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.

"National brands" and State aid: AG Whatelet on investing in "State branding" (C-533 & 536/12)

In his Opinion of 15 January 2014 in joined cases C-533/12 P and C-536/12 P SNCM v Corsica Ferries France, Advocate General Whatelet has addressed an interesting (and creative) argument concerning the protection of a "national brand" as a justification for the granting of public support that would otherwise constitute illegal State aid under Article 107 TFEU.

In the case at hand, and as part of a privatisation process, the French Republic had allegedly agreed to assume the costs of payment of excessive compensations for termination of employment and retirement of certain employees of a public undertaking. Regardless of the fact that the existence of such excessive compensations was also challenged, the French Republic claimed the protection of the national brand (ie, the reputation of French business conglomerates) as a justification for such public support to the privatised undertaking (or, rectius, its new owners). France considered that any social unrest derived from severance and pension payments within the context of the privatisation process would trigger significant strikes that would, in turn, create the image that the French State and its industrial conglomerates are not a reliable trading partner. As the argument goes, the protection of future business by French companies (or companies more closely linked to the French State) would justify such a (reputational) investment under the private investor test and, consequently, would exclude the existence of illegal State aid under Article 107 TFEU. More specifically, the French arguments were as follows:
72 . Furthermore, the French Republic considers that the payment of additional compensations is necessary to protect the brand image of the state. In support of his thesis, it refers to the risk that sympathy strikes would spread throughout the public sector and would have the effect of paralyzing the economic activity of enterprises in this sector.
73 . In this context, the French Republic claims that an epidemic of strikes would generate serious economic losses to the state. It refers to the abrupt disruption of contractual relationships between the companies at strike and their suppliers and customers, as well as to payment and supply difficulties that would force non-professional clients of public companies to switch to competing private companies.
74 . The French Republic therefore claims to have considered the avoidance of these dire economic consequences as the indirect material benefit that the state wished to obtain from the payment of additional compensations (Opinion in C-533 & 536/12 P, own translation from Spanish).
AG Whatelet disagrees with this argument very clearly and presents a set of very interesting remarks in paragraphs 76 to 96 of his Opinion. In short summary, I think that the most remarkable points of AG Whatelet's wrap-up of the (limited) existing case law concerned with the existence and protection (through investment) of a "national brand" are the following: 
  1. In the absence of specific circumstances and a specially compelling motivation, protecting the brand image of the state as a global investor in the economy cannot be a sufficient justification to demonstrate the long-term economic rationality of the assumption of additional costs such as additional employment and retirement-related compensation (para 78).
  2. As AG Jacobs and CJEU made clear in joined cases C-278/92, C-279/92 and C-280/92 Spain v Commission, it is difficult to accept that a state holding would worry so much about the damage that its global image would suffer as a result of the failure of one of its companies (or as a result of social unrest related to its winding up or bankruptcy) so as to offer, just for that reason, huge sums as an incentive for a private company to take charge of it (paras 83-86).
  3. The same position was held by the GC in joined cases T-129/95 Neue Maxhütte Stahlwerke and Lech-Stahlwerke v Commission, where it also considered that "It is not credible that Bavaria have been obligated to pay a sum of money to a private company [...] to entice it to restructure [the company in question] in order to prevent that the bankruptcy of the latter could harm severely the reputation of the Land" (paras 87-90).
Hence, AG Whatelet concludes that, in the case at hand,
the General Court did not commit any error of law in concluding that "in the absence of special circumstances and without a particularly compelling motivation, the protection of the brand image of a Member State as a global investor in a market economy cannot constitute sufficient justification to demonstrate the long-term economic rationality of the assumption of additional costs such as additional severance pay" (Opinion in C-533 & 536/12 P, at para 91, own translation from Spanish).
And, as a matter of general principle, clearly indicates that 
I find it highly unlikely that the considerations made so far by the States on their brand image as global investors in a market economy can eventually circumvent the qualification of their decisions as State aid in light of the private investor test [...] the concerns raised by the Member States in relation to their brand image as global investors in a market economy, however noble they may be for other reasons, are far from those of a private investor, whether they relate to 'political costs' (in addition to the economic and social costs) of closing a business, "trade union or political pressure", the location of the failing firm in "in an area in social crisis" or, as in this case, the risk of sympathy strikes that would spread throughout the public sector. These considerations are absent of any prospect of profitability, even in the long term (Opinion in C-533 & 536/12 P, at paras 92 and 94, footnotes omitted and own translation from Spanish).
Ultimately, the rationale for this line of thought is that State aid rules' effectiveness would be significantly impaired if Member States can justify their public support decisions on the basis of the construction of their own "national brand". In my view, this is a very interesting Opinion and it is to be hoped that the CJEU will follow it and consolidate a very restrictive approach towards this type of justifications in the field of EU State aid law.