contract pursuant to regulation 73(2) of the Public Contracts (Scotland) Regulations 2015 (the “PCRs”).

Integri invited the Court to exclude these allegations for a number of reasons, including:

1. There was no fair notice of what factual misrepresentation had been made during the course of the tendering procedure.  That was a necessary component in any allegation of collusion, properly alleged.
2. No questions had been asked about the tendering procedure or about access by officers and employees of Integri to procurement documentation and there was also no general duty of disclosure in respect of pre-contractual representation. Therefore, the tenderer had been under no obligation to reveal their prior involvement.
3. In its view, the case-law illustrated that a conflict of interest would only be relative where this had actually led to the award of the contract in favour of the organisation which was favoured by that conflict^[3].  The defendant had been unable to cite a relevant case of conflict of interest causative with the award of the Term Contract in this case.^[3]
4. Even if the provisions of the PCRs had been breached, the effect would have been that the contract would be terminated (payment due up to the date of termination) rather than treated as invalid ab initio (no payment due).

Midlothian Council submitted that its arguments provided ample specification of the nature of the misrepresentations made and the nature of the conflict of interest that undermined the validity of Integri’s tender. By its conduct, Integri had effectively represented it had tendered properly and without any conflict of interest, neither of which were true. Further, it argued that its submissions as to collusion were not intended to be allegations of fraud.

The Court accepted this position and the Judge commented that the parties had effectively been at cross-purposes as to the meaning of “collusion”. The Judge notedthat whilst the definition of collusion in Jowitt’s Dictionary of English Law stated that collusion may involve fraud, it does not necessarily need to.  In the Judge’s view, the defendant was using the word “collusion” in the sense used in the Oxford English Dictionary of “underhand scheming or working with another” (applied here, the officers of the Council and the individuals working for Integri with a pre-existing relationship),   That being the case, Integri’s argument as to fraud not being pled to the requisite standard fell away.

The Court ultimately held that Integri had failed to meet the high test for excluding answers from probation and the Council’s submissions had been sufficiently detailed so as to allow its case to go to a ‘proof before answer’, which is a hearing on both factual and legal issues, the relevant witnesses having given evidence to the Court.

Comment

Whilst this is a Scottish judgment, it is useful to understand the Court’s attitude to conflicts of interest and allegations of collusion in a tendering process.  It is important to emphasise that nothing has yet been proven in this case with regard to collusion or improper tendering.  Nevertheless it is an important reminder to contracting authorities and contractors to be aware of who has been involved in the early stages of a tender process and whether adequate disclosures have been made, in accordance with regulation 24 of the PCRs (both UK and Scotland).

It is of particular interest that the Judge has regarded there to be a realistic prospect of success of showing that the contract is void ab initio under the common law as opposed to just terminable under Regulation 73 of the PCSR (which includes a statutory right for certain irregularities at the tendering stage).  A declaration of ab initio voidness would put into doubt the right of a contractor to be paid for work carried out under the contract.

It will be interesting to see how the case progresses as it could have ramifications on contracts where conflicts of interest have not been adequately considered or disclosed, with the contract being declared invalid.

---

[1] (Bell Comm. II II 141)

[2] Highlands and Islands Airports Ltd v Shetland Islands Council [60]

[3] Counted4 Community Interest Company v Sunderland City Council [2015] EWHC 3898 TCC) at 31-33.

Download PDF