Procurement in a Nutshell – Commercial dispute settlements
10th October, 2016
A preliminary ruling of the Court of Justice of the European Union (CJEU) has held that a procurement contract under the Public Sector Directive, to which the parties have changed the scope as a result of a settlement agreement, requires a new tendering procedure to be carried out.
This updates provides an overview of the decision in Finn Frogne A/S v Rigspolitiet ved Center for Beredskabskommunikation, Case C‑549/14, and the practical implications for contracting authorities (CAs).
The facts
A Danish public body – the Centre for Emergency Communication of the National Police (“CFB”) – awarded a €70 million contract for the supply and maintenance of a global communications system to Terma.
The parties encountered difficulties in meeting delivery deadlines, rendering performance of the contract as agreed impossible.
The result of negotiations was a settlement agreement reducing the scope of the contract to the supply of a radio communications system for regional police forces (worth approximately €4.69 million).
It was also agreed that CFB would purchase equipment worth approximately €6.7 million, which Terma had previously planned to lease to CFB under the original contract terms.
Prior to finalising the settlement, CFB published a voluntary transparency notice in the Official Journal of the European Union (OFEU) and allowed a ten-day standstill period to pass.
A challenge was brought to the national public procurement complaints board and progressed to the national courts, arguing that a new tendering procedure should have been initiated. The Danish Supreme Court requested a preliminary ruling from the CJEU.
The ruling
The question referred to the CJEU was, in essence:
“…whether Article 2 of Directive 2004/18 must be interpreted as meaning that, following the award of a public contract, a material amendment cannot be made to it without a new tendering procedure being initiated, even in the case where the amendment is, objectively, a type of settlement agreement, with both parties agreeing to mutual waivers, designed to bring an end to a dispute with an uncertain outcome, which arose from the difficulties encountered in the performance of the contract.”
The Court underlined the importance of the need for amendments to procurement contracts to respect the principle of equal treatment for the benefit of all operators potentially interested in a public contract.
It noted that the following points did not serve as justification for abandonment of this position:
- “the fact that a material amendment of the terms of a contract results not from the deliberate intention of the CA and the successful tenderer to renegotiate the terms of that contract, but from their intention to reach a settlement in order to resolve objective difficulties encountered in the performance of the contract”; and
- “the objectively unpredictable nature of the performance of certain aspects of the contract”.
Therefore the CJEU’s answer to the preliminary question was that:
“…Directive 2004/18, Article 2 [is] to be interpreted so that, following the award of a public contract, a material amendment cannot be made…without a new tendering procedure being initiated even in the case where that amendment is, objectively, a type of settlement agreement, with both parties agreeing to mutual waivers, designed to bring an end to a dispute….which arose from difficulties encountered in the performance of that contract.”
The final point made by the Court was that the position would have been different if the contract documents had made provision for the possibility of making changes to the contract, including ones which are material. In UK law, this is reflected by regulation 72 of the PCR 2015 which sets out the permitted modifications to procurement and includes where the modification is provided for in the initial procurement documents under a “clear, precise and unequivocal review clause”.
Why is this important?
CAs will need to think carefully about their approach to resolving disputes as the implication of the preliminary ruling is that changes proposed by a settlement agreement are constrained by the provisions of regulation 72.
The topic of modifications to contracts, particularly of the nature of a reduction in scope, as in Finn, is of relevance in the current climate of Brexit uncertainty.
Continued pressure on public sector budgets could prompt the consideration of, or the need for, contract review and re-negotiation of contracts, resulting in modification.
In a previous update we outlined the variations permitted by regulation 72. CAs must have these limitations in mind in the context of any decision which will amount to the re-scaling of a contract.
Where a proposed modification does not fit into any of the categories set out by regulation 72, a new contract must be procured.
CAs might be tempted to incorporate broad clauses into contracts in an attempt to capture a variety of circumstances within the permitted modification rule.
Such an approach is unlikely to succeed however, as highlighted by the CJEU’s reminder that contractual provisions must “fix the detailed rules for the application of that possibility”.
Compliance is critical. Amended contracts which should have been advertised in the OJEU face the most draconian public procurement remedy of ineffectiveness, and the offending CA may also be required to pay damages.
How can I find out more?
If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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