Public contracts are the end-result of a public procurement process undertaken by contracting authorities to purchase supplies or services in various sectors such as energy, transport, health and education.
Public authorities of the EU members spend a significant percentage of the GDP on the purchase of services and supplies.
Public procurement is regulated at EU level by various directives aimed at ensuring that contracting entities observe the principles of transparency, equal treatment and open competition in such processes.
The principle of transparency requires that the whole procurement process is carried out in an open manner. While public entities are free to determine the subject of public contracts according to their needs, including technical specifications and award criteria, economic operators need to be made aware in advance of the rules of the game and the decision-making process is recorded, reported and open to scrutiny to ensure that the actions of contracting authorities may be tested.
The principle of open competition is achieved through advertising. This is key as advertising creates publicity and increases competition by allowing economic operators to participate in public procurement processes.
The benefit will be reaped by the contracting entity and ultimately the end-consumer.
Equal treatment is another overarching principle governing tendering procedures.
Maintaining equality between economic operators is imperative to achieve a healthy competitive process. This principle requires that comparable situations are treated in a similar fashion.
These principles were at the heart of a preliminary ruling delivered recently by the Court of Justice of the European Union (CJEU).
The case arose following an award made by the Danish state of a public contract for the supply and maintenance of a global communications system common to all emergency response services worth millions to a company called Terma.
During the course of the contract, a dispute arose between Terma and Denmark over delivery deadlines.
The principle of transparency requires that the whole procurement process is carried out in an open manner
There were delays but following negotiations, a settlement of the dispute was reached between the parties, in terms of which the scope of the original contract awarded by Denmark was reduced to the supply of a radio communications system and the sale of server farms. The parties agreed to waive all other rights emanating from the original contract other than those arising from the settlement agreement.
Frogne, which had not participated in the tendering procedure for the original contract, challenged the settlement and argued that this constituted a material amendment to the original contract as the settlement covered the sale of server farms not covered by the original contract.
Denmark countered by contending that the principles of equal treatment and transparency did not preclude the conclusion of a settlement provided that there was a close link between the original contract and the services provided in connection with it.
The Danish Supreme Court referred the matter to CJEU for guidance on whether EU procurement rules prohibited a material amendment to a public contract following its award when such amendment is in the form of a settlement agreement where both parties agree to mutual waivers designed to bring an end to a dispute with an uncertain outcome.
The Luxembourg Court found that the terms of a settlement agreement could constitute an illegal modification to a public contract – indicating that the proper procedure in such situations would be for the contracting authority to initiate a new tendering procedure.
The court reached this conclusion on the basis of the principles of equal treatment and transparency that need to be observed even where the amendment of a public contract takes the form of a settlement designed to compromise a dispute.
Essentially the original contract was modified substantially such that its scope was brought within reach of economic operators who may not have otherwise been interested or eligible for the original contract.
The CJEU dismissed the argument that the parties had no intention to renegotiate the terms of the original contract and that the modification was the result of unpredictable difficulties encountered during the performance of the contract.
In finding that a new procedure should have been initiated, the court ruled that the contracting authority may retain the possibility of adjusting contractual conditions, even if material ones, after the award of the contract, provided the contract documents provide for modification mechanisms.
In this manner, all suppliers interested in participating in the procurement process would have been made aware of that possibility from the outset.
jgrech@demarcoassociates.com
Josette Grech is adviser on EU law at Guido de Marco & Associates.