Could the Finn Frogne case law get any weirder? The strange case of the partial termination of a parking concession (Conseil d’État, N°s 409728, 409799)

© Erwin Wurm

© Erwin Wurm

In its Decision of 15 November 2017 in the case of the Commune d'Aix-en-Provence and the Societe d'économie mixte d'équipement du Pays d'Aix (SEMEPA) (N°s 409728, 409799, the ‘SEMEPA Decision’), the Conseil d’État applied the new French rules on the modification of concession contracts that transpose Art 43 of the Concessions Directive (Dir 2014/23/EU). In the SEMEPA Decision, the Conseil d’État followed an approach that resembles very closely that of the Court of Justice of the European Union in its Judgment 7 September 2016 in Finn Frogne, C-549/14, EU:C:2016:634 (see here, which the Conseil d’État does however not mention), and decided that the partial termination of a concession contract for the exploitation of street and underground parking sites in Aix-en-Provence in a way that changed the overall nature of the contract was illegal. The SEMEPA Decision leaves an important factual element unexplored—ie the potential existence of an in-house relationship between the contracting authority and the concessionaire—which raises some questions as to the scope and limits of the applicability of the modification and termination rules derived from the 2014 Public Procurement Package to in-house providing structures.

Regardless of that, in itself, the Decision of the Conseil d’État is remarkable (and puzzling) for the extreme brevity of the justification given for the conclusion that the partial termination of the concession contract was illegal. In my view, the only plausible explanation for this extremely brief justification by the Conseil d’État is the even weirder background of the dispute, which involves a rebellious rejection by the municipality of Aix-en-Provence of a legal reform that transfers the competence for the management of (certain types of) parking sites to a higher level of regional administration (the ‘métropole d’Aix-Marseille-Provence’). In this post, I briefly address these two aspects of a truly interesting case that Prof François Lichère brought to my attention—for which I am grateful.

The illegality of the partial termination of the concession contract

In the case at hand, the municipality of Aix-en-Provence had entered into a series of concession contracts with SEMEPA for the exploitation of street and underground parking sites in that city—the oldest of which dated back from 29 December 1986. SEMEPA is a mixed economy company in which the municipality holds a controlling stake and appoints the majority of the board of directors (ie a body governed by public law and, prima facie, an in-house entity). On 9 June 2016, the municipality decided to partially terminate one of the concession agreements, and this decision was brought under judicial review. On this specific point, the Decision of the Conseil d’État establishes that

Considering, in the first place, that under the terms of Article 55 of the Ordinance of 29 January 2016 on concession contracts, applicable by virtue of Article 78 thereof to the modification of concession contracts in force prior to the entry into force of the Ordinance: ‘the conditions in which a concession contract can be modified during its term without a new concession award procedure are established by implementing regulation. Such modifications cannot change the overall nature of the concession contract. / Where the execution of the concession contract cannot be carried out without a modification contrary to the terms of this Ordinance, the concession contract can be terminated by the conceding authority’; under the terms of Article of the Decree of 1 February 2016 which sets implementing rules for the application of this Ordinance: ‘A concession contract can be modified in the following cases: (…) 5 Where the modifications, of whichever value, are not substantial. / A modification is considered substantial where it changes the global nature of the concession contract. In any case, a modification is substantial where any of the following conditions is met: / a) it introduces conditions which, had they been part of the initial concession award procedure, would have attracted additional participants in the concession award procedure, or allowed for the admission of candidates or tenderers other than those initially admitted, or for the acceptance of a tender other than that originally accepted. b) it changes the economic balance of the concession in favour of the concessionaire in a manner which was not provided for in the initial concession (…);

Considering that it is proven that the agreement concluded on 29 December 1986 between the municipality of Aix-en-Provence and SEMEPA, which had as its object the concession of the management of a public service of off-street parking and a public service of on-street parking, constituted, in fact and notably from the characteristics of its financial equilibrium, a single agreement; that, even if the municipality of Aix-en-Provence and SEMEPA declared to have proceeded to the ‘partial termination’ of that agreement, the agreement of 9 June 2016 had as its object a modification of the initial concession contract; that this modification needs to be view, in regard to its extension [ie the fact that it covered a large number of the parking sites initially covered], as changing the global nature of the initial contract; that it [the modification] introduced, in addition, conditions which, had they been part of the initial concession award procedure, could have attracted additional participants, or allowed for the admission of candidates or tenderers other than those initially admitted, or for the acceptance of a tender other than that originally accepted; that, consequently, [the challenge] based on the fact that this modification of the agreement of 29 December 1986 was adopted in breach of the rules for the modification of concession contracts is such as to create serious doubts as to its validity (paras 19-20, own translation from French).

As mentioned above, the Decision of the Conseil d’État in SEMEPA seems aligned with the Finn Frogne Judgment of the Court of Justice in the sense that it considers that a material reduction of the scope of the concession contract is able to change its nature and thus determine the illegality of the modification. However, in Finn Frogne the change in the nature of the contract derived (at least partially) from the fact that the partial termination resulted in a supply (and installation?) contract, rather than a concession. This is not the case in SEMEPA and it is hard to disentangle the two reasons given by the Conseil d’État in the same para (20): that the material reduction was such as to alter the global nature of the contract AND one that, had it been part of the initial award procedure, would have created different competition conditions and possibly led to a different award decision. From that perspective, the SEMEPA Decision does not make much to contribute to a proper understanding of the several grounds prohibiting different types of illegal (concession) contract modifications.

Additionally, given that SEMEPA is an in-house entity (or at least that is what seems to derive from the discussion in the next paragraph of the Decision, see below), the Conseil d’État missed an opportunity to clarify whether the applicability of the rules on contract modification in this specific case result solely from an (expansive) interpretation of the domestic law, or rather derive from the rules in the Concession Directive and/or general principles of EU public procurement law—which is, however, a tricky issue best saved for another time.

Procurement law to the rescue? Background to the partial termination of the concession

Going back to the SEMEPA Decision, and as also mentioned above, the only plausible explanation I can find for the extremely shallow and formalistic analysis and the brief justification given by the Conseil d’État for the finding of illegal modification is the even weirder background of the dispute, which is described in the following terms:

Considering, in the second place, that in a communication of 20 June 2016, published on the [Aix-en-Provence] municipality’s website, it indicated that the City Council had sold eight ‘off-street’ parking sites to SEMEPA, which had until then been exploiting them in the framework of a public service delegation, that this sale would allow the municipality to ‘avoid the obligation of gratuitously transmitting its parking sites to the [métropole d’Aix-Marseille-Provence], which the law required’, that ‘such parking sites constitute an estate, which the municipality has created, that its inhabitants have paid for, et [which] it would have been abnormall to have to donate them [to the métropole d’Aix-Marseille-Provence]’, and that ‘to those who doubt that this sale contributes to take the parking policy from the elected, to transfer it to the non-elected, without any guarantee that such policy will be preserved, it will be put that the exact opposite will happen: SEMEPA is a mixed economy company managed by a board of directors in which the elected from the municipality are the majority. The tariffs will continue to be controlled by the municipality; this will form part of the contract between both partners. In addition, SEMEPA’s annual activity report is presented annually to the City Council’; … proceeding to the … modification of the [concession] contract of 29 December 1986, and to the transfer of the off-street parking sites to SEMEPA, the Municipality and SEMEPA had as the sole goal to prevent the exercise, by the métropole d’Aix-Marseille-Provence of the power to regulate parking sites which it is given with effect from 1 January 2018the [challenge] based on the fact that the [modification] of 9 June 2016 had an illicit object and had to be considered an ‘abuse of power’ is such as to create serious doubts as to its validity  (paras 21, own translation from French).

Now, that explains everything! Except the need to use public procurement law at all in a situation of such clear fraudulent use of contractual mechanisms to avoid mandatory public law duties …

 

In-depth discussions on contract modifications at the Danish Association for Public Procurement

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I had the honour of being invited to speak at the workshop on "Contract Changes in a European Perspective" organised by the Danish Association for Public Procurement (Dansk Forening for Udbudsret), where I shared thoughts with academic colleagues that have been researching on the topic for a long time--such as Prof Steen Treumer, Dr Piotr Bogdanowicz and Dr Carina Risvig Hamer--as well as with practitioners, such as Erik Kjær-Hansen, facing the increasingly complex task of advising contracting authorities and economic operators.

In my presentation, I covered general issues concerning the interaction between contract modifications and competition for public contracts (slides below), Piotr concentrated on specific interpretive difficulties raised by Article 72 of Directive 2014/24/EU, and the general discussion raised interesting topics based on Danish practice--which is rather sophisticated, and also in a state of shock after the CJEU's Finn Frogne decision of last year (see here).

In my view, there are significant challenges derived from the extension of EU rules to the execution phase of public contracts and the pro-competitive logic that generally inspires the rules in Article 72 of Directive 2014/24/EU, as well as the previous case law of the CJEU, is limited and bound to continue hitting the wall of unnecessary inflexibility of procurement procedures unless some more commercially-oriented sophistication is introduced in future case law (which should limit, if not reverse, Finn Frogne).

In the meantime, there is notable pressure on lawyers involved in the drafting of contract modification clauses, which are after an impossible mix of flexibility and predictability. Definitely an area where further discussions are needed. If you want to get involved in the conversation, please feel free to email me at a.sanchez-graells@bristol.ac.uk (or comment below).

Is allocating airport space to groundhandling operators, even if only temporarily, subject to eu utilities procurement rules? (AG Opinion in C-701/15)

In his Opinion of 3 May 2017 in the case of Malpensa Logistica Europa,
C-701/15, EU:C:2017:332, Advocate General Campos Sánchez-Bordona has considered the extent to which an airport management company is under a duty to carry out a tendering procedure when temporarily allocating certain airport facilities to groundhandling services companies, under the rules of Directive 2004/17/EC on utilities procurement and Directive 96/67/EC on access to groundhandling market at EU airports.

In the case at hand, the body managing the Milan Malpensa airport (SEA) carried out a competitive procedure for the allocation of certain areas within the airport to groundhandling operators. Both Beta-Trans and Malpensa Logistica submitted bids in that selection procedure for the performance of handling activities at the airport. Beta-Trans was successful. However, it was unable to occupy the area assigned to it because the space was not yet ready and had to be fitted out. SEA therefore gave Beta-Trans the temporary use of a hangar so that it could commence its groundhandling activities immediately. The allocation of the hangar was merely temporary until the ‘final area’ was ready for use (scheduled for July 2017) (AGO in C-701/15, paras 22-23). The decision to temporarily allocate the hangar to Beta-Trans was challenged by Malpensa Logistica on the basis that this should also have been subjected to a (separate) public selection procedure.

In general terms, I think it is clear that a procedure for the allocation of airport space to groundhandling operators authorised to provide services in that airport should not be covered by the utilities procurement directive (either the 2004 version, or the current 2014 version, or the 2014 concessions directive) because the body managing the airport is not procuring services from those companies when it takes the space allocation decision. This could have led to a rather straightforward subjection of SEA's decision to the specific procedures for access to groundhandling only, which did not require such competitive tendering. However, the referring court had indicated that, under relevant case law of the Italian Consiglio di Stato, domestic public procurement legislation transposing Directive 2004/17/EC governed the concession of areas within airports for the provision of groundhandling services. Since the award of those concessions came within the material scope of the legislation on special sectors, a public selection procedure had to be conducted (AGO in C-701/15, para 25).

This is relevant because the Italian procurement rules (rectius, their interpretive case law) may impose requirements that go beyond those derived from Directive 96/67/EC on access to groundhandling markets and its Italian transposition. Therefore, the main legal issue concerns a clash between the Italian instruments transposing EU rules, rather than between the EU rules themselves. However, both layers of legislation need to be coordinated in order to ensure regulatory consistency--and the Opinion of AG Campos seems to show that there may be underlying coordination issues concerning the definition of public contracts that remain unaddressed. Additionally, the case is interesting in the flexibility that AG Campos tries to create for temporary 'substitutory' measures under the groundhandling market access rules, which may however not be exportable to decisions actually covered by the procurement rules. Each of these issues is discussed in turn below.

Difficulties concerning the concept of public contract?

On the domestic peculiarities of the case, AG Campos indicates that the "fact that both sets of national provisions ‘are derived from EU law’ ... does not prevent the Italian legislature from requiring that public selection procedures apply in the case of allocations of areas within airports ... [even if they] are not covered by Directive 2004/17. Whilst that directive certainly requires that contracts falling within its scope be awarded in accordance with its provisions, there is nothing to prevent a Member State from deciding, on its own initiative, to extend those rules to other contractual arrangements" (AGO in C-701/15, para 45).  While the principle behind this statement seems correct in so far as Directive 96/67/EC is a liberalisation instrument rather than a maximum harmonisation directive, it seems to me that the instrument and the reasons used by Italian law to impose additional requirements deserve additional scrutiny.

There can be a problem if the sole reason why the Consiglio di Stato mandates compliance with domestic rules transposing Directive 2004/17/EC in decisions involving the allocation of rights to use areas within airports for the provision of groundhandling services (which are not concessions, in the technical meaning of EU procurement rules) is that it considers these decisions "within the material scope of the legislation on special sectors [procurement]" (AGO in C-701/15, para 25). This would be a misinterpretation of the relevant EU rules because, as rightly concluded by AG Campos, given that this is an arrangement akin to the rental of the relevant space by the contracting entity (which receives the relevant fees rather than paying any pecuniary compensation), the allocation of the right to use "airport facilities to a supplier so that the latter can provide groundhandling services to third parties cannot be classified as a public service contract for the purpose of Article 1(2)(a) and (d) of Directive 2004/17, with the result that the relationship referred to in the main proceedings falls outside the scope of that directive" (AGO in C-701/15, para 53). In my view, such misinterpretation should not be saved on the basis of the Member States' abstract ability of creating requirements beyond those in Directive 2004/17/EC.

If the Consiglio di Stato case law solely (or primarily) relies on an improper interpretation of the domestic rules in relation with EU rules (which cannot be ascertained on the basis of the information in the Opinion), Italian law would not be respecting the material scope of EU public procurement rules because it would be distorting (ie expanding) the definition of public contract--both under Art 1(2)(a) Dir 2004/17/EC, and under the equivalent provisions of the 2014 EU public procurement rules, including the definition of services concessions in Art 5(1)(b) Dir 2014/23/EU. This could be important because, in the absence of separate/explicit domestic rules explicitly subjecting these decisions to competitive tendering, it is questionable that the case law of the Consiglio di Stato can be seen in compliance with the supremacy of EU law (in terms of respecting the interpretation of the concept of public contract and public procurement by the CJEU, which continues to gain prominence in recent cases such as Falk Pharma or Remondis) and the duty of consistent interpretation--as well as raising issues about the possibility of expanding the scope of legislation through case law under Italian constitutional rules, which I am in no position to assess.

Also, while the deviation from the concept of public contract may be seen not to create problems in this specific instance because the (possibly wrong) interpretation embedded in the case law of the Consiglio di Stato results in overcompliance, this can be an issue in terms of ensuring a level playing field across the EU in utilities sectors. Therefore, in my opinion, this is an issue that could merit close assessment in relation with the Italian transposition of the 2014 EU Public Procurement Package.

The scope for temporary 'substitutory' measures

The second aspect of the Malpensa Logistica Europa Opinion that I find relevant concerns AG Campos' approach to the requirements applicable to the temporary allocation of the use of the hangar as a substitutory measure. In that regard, he submits to the Court that the analysis should proceed as follows:

... SEA awarded Beta-Trans the definitive airport facilities as the result of a competitive selection procedure in which Malpensa Logistica also participated. ... the assignment of the temporary hangar ... came about because the area which had been definitively awarded was not ready.
These factors (the temporary nature of the hangar and the existence of an earlier competitive procedure) may be relevant in determining whether SEA complied with Article 16(2) of Directive 96/67. Since this provision allows the managing body a broad discretion, subject to the [obligation to to observe, when allocating areas or facilities within airports, ‘relevant, objective, transparent and non-discriminatory rules and criteria’], responsibility for assessing it lies with the national courts.
It should also be borne in mind that the objectives of Directive 96/67 include encouraging the presence of new suppliers of groundhandling services and that one of the criteria for assigning available space within airports is to promote ‘effective and fair’ competition between all operators, ‘including new entrants in the field’. Effective competition precisely requires the removal of barriers preventing the entry of new operators. From that perspective, the principles of objectivity, transparency and non-discrimination may justify decisions on the allocation of areas which take account of the situation of suppliers of groundhandling services already in place and their possible dominance in the provision of those services at a given airport (AGO in C-701/15, paras 73-75, footnotes omitted).

I find this reasoning interesting because it suggests that the adoption of substitutory measures aimed at facilitating competition on a temporary or anticipatory basis is allowable where the deciding entity is under an obligation to adopt decisions in compliance with 'relevant, objective, transparent and non-discriminatory rules and criteria'. This could be important because, at least functionally, it would imply that having carried out a competitive procedure for a specific object (ie the space allocated on a permanent or definitive basis) provides legal cover for a temporary modification of the object of the authorisation or licence to use that object (ie the temporary assignment of alternative space). This makes commercial sense and avoids situations where the effects expected from the initial competitive procedure can be delayed or frustrated.

However, when compared with the rules on contract modification under the EU procurement rules, one can wonder if the same flexible and commercially-oriented approach could pass legal muster. Given that delays are common in public contracts (most likely, that was also the case for the lack of availability of the definitive premises at Malpensa), it would be interesting to see how the analysis would play out if it was a public contractor to offer an alternative, temporary solution to a contracting authority or entity. In that case, my guess is that this would be assessed as a contract modification of difficult assessment under value-based thresholds, and probably subjected to an analysis of whether the modification is substantial (cfr Art 72(4) Dir 2014/24/EU, Art 80(4) Dir 2014/25/EU and Art 43(4) DIr 2014/23/EU), which could easily lead to a finding that the temporary substitutory measure was not allowed--unless the ECJ would be willing to deviate from recent decisions, such as Finn Frogne.

Of course, this falls short from showing a stark internal contradiction between different sets of rules within the broader system of EU economic law, but I think that it does indicate that the internal market logic--and even the pro-competitive logic--that underlies the system can create opposing normative criteria, unless they are reconciled with some checks and balances based on commercial considerations. Not that this is bound to carry legal weight, but it may help construct a different parameter of evaluation closer to the concept of market economy agent, which could provide some additional consistency in the area of EU economic law.

Some thoughts on recent ECJ case law at ERA's annual conference on European Procurement Law

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One more year, it has been a pleasure to participate in ERA's Annual Conference on European Public Procurement Law, and to exchange views with practitioners and policy-makers about recent developments and future challenges in this important area of EU economic law. It has also been an honour to contribute to the celebrations of ERA's 25 years of good work towards improving our knowledge of EU law.

This year, I was invited to provide some critical remarks on recent case law of the ECJ in some areas of practical relevance and, in particular, on case law concerning:

  1. the rules on subcontracting and teaming or consortium bidding,
  2. the rules on contract modification and termination; and
  3. the scope of the concessions Directive.

My main remarks concentrated on

  1. the difficulties of keeping the right balance between preserving the maximum possible procedural flexibility to ensure participation in tenders by groupings of economic operators (loosely defined) and allowing the contracting authority to scrutinise the technical and economic standing of joint bidders--while ensuring that competition rules are respected and the supreme and directly effective provisions of the TFEU (notably Art 101) are enforced at all levels of procurement activity;
  2. the challenges in adapting a commercially-oriented approach to the adjudication of disputes at execution phase where the risks of discriminatory or anti-competitive procurement are largely absent; and
  3. the limited advances made so far in fine tuning the definition of a concession contract, in particular in cases not involving relatively straightforward instances of improper use of the label 'concession' (such as using it to refer to licences or authorisations), or not involving the need to differentiate the scope of application of the rules in what is now Dir 2014/23 and competing frameworks, such as the Services Directive or the Transport Regulation.

The slides I used appear below. The presentation was recorded and will soon be available (keep an eye on @how2crackanut for details).

CJEU ignores commercial reality and sets unjustified contractual boilerplate requirements for contractual modifications (C-549/14)

In its Judgment of 7 September 2016 in Finn Frogne, C-549/14, EU:C:2016:634, the European Court of Justice (ECJ) issued guidance on the requirements (and constraints) derived from the principle of equal treatment in situations where the difficulties in the performance of a contract are such that the contracting authority decides to settle its early termination in a way that implies a material amendment to the initial contract. This case is relevant in the early stages of the new rules on contract modification and termination in Articles 72 and 73 of Directive 2014/24. However, the compatibility between the Finn Frogne Judgment and these new rules raises several questions.

In Finn Frogne, and according to the rather limited facts given in the Judgment, the dispute concerned the contract for the supply of a global communications system common to all emergency response services and for the maintenance of that system for several years, which was awarded after a competitive dialogue. The execution of the contract was subsequently delayed due to difficulties for which neither the contracting authority nor the supplier accepted responsibility (in the terms of the ECJ, both parties disagreed "as to which party was responsible for making it impossible to perform the contract as stipulated", para 10), which eventually led them to enter into a settlement involving the reduction of the contract and each party waiving all other rights arising from the original contract (para 11).

The main point of contention was that the settlement not only included the supply of equipment initially covered by the original contract (a radio communications system), but also the sale of two central server farms which the contractor had itself acquired with a view to leasing them to the contracting authority in performance of the original contract (paras 11 and 19). The settlement was the object of a voluntary ex ante transparency notice and subsequently challenged by a third party.

The legal issue in front of the ECJ 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 that contract" (para 27). Or, in simple terms, whether settling the disputes that had made the commercial relationship between the supplier and the contracting authority non-viable in a way that implied a substantive amendment of the initial contract breached the principle of equal treatment and the obligation of transparency.

In Finn Frogne, the ECJ first took the opportunity to clarify its case law in pressetext (C‑454/06, EU:C:2008:351) and in Wall (C‑91/08, EU:C:2010:182) in the sense of emphasising that a material reduction of the scope of a public contract is equally caught by the restrictions on contract modification as a material extension of the scope of that contract. The reasons for this are as follows:

an amendment of the elements of a contract consisting in a reduction in the scope of that contract’s subject matter may result in it being brought within reach of a greater number of economic operators. Provided that the original scope of the contract meant that only certain undertakings were capable of presenting an application or submitting a tender, any reduction in the scope of that contract may result in that contract being of interest also to smaller economic operators. Moreover, since the minimum levels of ability required for a specific contract must ... be related and proportionate to the subject matter of the contract, a reduction in that contract’s scope is capable of resulting in a proportional reduction of the level of the abilities required of the candidates or tenderers (C-549/14, para 29).

This makes logical sense and is generally linked with the discussion of the division of contracts into lots and how to manage volume-related restrictions of competition for public contracts. However, in the context of a contractual settlement aimed at terminating the commercial relationship between the original (larger) provider and the contracting authority, this would lead to the conclusion that, in a case of breakdown of the commercial relationship implicit in all public contracts, "the principle of equal treatment and the obligation of transparency imply that a contracting authority cannot consider entering into a settlement to resolve the difficulties arising from the performance of a public contract without this automatically giving rise to the obligation to organise a new tendering procedure relating to the terms of that settlement" (para 24), which the referring court considered problematic.

Indeed, in my opinion, taking this position would create situations where the contracting authority is simply in a catch 22 by having to either remain committed to a non-functioning contractual relationship that is not allowing it to perform its public functions to which the contract is instrumental, or having to spend significant funds in the creation of an alternative commercial relationship that may not be the best solution for its needs--particularly if there are economies to be had from preserving part of the original contract or the preparatory actions which the parties had already undertaken in view of its performance.

Regardless of this clear practical difficulty, the ECJ considered that

neither (i) the fact that a material amendment of the terms of a contract results not from the deliberate intention of the contracting authority 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 nor (ii) the objectively unpredictable nature of the performance of certain aspects of the contract can provide justification for the decision to carry out that amendment without respecting the principle of equal treatment from which all operators potentially interested in a public contract must benefit (C-549/14, para 29).

Consequently, it stuck to its previous line of case law in Succhi di Frutta (C‑496/99 P, EU:C:2004:236) whereby any material modification of a public contract requires a new tender (para 38), but placed significant emphasis on the fact that

Although the principle of equal treatment and the obligation of transparency must be guaranteed even in regard to specific public contracts, this does not mean that the particular aspects of those contracts cannot be taken into account. That legal imperative and that practical necessity are reconciled, first, through strict compliance with the conditions of a contract as they were laid down in the contract documents up to the end of the implementation phase of that contract, but also, second, through the possibility of making express provision, in those documents, for the option for the contracting authority to adjust certain conditions, even material ones, of that contract after it has been awarded. By expressly providing for that option and setting the rules for the application thereof in those documents, the contracting authority ensures that all economic operators interested in participating in the procurement procedure are aware of that possibility from the outset and are therefore on an equal footing when formulating their respective tenders (C-549/14, para 37, emphasis added).

Ultimately, the ECJ ruled that

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 that contract 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 the outcome of which is uncertain, which arose from the difficulties encountered in the performance of that contract. The position would be different only if the contract documents provided for the possibility of adjusting certain conditions, even material ones, after the contract had been awarded and fixed the detailed rules for the application of that possibility (C-549/14, para 40, emphasis added).

In my view, the Finn Frogne Judgment must be criticised, at least for two reasons.

First, because it is very difficult to coordinate with the functional approach of Art 72 (and to some extent, 73) of Directive 2014/24 and gives excessive deference to the creation of contractual modification mechanisms. Strictly on the coordination aspect, it is worth stressing that Art 72 seems to be concerned with extensions of the contractual object, but not with its reduction (Art 72(4)(c)), and with qualitative or technical changes that would have allowed other tenderers to participate (Art 72(4)(a)). In the Finn Frogne case, there would have seemed to be more reason to challenge the content of the settlement on the basis that it changed one of those conditions (sale rather than lease of the central server farms) rather than on the change of overall value of the contract. 

Moreover, it is worth stressing that Art 72 also provides significant leeway for the modification of contracts up to 50% of their value (per modification, without a maximum cap) where a diligent contracting authority could not have foreseen the circumstances leading to the need for the contractual modification. Implicitly, the ECJ seems to indicate that every diligent contracting authority needs to foresee the possibility of the commercial relationship breaking down (which may be fair enough), but it also goes on to require a full contractual regulation of how such termination of the contractual relationship needs to unfold.

In that regard, it must be stressed that the requirements for the inclusion of "general" contractual review clauses foreseen in Art 72(1)(a) demands them to be "clear, precise and unequivocal", which may or not be coincidental with the ECJ's requirement for the contractual arrangements to fix "the detailed rules for the application [of] the possibility of adjusting certain conditions"--and which may not be (feasibly) applicable to "termination through settlement" clauses, whereby the parties must necessarily engage in negotiations.

In my view, the ECJ has fallen in the same problematic assumption of the possibility to design "perfect contracts" explicitly and exhaustively regulating all consequences of their (un)foreseeable non-viability or imperfection that also affects the provision in Art 72(1)(a) of Dir 2014/24 [for criticism, see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 428], but with the aggravating factor of not acknowledging that they may also be totally ineffective in scenarios where the commercial relationship is broken and, consequently, the parties need to settle, mediate, arbitrate or litigate those consequences regardless of the prior inclusion of such contractual clause.

The second reason why the Finn Frogne Judgment needs to be criticised is because it does not make any effort to attempt to distinguish between settlement conditions that remain strictly within the scope of the original contract and, consequently, only entail its partial enforcement (in its own terms) from settlements which include substantive changes in either their scope or the conditions for (partial) performance. While the first imply a consolidation of the effects already (de facto) created by the original contract, the latter seem to indicate the appearance of different needs of the contracting authority and/or different ways of satisfying them by the supplier. And, in my opinion, while the latter may justify the imposition of strict restrictions and (depending on the circumstances and the proportionality of the requirement) a new tender, the former do not seem to warrant such an approach.

These are issues that will necessarily arise again in litigation concerning the termination of contracts under the combined effect of Arts 72 and 73 of Directive 2014/24 and I would hope that the ECJ will adopt a more analytically rigorous approach when that happens because following the path started in Finn Frogne does not make commercial sense.

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.

Justifications for apparently abnormally low tenders need to be in sync with original tender (T-422/11)

In its Judgment in Computer Resources International (Luxembourg) v Commission, T-422/11, EU:T:2014:927, the General Court (GC) has clarified (although limited if any doubt could be bharboured) that the reasons provided by tenderers to justify the viability of their apparently abnormally low tenders need to be compatible with the terms of their initial tender.
 
In the case at hand, the apparent abnormality of the offer derived from the low manpower costs offered in relation to the provision of IT services in Luxembourg. Upon request of the contracting authority, the participating consortium tried to justify the low cost included in the tender on the basis that the services would (actually) be provided as a mix of presential support in Luxembourg and remote support from Romania. The contracting authority rejected this explanation as inadmissible and rejected the offer for being abnormally low. The GC has confirmed this decision (paras 53-55 and 82 and ff).
 
Maybe more interestingly, the GC also rejected an argument based on a sort of estoppel, whereby the participating consortium challenged the abnormally low consideration of costs that had, however, been accepted by the same contracting authority in a different procurement exercise. As a general point, the GC determined that the contracting authority
correctly took the view that a comparison of the prices proposed in the applicant’s tenders with the prices proposed within the context of other tendering procedures was irrelevant. Contrary to the applicant’s claim that no precedent is irrelevant when it is in the ‘same market’, the content of a tender must be examined in the light of the call for tenders to which it responds (T-422/11, para 69, emphasis added).
In my view, this is the only criticisable point in the Judgment (and an unnecessary one, given the lack of support for the applicant's arguments) and should be limited to the obiter dictum character it has in the specific circumstances of the case. Indeed, looking at the prices the contracting authority has accepted in contemporaneous and comparable procurement exercises would be relevant to the assessment of abnormality--not so much in order to create a (constructive) estoppel, but as an economic benchmark.

Other than that, the Judgment of the GC in Computer Resources International is an interesting summary and case study of the specific obligations imposed on contracting authorities that suspect that an offer (or some of its components) is abnormally low. This should serve as guidance in the interpretation and enforcement of article 69 of Directive 2014/24.

Latest GC on contract modification in #publicprocurement: Practical difficulties and the need for new rules in the 2013 Directive

In its Judgment of 31 January 2013 in case T-235/11 Spain v Commission (AVE), the General Court has set a very rigid position against the permissibility of contract modifications under EU public procurement rules. 

In a nutshell, and further developing the previous case law in Succhi di Frutta and Pressetext Nachrichtenagentur, the GC has declared that (non-insignificant) contract modifications amount to direct award of (complementary) public contracts and that, consequently, failure to do so in accordance with the rules of the Directives implies a breach of EU law by the contracting authority or entity.

Indeed, the GC has declared that:

69 [...] nor can the argument of the Kingdom of Spain that despite the alteration of certain of the characterizing elements of the services contracted, by keeping the contract initially concluded, the modification of the original contract cannot be considered substantial. As is clear from the case law, in order to ensure transparency of procedures and equal treatment of tenderers, amendments to the provisions of a public contract during its validity constitute a new award of the contract when they have characteristics substantially different from those of the original contract and therefore highlight the willingness of the parties to renegotiate the essential aspects of the contract (see, to that effect, the judgment of the Court of 5 October 2000, Commission / France, C-337/98, ECR p. I-8377, paragraphs 44 and 46, see, by analogy, Pressetext Nachrichtenagentur, paragraph 60 above, paragraph 34).
70 The modification of a contract in force may be considered material when it introduces conditions that, had they been included in the initial award procedure, would have allowed the participation of tenderers other than those initially admitted, or would have allowed the selection of a tender other than the initially selected. Also, a modification of an initial contract can be considered substantial when the contract extends largely to works not originally foreseen. An amendment can also be considered substantial when it changes the economic balance of the contract in favor of the contractor in a way that was not foreseen in the terms of the original contract (see, by analogy, Case Pressetext Nachrichtenagentur [C‑454/06, Rec. p. I‑4401] paragraphs 35 to 37).
71 In the present case, the technical specifications that were modified cannot be considered ancillary, but of a greater importance, as they relate, in particular, to the implementation of important works (such as the execution false tunnels, a viaduct, deepening of foundations, strengthening of technical armor blocks, extension of drainage works, etc..). Therefore, the Kingdom of Spain cannot claim that the work to be executed remains the one initially designed, ie, the high-speed train line, not that the object of the initial contract remained essentially unaltered. (T-231/11 at paras. 69-71, own translation from Spanish; emphasis added).
This position generates practical difficulties, particularly in technically complicated projects, where the use of non-modifiable fixed-price contracts could deter bidders from participating or could generate an increase of total procurement costs due to the need of contractors to create a 'financial cushion' in their offers to cover any unexpected needs for amendments in the scope of works.

This seems now recognized in the current version of the Compromise Text for the reform of current EU public procurement Directives, which includes a (more flexible) rule on contract modification that reduces the risk of (illegal) direct award of public contracts where modifications are justified and necessary.
Article 72 Modification of contracts during their term
1. A substantial modification of the provisions of a public contract or a framework agreement during its term shall be considered as a new award for the purposes of this Directive and shall require a new procurement procedure in accordance with this Directive. In the cases referred to in paragraphs 3, 4 or 5, modifications shall not be considered as substantial.
2. A modification of a contract or a framework agreement during its term shall be considered substantial within the meaning of paragraph 1, where it renders the contract or the framework agreement materially different in character from the one initially concluded. In any case, without prejudice to paragraphs 3, 4 or 5, a modification shall be considered substantial where one of the following conditions is met:
(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 an offer other than that originally accepted or would have attracted additional participants in the procurement procedure;
(b) the modification changes the economic balance of the contract or the framework agreement in favour of the contractor in a manner which was not provided for in the initial contract or framework agreement;
(c) the modification extends the scope of the contract or framework agreement considerably to encompass supplies, services or works not initially covered.
3. Modifications shall not be considered substantial within the meaning of paragraph 1 where they have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses or options. Such clauses shall state the scope and nature of possible modifications or options as well as the conditions under which they may be used. They shall not provide for modifications or options that would alter the overall nature of the contract or the framework agreement.
4. Where the value of a modification can be expressed in monetary terms, the modification shall not be considered to be substantial within the meaning of paragraph 1, where its value does not exceed the thresholds set out in Article 4 and where it is below 10% of the initial contract value, provided that the modification does not alter the overall nature of the contract or framework agreement. Where several successive modifications are made, the value shall be assessed on the basis of the net cumulative value of the successive modifications.
5. A modification shall not be considered to be substantial within the meaning of paragraph 1, where the following cumulative conditions are fulfilled:
(a) the need for modification has been brought about by circumstances which a diligent contracting authority could not foresee;
(b) the modification does not alter the overall nature of the contract;
(c) any increase in price is not higher than 50% of the value of the original contract or framework agreement.
Contracting authorities shall publish in the Official Journal of the European Union a notice on such modifications. Such notices shall contain the information set out in Annex VI part G and be published in accordance with Article 49. 
6. Without prejudice to paragraph 3, the substitution of a new contractor for the one to which the contracting authority had initially awarded the contract shall be considered a substantial modification within the meaning of paragraph 1. However, the first subparagraph shall not apply in the event of universal or partial succession into the position of the initial contractor, following corporate restructuring, including takeover, merger, […] acquisition or insolvency, of another economic operator that fulfils the criteria for qualitative selection initially established provided that this does not entail other substantial modifications to the contract and is not aimed at circumventing the application of this Directive.
As can be seen, the current proposal incorporates the (formalistic) criteria used by the GC in Spain v Commission (AVE), but also creates some flexibility both in terms of setting a value threshold that excludes the need to run a new procurement procedure to increase contract value of up to 10% (as long as the addition remains below EU thresholds, which does not seem to be a necessary or practical requirement), and recognizing that there are sets of circumstances where contract modifications are simply needed and, consequently, legitimate.

In my view, the adoption of new Article 72 in the 2013 EU public procurement Directive is much needed from a practical perspective, although the final wording could still be improved to enhance the effectiveness of its paragraph 4.