Consequences of ineffectiveness under reg.101 Public Contracts Regulations 2015

Reg.101 of the Public Contracts Regulations 2015 (PCR2015) determines the consequences of the ineffectiveness of a contract declared under reg.99 PCR2015. According to reg.101(1) PCR2015, the declaration of ineffectiveness determines that the contract is to be considered to be prospectively, but not retrospectively, ineffective as from the time when the declaration is made and, accordingly, those obligations under the contract which at that time have yet to be performed are not to be performed.

This means that the effects of the declaration of ineffectiveness are ex nunc or from now on, which is a possibility allowed for under Art 2d(2) of Directive 89/665 as amended by Directive 2007/66 (here). In this case, though, the limitation of the effects of the ineffectiveness to the future triggers an obligation to impose additional penalties, which are dealt with by reg.102 PCR2015. Pedro concurs.

Given that such decision can be appealed and, consequently, the declaration of ineffectiveness can be stayed, reg.101(2) PCR2015 clarifies that, in case of exercise of any power under which the orders or decisions of the Court may be stayed, at the end of any period during which a declaration of ineffectiveness is stayed, the contract is to be considered to have been ineffective as from the time when the declaration had been made. Consequently, the practical effects of the declaration of ineffectiveness need to be adjusted to the time of the adoption of such declaration, even if that means that it gains some retrospective effectiveness upon confirmation (or lift of the stay).

In practical terms, reg.101(3) PCR2015 allows the Court making a declaration of ineffectiveness to make any appropriate order addressing the implications of the declaration of ineffectiveness and
any consequential matters arising from the ineffectiveness. Such order can be made at the same time of the decision on ineffectiveness, or at any time after doing so. Reg. 101(4) PCR2015 further clarifies that such an order may, for example, address issues of restitution and compensation as between those parties to the contract who are parties to the proceedings so as to achieve an outcome which the Court considers to be just in all the circumstances.

Reg.101(5) PCR2015 regulates the possibility that the contracting authority and the contractor may have self-regulated the consequences of a declaration of ineffectiveness. In that case, for the contractual regime to have effect, it is necessary that the parties to the contract have agreed before the declaration of ineffectiveness and by contract any provisions regulating their mutual rights and obligations in the event of such a declaration being made. That is, the contractual regime applicable to the ineffectiveness needs to pre-exist the declaration of ineffectiveness so as to avoid strategic behaviour between the parties. 

In any case, should there be a contractual regulation of the consequences of the declaration of ineffectiveness, reg.101(6) PCR2015 determines that the Court must not exercise its power to make an order under reg.101(3) in any way which is inconsistent with those provisions, unless and to the extent that the Court considers them incompatible with the requirements in reg.101(1) or (2)--that is, unless they restrict the future ineffectiveness of the contract, considered from the date of the declaration.

One of the issues that is likely to trigger more litigation concerns any sort of compensation for loss or damage derived from the ineffectiveness of the contract (either contractual, or as a result of an issue of compensation under a Court order)--which, in my view, would run contrary to the effectiveness of the remedies Directive and, consequently, should not be allowed [in similar terms, see J Arnould, "Damages for performing an illegal contract: the other side of the mirror - comments on the three recent judgments of the French Council of State" (2008) 17(6) Public Procurement Law Review NA274-281]. 

This was an unresolved issue in the CJEU Judgment in Commission v Germany, C-503/04, EU:C:2007:432, para 36: "even if it were to be accepted that the principles of legal certainty and of the protection of legitimate expectations, the principle pacta sunt servanda and the right to property could be used against the contracting authority by the other party to the contract in the event of rescission, Member States cannot rely thereon to justify the non-implementation of a judgment" declaring the ineffectiveness of a public contract (emphasis added). 
In my view, such compensation of damages should not be allowed because it would entail a payment derived from an infringement of EU law that actually benefits a party intimately involved in the infringement. Moreover, the grounds for ineffectiveness are extremely limited and the infringements that trigger ineffectiveness are clear-cut and easy to monitor by the contractor, so that it is impossible for it to seriously claim lack of knowledge of the infringement (bad faith) for the purposes of claiming compensation [in similar terms, see S Treumer, "Towards an obligation to terminate contracts concluded in breach of the E.C. Public procurement rules - the end of the status of concluded public contracts as sacred cows" (2007) 16(6) Public Procurement Law Review 371-386, 381: "if for example the contract party has been fully aware or should have been fully aware that the public procurement rules have been disregarded, this will presumably reduce the consideration given to the interest of the contract party in maintaining the contract. It might even lead to the exclusion of consideration to this interest of the contract party in cases where they have been fully aware of violation of the rules combined with very active participation in the violation". For a slightly different approach and a discussion of the standard of diligence required from a contractor considering claims in this setting, see MA Simovart, "The new Remedies Directive: would a diligent businessman enter into ineffective procurement contract?" (2009)].