EFTA Court reverses position on liability threshold for procurement damages (Fosen-Linjen II, E-7/18)

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In its Judgment of 1 August 2019 in Fosen-Linjen AS, supported by Næringslivets Hovedorganisasjon (NHO) v AtB AS (E-7/18, Fosen-Linjen II), the EFTA Court has remarkably reversed its earlier position on the liability threshold for procurement damages claims, which it had previously established in its Judgment of 31 October 2017 in (E-16/16, Fosen-Linjen I ).

I had strongly criticised the original Fosen-Linjen I Judgment in this blog (here and here), at a seminar at the University of Bergen and, in extended detail, in A Sanchez-Graells, ‘You Can’t Be Serious: Critical Reflections on the Liability Threshold for Damages Claims for Breach of EU Public Procurement Law After the EFTA Court’s Fosen-Linjen Opinion' (2018) 1(1) Nordic Journal of European Law 1-23.

Therefore, I am truly glad to see this outcome of the Norwegian Supreme Court’s (creative) referral of the case to the EFTA Court for a second opinion.

It will be recalled that, in Fosen-Linjen I, the EFTA Court controversially found that

A simple breach of public procurement law is in itself sufficient to trigger the liability of the contracting authority to compensate the person harmed for the damage incurred, pursuant to Article 2(1)(c) of Directive 89/665/EEC, provided that the other conditions for the award of damages are met, including, in particular, the condition of a causal link (E-16/16, para 82).

In a 180-degree U-turn, in Fosen-Linjen II, the EFTA Court has now rather established that

... Article 2(1)(c) of the Remedies Directive does not require that any breach of the rules governing public procurement in itself is sufficient to award damages for the loss of profit to persons harmed by an infringement of EEA public procurement rules (E-7/18, para 121).

To be sure, this reversal is likely to generate further commentary (we are thinking of a special issue to collect some different views, so stay tuned) but my hot take is that with the Fosen-Linjen II Judgment, the EFTA Court has corrected the excesses of the earlier Fosen-Linjen I approach and (re)aligned EEA with EU law in the area of liability in damages for breaches of public procurement law.

Important EFTA case on procurement damages: Was the court of one mind, and will the CJEU follow? (E-16/16)

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In its Judgment of 31 October 2017 in Fosen-Linjen AS v AtB AS, the EFTA Court issued an important Opinion on the interpretation of the procurement Remedies Directive (Dir 89/665/EEC, as amended by Dir 2007/66/EC) and, in particular, on the conditions for the recognition of a right to damages compensation where the contracting authority uses an illegal award criterion and subsequently decides to cancel the tender for that reason. That is, cases where it is clear (and acknowledged by the contracting authority itself) that the procurement procedure was not fully compliant with substantive EU/EEA public procurement rules--which comes to constrain the legal analysis to the question whether the irregularity is such as to allow disappointed tenderers to claim damages compensation.

The Fosen-Linjen case raised a number of issues in the six questions sent to the EFTA Court, such as the threshold for liability, evidentiary requirements, causation, exoneration causes and due diligence requirements. All of them are important but, in my view, the main relevance of the case concerns the threshold of liability, on which the EFTA Court found that 

A simple breach of public procurement law is in itself sufficient to trigger the liability of the contracting authority to compensate the person harmed for the damage incurred, pursuant to Article 2(1)(c) of Directive 89/665/EEC, provided that the other conditions for the award of damages are met, including, in particular, the condition of a causal link (E-16/16, para 82).

The EFTA Court reached this position in answer to a series of questions and sub-questions concerning whether liability under the Remedies Directive was conditional upon the contracting authority having deviated markedly from a justifiable course of action, upon it having incurred a material error that justified a finding of culpability under a general assessment, or upon it having incurred in an inexcusable'material, gross and obvious error' (question 1), or whether liability can be triggered under a test of 'sufficiently qualified breach' where the contracting authority was left with no discretion as to how to interpret or apply the infringed substantive rule (question 2). 

In the case at hand, the EFTA Court decided to group these questions and address them together. In my view, this has been determinative of the outcome of the case. Had the Court addressed the questions sequentially, and inverting the order, it would have been possible to establish that a breach of a substantive provision for which interpretation and application the contracting authority has no discretion constitutes a 'sufficiently serious breach' of EU/EEA procurement law triggering liability (if all other requirements are met) (question 2), which would have rendered the other issues (question 1) moot and unnecessary in this case. By choosing not to do so, the EFTA Court grabbed an opportunity to influence the development of EU/EEA law in the area of procurement remedies in a way that I am not sure will be productive in the long run, particularly because the rather extreme position taken by the EFTA Court--ie that any simple breach of EU/EEA procurement law suffices to generate liability for damages--was not really necessary under the circumstances and does not easily sit with previous developments in the case law of the Court of Justice of the European Union (CJEU).

Ultimately, this finding is controversial because of (1) the way the EFTA Court couches the deviation of liability standards under the Remedies Directive and under the general doctrine of State liability for breach of EU/EEA law, as well as (2) due to the fact that the EFTA Court engages in contradictory normative assessments in the reasoning that leads to this conclusion--which makes the interpretation and operationalisation of its main finding rather tricky. In my view, these two points of contention make it unclear that the CJEU--which is not bound by the EFTA Court's interpretation--will adopt the same approach. I will explore these two issues in turn.

Is public procurement special?

One of the normative and doctrinal issues in the background of the discussion surrounding the threshold of liability under the Remedies Directive concerns its relationship with the general doctrine of State liability for breach of EU/EEA law. The position taken by the EFTA Court on this point is not very clear--despite explicit submissions to that effect by the parties, the Norwegian government and the EFTA Surveillance Authority--but it seems to indicate that the Court considers that procurement law is somehow special.

While it is commonly accepted that the State liability doctrine is premised on the existence of a sufficiently serious breach of EU/EEA law (as seminally established in Francovich and Others, C‑6/90 and C‑9/90, EU:C:1991:428, para 35, and in Brasserie du Pêcheur and Factortame, C‑46/93 and C‑48/93, EU:C:1996:79, paras 31 and 51, and consistently reiterated by the CJEU, most recently in Ullens de Schooten, C-268/15, EU:C:2016:874, para 41), the EFTA Court is not willing to retain this threshold of liability in the area of procurement. As the EFTA Court indicated

... it has already been established that a national rule making the award of damages conditional on proof of fault or fraud would make actions for damages more difficult and costly, thereby impairing the full effectiveness of the public procurement rules ... The same must apply where there exists a general exclusion or a limitation of the remedy of damages to only specific cases. This would be the case, for example, if only breaches of a certain gravity would be considered sufficient to trigger the contracting authority’s liability, whereas minor breaches would allow the contracting authority to incur no liability (E-16/16, para 77, emphasis added).

In other words, the EFTA Court is not willing to tolerate a situation where what could be termed de minimis breaches of EU/EEA public procurement law remain unchallenged and, in that regard, the Court seems to have been influenced by the European Commission's position that 'any infringement of public procurement law should be followed up and should not be left unattended because the breach is not “sufficiently serious”' (E-16/16, para 59). The EFTA Court thus seems to consider that the establishment of an almost absolute right to claim damages is necessary to ensure the desirable effectiveness of EU/EEA procurement law.

The Court also considers that '[a] requirement that only a breach of a certain gravity may give rise to damages could also run contrary to the objective of creating equal conditions for the remedies available in the context of public procurement. Depending on the circumstances, a breach of the same provision on EEA public procurement could lead to liability in one EEA State while not giving rise to damages in another EEA State' (E-16/16, para 78), which is by no means obvious, in particular if the preliminary reference mechanism works appropriately. 

In my opinion, this general line of reasoning conflates two separate issues. First, whether any infringement of EU/EEA substantive law should trigger a ground for the review of the procurement decision concerned and, if justified, to set it aside. Second, whether any infringement of EU/EEA substantive law should provide a right to claim damages. By conflating both issues, the EFTA Court implicitly assumes that claims for damages are the only effective remedy. The Court does not take into account the existence of public oversight mechanisms able to 'pick up' on those de minimis infringements of EU/EEA public procurement law, and seems not to think it possible for disappointed tenderers to exercise rights of review in the absence of the financial incentives resulting from damages claims. This comes both to establish a hierarchy of remedies that is absent in the Remedies Directive [see A Sanchez-Graells, '"If It Ain't Broke, Don't Fix It"? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts' in S Torricelli & F Folliot Lalliot (eds), Contrôles et contentieux des contrats publics (Bruylant, 2018) forthc.], and to create the same risk of deformation of EU tort law that we have witnessed in other areas of EU economic law [see O Odudu & A Sanchez-Graells, 'The interface of EU and national tort law: Competition law', in P Giliker (ed), Research Handbook on EU Tort Law (Elgar, 2017); as well as the rest of contributions to that volume].

From a normative perspective, I find this approach problematic due to the perverse incentives it creates--and which I think the EFTA Court was somehow aware of (see below). Moreover, I am not persuaded that this would necessarily be the position of the CJEU, which has in the past held that Art.2(1)(c) of Directive 89/665 'gives concrete expression to the principle of State liability for loss and damage caused to individuals as a result of breaches of EU law for which the State can be held responsible' (Combinatie Spijker Infrabouw-De Jonge Konstruktie and Others, C-568/08, EU:C:2010:751, para 87, emphasis added). From that perspective, and even if the CJEU is likely to continue developing its line of case law that prevents the creation of additional requirements for the existence of liability in damages (as is clear it did by rejecting the imposition of a requirement of fault in Strabag and Others, C-314/09, EU:C:2010:567), I see no reason why it would accept that the requirement for a 'sufficiently serious breach' does not apply in this sub-field of State liability.

In my view, this is particularly important because the position taken by the EFTA Court was both unnecessary for the resolution of the case, and not explicitly premised on a deviation of the State liability doctrine, which leaves the CJEU an easy way out if it decides to take a different approach in the future. In my view, this is likely, because from a normative point of view, the position taken by the EFTA Court is not easily tenable.

What are the implications for contracting authorities and tenderers?

One of the important normative aspects on which the EFTA Court's Fosen-Linjen Judgment rests concerns the incentives that different liability thresholds and requirements create. In that regard, the Court seems to adopt two contradictory normative standpoints in dealing with the twin question of the threshold for liability and the causality requirement--which are indivisibly interlinked in its overall finding that 'A simple breach of public procurement law is in itself sufficient to trigger the liability ... provided that the other conditions for the award of damages are met, including, in particular, the condition of a causal link' (E-16/16, para 82, emphasis added). The contradiction is as follows.

On the one hand, the EFTA Court considers that a simple infringement of EU/EEA public procurement rules must suffice to trigger liability because

... damages seek to achieve a three-fold objective: to compensate for any losses suffered; to restore confidence in the effectiveness of the applicable legal framework; and to deter contracting authorities from acting in such a manner, which will improve future compliance with the applicable rules. Liability through damages may also provide a strong incentive for diligence in the preparation of the tender procedure, which will, ultimately, prevent the waste of resources and compel the contracting authority to evaluate the particular market’s features. Were liability to be excluded, this may lead to a lack of restraint of the contracting authority (E-16/16, para 76, emphasis added).

Thus, in this part of the Judgment, the EFTA Court considers a high likelihood of liability a proper incentive for adequate diligence and decision-making on the part of the contracting authority.

Conversely, on the other hand, when assessing the causality requirements for the recognition of a right to damages compensation (in the context of the fourth question referred by the Norwegian court), the EFTA Court stresses that

... there must be a balance between the different interests at stake. While liability of the contracting authority for any errors committed promotes, in principle, the overall compliance with the applicable legal framework, exaggerated liability of the contracting authority could lead to excessive avoidance costs, reduce the flexibility of the applicable framework and may even lead to the unjust enrichment of an unsuccessful tenderer. Furthermore, excessive liability may provide an incentive for a contracting authority to complete award procedures, that were evidently unlawful, or impinge upon the freedom to contract (E-16/16, para 101, emphasis added). 

This clearly indicates that the existence of liability needs to be constrained or modulated. The EFTA Court seems to want to do so by establishing a complicated approach to causality requirements that would distinguish between those applicable to claims for negative and positive damages (ie bid costs and loss of profits). Even in the context of the first question, the EFTA Court had already shown some inconsistency when establishing that 'a claim for damages can only succeed if certain other conditions are fulfilled, such as the condition that there must be a sufficient causal link between the infringement committed and the damage incurred' (E-16/16, para 81, emphasis added)--which, however, is not equally reflected in the wording of its general finding, which only makes reference to 'the condition of a causal link' (para 82). 

In my view, the approach (implicitly) followed by the EFTA Court is not better than the alternative approach of having closely stuck to a requirement for a sufficient breach of EU/EEA public procurement rules. Even if a combination of low liability threshold (simple breach) and high causality requirements ('sufficient causality') could lead to the same practical results that a requirement for 'sufficiently serious breach', the EFTA approach creates legal uncertainty and more scope for divergence across EU/EEA jurisdictions, not the least because causation is within the remit of domestic law. more importantly, it can create a wave of litigation based on any (minimal, formal, irrelevant) errors in the conduct of procurement procedures in an attempt to test the boundaries of that test.

In my view, on the whole, it would have been preferable to stick to the general framework of the State action doctrine as specified in the Remedies Directive, which is compatible with a finding of a requirement for there to be a 'sufficiently serious breach' of EU/EEA procurement law and, at the same time, with a finding that breaching a provision for which interpretation and application the contracting authority has no discretion (eg the obligation to be in a position to verify the content of tenders against its requirements and award criteria, as in Fosen-Linjen) suffices to trigger liability (the same way that the mere lack of transposition of a Directive triggers State liability under the general test). Therefore, I very much hope that this issue is brought to the CJEU soon, and I would strongly advocate for the CJEU to explicitly reject the EFTA Court's approach.

 

A bunch of perfectly useless deposit-guarantee schemes will do ( EFTA Court E-16/11 #icesave )

In its recent Judgment of 28 January 2013 in Case E-16/11 EFTA Surveillance Authority and Commission v Iceland (Icesave Judgment), the EFTA Court has given an interpretation to Directive 94/19/EC on deposit-guarantee schemes (even as amended by Directive 2009/14/EC) that significantly reduces the potential effectiveness of EU/EEA/EFTA banking and security deposit-guarantee schemes. This is worrying.

According to the EFTA Court,
135 [...] pursuant to Article 3 of the Directive, EEA States have to introduce and officially recognise a deposit-guarantee scheme. Moreover, they have to fulfil certain supervisory tasks in order to ensure the proper functioning of the deposit-guarantee scheme. However, it is not envisaged in that provision that EEA States have to ensure the payment of aggregate deposits in all circumstances.
139 It appears that under the new version of the provision EEA States are obliged to ensure a certain level of coverage. Whether this obligation is limited to a banking crisis of a certain size would require further assessment. However, that question can be left open here since […] Directive 2009/14 is not applicable in the present case.
140 At any rate, the rewording of Article 7 of the Directive shows that the European legislature considered substantial change necessary to extend the responsibility of the EEA States beyond the establishment of an effective framework.
141 This supports the view that the obligation on the EEA States under the version of the provision applicable in the case at hand is limited to ensuring that national rules which require a coverage level of at least EUR 20 000 are maintained or adopted.
144 […] it must be held that Article 7 of the Directive does not lay down an obligation on the State and its authorities to ensure compensation if a deposit-guarantee scheme is unable to cope with its obligations in the event of a systemic crisis.
148 […] an obligation on the State and its national authorities to ensure compensation if a deposit-guarantee scheme is unable to cope with its obligations under exceptional circumstances such as in a systemic crisis cannot be derived from that provision [Article 10 of the Directive].
172 […] recital 24 in the preamble to the Directive states that liability of a State and its competent authorities in respect of depositors is precluded “if they have ensured that one or more schemes guaranteeing deposits or credit institutions themselves and ensuring the compensation or protection of depositors under the conditions prescribed in this Directive have been introduced and officially recognized.”
176 […] the reservation set out in recital 24 in the preamble to the Directive aims expressly to preclude an excessive shifting to the State of the costs arising from a major banking failure.
178 In view of the above, the Court holds that the Directive does not envisage that the defendant itself must ensure payments to depositors in the Icesave branches in the Netherlands and the United Kingdom, in accordance with Articles 7 and 10 of the Directive, in a systemic crisis of the magnitude experienced in Iceland. (E-16/11 at paras 135 to 178, emphasis added).
In my view, this jeopardises the effectiveness of deposit-guarantee schemes (DGS) by allowing Member States and their supervision entities to shield behind formalities linked to the design of such DGS and to reject any liability potentially derived from their errors of assessment or insufficient solvency requirements in case of a systemic crisis. The issue of State liability is discussed in such formalistic terms that the Icesave Judgment seems completely disconnected from the general supervisory trends required in an area where risk assessment and risk-avoidance / risk-mitigation policies impose a much more sophisticated exercise to all other players (namely, the banks and the DGSs themselves). 

The simplicity of the analysis, which omits any appraisal of the proportionality of the regulatory measures carried out by the State (both in terms of their suitability and their sufficiency), sets a bad precedent in an area where the incentive to set per-se rules in discharge of State liabilities seem already excessive.

Moreover, regardless of the attempt to restrict these findings to the 'pre-2009' version of the Directive, the extremely broad wording of paragraphs 144, 172 and 176 of the Icesave Judgment indicate otherwise. Particularly in view of the fact that at paragraph 139 the EFTA Court hints at the inapplicability of the 'post-2009' version to 'a banking crisis of a certain size[, which] would require further assessment'--and, indeed, this seems to be the most plausible (future) interpretation, unless a significant reversal of the Icesave Judgment is intended.

In this day and age, it looks implausible to have (significant) non-systemic banking crises (which, at any rate, would not be a significant problem if the existing mechanisms are properly in place and States keep any type of financial muscle). And, after the Icesave Judgment, I think that the most optimistic assessment is that, in cases of (ever more likely) systemic crises, the current 'guarantees' are perfectly useless and leave savers and investors unprotected and on their own. And this does not seem to be the best way to trigger investor confidence and to support the reconstruction of the banking industry.


Coupled with the recent reduction of capital requirements derived from the delayed start of Basel III, this 'new configuration' of DGS' as absolute safeguards of Member States' liability  (limited, seemingly, to setting them up even if improperly or insufficiently), seems a worrying sign that the banking industry and, what is worse, its supervision is back to business as usual. I think I will start looking for a way to burn my limited savings before somebody else does it for me.