Delays in public procurement and liquidated damages (Dosi & Moretto, 2015): a further justification for new rules on modification and termination

In their recent paper, 'Procurement with Unenforceable Contract Time and the Law of Liquidated Damages' [(2015) 31(1) Journal of Law, Economics & Organisation 160-186], Cesare Dosi and Michele Moretto of the University of Padova find an interaction between the rules on liquidated damages for time overruns in public procurement and the (risky) bidding behaviour of tenderers.
More specifically, considering a scenario of insufficient (negative) incentives to meet time commitments due to suboptimal liquidated damages, they demonstrate that "[t]he inability to force sellers to meet their contractual obligations determines their bidding behavior. Conversely, bidding behavior alters the incentive to meet the contract time. In particular, by placing more aggressive bids, all bidders may become potential violators of the contractual agreement, and the more the bidders and/or the higher the expected cost volatility [of relevant inputs], the higher the probability of breach."

In my view, their general findings are interesting in themselves in the design of liquidated damages clauses to be included in procurement contracts. But, more importantly, their findings also stress a key justification for the new rules on contractual modifications and contract termination in Arts 72 and 73 of
Directive 2014/24, which need to serve to actually empower contracting authorities to enforce the terms of the original contract as awarded. In economic terms and from this perspective, these rules deserve both criticism and praise.

In terms of contractual modification, and from the perspective of creating red lines that enforce time commitments, the rules in the new Directive can be criticised because Art 72 does not specifically address the issue of modification of deadlines for the execution of the contract--which is left to the residual clause in Art 72(1)(e) "modifications [that], irrespective of their value, are not substantial", in relation to 72(4)(a) "the modification introduces conditions which, had they been part of the initial procurement procedure, would have allowed for the admission of other candidates than those initially selected or for the acceptance of a tender other than that originally accepted or would have attracted additional participants in the procurement procedure". This sets a very difficult standard when it comes to interpret whether a deadline is essential and its modification is, consequently, "substantial" to the contract overall. This restricts the possibility to limit time-related negotiations between contractors and contracting entities during the term of the contract and perpetuates a problem that ultimately depends on domestic rules in the Member States.

Secondly, in terms of contract termination, that criticism is carried over to the rules in art 73, as one of the main causes for contractual termination is derived from an infringement of Art 72. However, it is also worth stressing that there is the possibility to create  causes for termination other than those expressly established by the Directive, for instance, to strengthen the consequences for contractors to miss contractual deadlines. In that regard, it is interesting that Art 73 is open ended and could create regulatory space for Member States to develop effective time-related termination rules (eg imposing contractual termination for breach of predetermined contractual milestones). 

Moreover, it is also interesting to note that Art 57(4)(g) Dir 2014/24 allows contracting authorities to exclude operators "where the economic operator has shown significant or persistent deficiencies in the performance of a substantive requirement under a prior public contract, a prior contract with a contracting entity or a prior concession contract which led to early termination of that prior contract, damages or other comparable sanctions". This would, again, increase the impact of failing to meet contractual deadlines. And, overall, it would counter one of the issues raised by Dosi & Moretto in their model: "[t]he inability to force sellers to meet their contractual obligations", which in turn would "determin[e] their bidding behavior" in a less risky way, so that they make sure ex ante that they can comply with contractual deadlines and the overall risk of non-compliance is reduced.