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Dispute settlement and new tenders

ECJ dreamstime 32904197LexisPSL Public Law analyses a ruling that the Public Sector Directive required a new tendering procedure to be carried out where the parties had made changes to the scope of a public contract, even though they were made pursuant to a settlement of a dispute.

While the Court of Justice ruling in in C-549/14: Finn Frogne A/S v Rigspolitiet ved Center for Beredskabskommunikation concerned the old Directive (Directive 2004/18/EC), parties operating under the new regime should also take note.

What are the practical implications of this case?

Parties to public contracts need to think carefully about the public procurement rules when settling disputes. If a change is made to the contract in the course of settlement, for instance in order to allow for continued performance/avoid termination, it may trigger the requirement to advertise a new tender process, in which case publishing a voluntary transparency notice and observing a standstill period may not be enough to avoid a challenge.

This is so even where Directive 2014/24/EU on public procurement applies (which repealed and replaced Directive 2004/18/EC). The new Directive sets out a comprehensive set of principles that determine when a contract or framework agreement may be modified without a new procurement (none of which specifically refers to settlement scenarios) and, like Directive 2004/18/EC, establishes the principles of equal treatment, nondiscrimination and transparency.

Directive 2014/24/EU was implemented in England, Wales and Northern Ireland by the Public Contracts Regulations 2015, SI 2015/102 (PCR 2015). The provisions of the PCR 2015 which govern modifications to public contracts during their term apply whether the contract was awarded before or after the 26 February 2015 (ie the date the PCR 2015 came into force).

For further reading on these rules, including which types of contract amendments are caught under PCR 2015 and the provision for drafting 'clear, precise and unequivocal review clauses' to allow for modification, see: Crown Commercial Service: Guidance on amendments to contracts during their term

What was the background?

CFB, a Danish public authority, awarded a contract to Terma for the supply and maintenance of a communications system. During the course of the contract, difficulties arose in meeting delivery deadlines, and the parties entered into a settlement agreement which provided for the scope of the contract to be reduced and for CFB to purchase equipment from Terma (which Terma was originally planning to lease to CFB under the original contract). CFB published a voluntary transparency notice regarding the settlement in the Official Journal of the European Union and observed a ten- day standstill period. Frogne (which had not tendered for the contract originally) brought a challenge to the national public procurement complaints board, and then to the national courts, arguing that a new tendering procedure was required.

Directive 2004/18/EC, art 2 required contracting authorities to observe the principles of equal treatment of economic operators and non-discrimination and to act in a transparent way.

At first instance, it was decided that although there had been a material amendment to the contract, it was not intended to circumvent the public procurement rules. CFB had published a voluntary transparency notice regarding the settlement, observed a ten-day standstill period and waited for the ruling of the complaints board on the possible suspensive effect of Frogne's challenge. The principles of equal treatment and transparency did not preclude the conclusion of the settlement provided that there was a 'close link' between the settlement and the original contract (and the services provided under it). The court in this case considered there was a close link with regard to the revised scope, but not with regard to the sale of equipment. Nevertheless, the court held that CFB had not made manifest errors of assessment in concluding that the settlement agreement with Terma was permitted without prior publication of a contract notice under the EU rules and the agreement should not be declared invalid.

Upon appeal, the Danish Supreme Court requested a preliminary ruling from the Court of Justice on the following question:

'Is Article 2 of Directive 2004/18, read in conjunction with the judgments of the Court of Justice of the European Union of 19 June 2008, pressetext Nachrichtenagentur (C-454/06, EU:C:2008:351), and of 13 April 2010, Wall (C-91/08, EU:C:2010:182), to be interpreted as meaning that a settlement agreement which introduces limitations on and amendments to the services to be provided as originally agreed by the parties under a contract previously put out to tender and also mutual agreement to waive the application of remedies for breach in order to avoid subsequent litigation constitutes a contract which in itself requires a tendering procedure, in a situation where performance of the original contract has encountered difficulties?'

What did the court decide?

The court ruled that Directive 2004/18/EC, art 2 was to be interpreted so that, following the award of a public contract, a material amendment cannot be made to it without a new tendering procedure, even where the amendment is, objectively, a type of settlement agreement, in which both parties agree to mutual waivers, which is designed to resolve a dispute arising from difficulties in the performing the contract.

This was so even though there had been a reduction in scope (the court noting that a smaller scope project may be within the reach of a greater number of tenderers). Nor did it matter that there had been no deliberate intention to renegotiate the terms of the contract, but rather the amendment arose following objective difficulties in performing a complex project.

The position would only be different if the contract documents contained express provisions allowing for the possibility of variation of certain conditions (even material ones) and fixing detailed rules for the application of that possibility - pressetext Nachrichtenagentur GmbH v Austria C-454/06, [2008] All ER (D) 244 (Jun)

Case details

  • Court: Court of Justice of the European Union (Eighth Chamber)
  • Judge: D Šváby (Rapporteur), President of the Chamber, J Malenovsky and M Vilaras, judges
  • Date of judgment: 7 September 2016

This analysis was originally published in LexisPSL Public Law and written by Holly Nankivell and Jon Gilbert. If you would like to read more quality content like this, then register for a free 1 week trial of LexisPSL.