A note on Reg 73 of the Public Contracts Regulations (and by extension Art 73 of the EU Public Procurement Directive) [Guest post* by Dr Aris Christidis]

In this guest post, Dr Aris Christidis follows up on the issue of termination of contracts where the contracting authority has exceeded the limits of permissible contract modifications under Article 72 of Directive 2014/24/EU, focusing in particular on the shortcomings of Art 73 thereof and its transposition in the UK through reg.73 Public Contracts Regulations 2015.

A note on Regulation 73 of the Public Contracts Regulations (and by extension Article 73 of the EU Public Procurement Directive)

In this earlier post about the alleged unlawfulness of the NHSX contract modification, Albert argued that ‘the cause for termination could not be waived because reg.73 is meant as a safeguard against abuses of reg.72 and, thus, is unavoidably triggered the moment the boundaries of reg.72 are exceeded’.

I want to pick up on this point and provide some thoughts on the scope of Regulation 73 and by extension on Article 73 of the EU Public Procurement Directives.

Let me start by examining the position under the EU Directives. The 2014 directives have included a provision (Art 73 of Dir 2014/24/EU and the equivalent of Art 90 of Dir 2014/25/EU and Art 44 of Dir 2014/23/EU) which requires the Member States to empower their contracting authorities, under their national laws with the option of unilaterally terminating a contract during its term at least under the following three situations:

(a) the contract has been subject to a substantial modification, which would have required a new procurement procedure pursuant to Article 72;

(b) the contractor has, at the time of contract award, been in one of the situations referred to in Article 57(1) and should therefore have been excluded from the procurement procedure;

(c) the contract should not have been awarded to the contractor in view of a serious infringement of the obligations under the Treaties and this Directive that has been declared by the Court of Justice of the European Union in a procedure pursuant to Article 258 TFEU.

While such a remedial measure is in the right direction because it allows contracting authorities to correct their violations after a contract comes into effect, it does not address various issues on how this remedy is supposed to operate. These issues are to be determined solely by national laws.

Also, it is not clear why the only option for contracting authorities is to terminate a contract, instead of providing other remedial alternatives such as the shortening of the duration of the contract—similarly with the ineffectiveness remedy.

Surely, even if contracting authorities are under an obligation to terminate a contract, this should not be automatic. Public interest considerations such as the urgency of executing the contract should be carefully considered before any decision to prematurely discharge such a contract is made.

Finally, the EU legislator does not explain convincingly the rationale behind the reason why in the aforementioned violations the contracting authorities should have the right (rather than the obligation – see next section) to terminate an existing contract and why other violations should not necessarily constitute reasons to terminate an existing contract (e.g. finding of conflict of interest or direct awards).

Does Article 73 impose a positive obligation?

Undoubtedly, Article 73 (c) - unlike the other two– has a mandatory effect. This is because it concerns a violation that has been declared under Article 258 TFEU, which Member States must comply with under Article 260 TFEU.

The purpose of this provision seems to be to ensure that a duty of a Member State to terminate a contract is fulfilled as quickly as possible and avoid any possible cumbersome procedural issues that may be imposed under national law.

An issue that requires some consideration is what amounts to a ‘serious infringement’ that may lead to an obligation to terminate a contract (interestingly, the proposal for the 2014 directive (COM (2011) 896) did not refer to the wording ‘serious infringement’ rather it stated: ‘…a Member State has failed to fulfil its obligation under the Treaties…’).

Following the ruling of the CJEU in Waste (C-503/04), which concerned a decision under Article 258 TFEU, a ‘serious infringement’ will constitute any violation that restricts the fundamental freedoms of the internal market, in that case, the fact that an unlawful direct award had the effect of restricting other economic operators from providing the particular service. 

It is submitted that serious breach may constitute any violation that influences the outcome of competition and that termination of an existing contract seems relevant, inter alia, in the following situations: when a tender should have been excluded because of prior involvement of candidates in the submission of bids, when a conflict of interest is found or when a tender should have been rejected because it did not comply with tender conditions.

What seems to be certain is that a ‘serious infringement’ would most probably be regarded by the CJEU as any violation of the other two explicit reasons for termination as provided in the Article at hand - namely, violations with regards to the modification of contracts (see case C-601/10 Commission v Hellenic Republic available in French and Greek) and the entering to a contract with a provider who should have been disqualified from the awarding process.

This argument, in turn, raises the concern on whether the provisions of Article 73 are facultative or in effect contracting authorities are under an obligation to terminate a contract when the prescribed violations take place. In other words, whether EU law raises a positive obligation for contracting authorities.

On the one hand, the wording of this Article is clear: ‘Member States shall ensure that contracting authorities have the possibility… under the conditions determined by the applicable national law, to terminate a public contract during its term…’ (emphasis added).

On the other hand, this wording does not align with the rationale behind the adoption of this measure. According to Recital 112, ‘contracting authorities are sometimes faced with circumstances that require the early termination of public contracts in order to comply with obligations under EU law in the field of public procurement’ (emphasis added).

I lean towards the more formalistic interpretation, that is, there is no positive obligation. In my view, the Directive is not sufficiently clear on this and, as discussed below, the UK has not made termination a requirement but rather an option for the contracting authorities.

The implementation in the UK

Regulation 73 of the Public Contract Regulations 2015 (PCR) has transposed the EU law requirement of empowering contracting authorities to terminate an existing contract. Regulation 73 did not opt to include other violations that could give the right to a contracting authority to terminate an existing contract.

Two things should be noted about this unilateral power. The first is that Regulation 73(1) makes it clear that it is up to the discretion of a contracting authority to terminate a contract or not. It specifically states that ‘…contracting authorities shall ensure that every public contract which they award contains provisions enabling the contracting authority to terminate the contract where…’ (emphasis added; see for example the Model Contract for Services by the Government Legal Department at clause 33). Therefore, contracting authorities can simply refrain from exercising such power even if the relevant violations have taken place.

The second is that Regulation 73(3) clarifies that when provisions for termination are not provided within the terms of the contract, such power shall be an implied term of the contract. In other words, Regulation 73 overrides the absence of express contractual terms by providing a statutory basis for such unilateral power to be exercised.

In my view, Regulation 73 has little practical effect. In principle, it is a very good idea to empower contracting authorities to unilaterally terminate a contract. They are, indeed, in the best position to correct any unlawful acts especially when these are unintentional. Also, the disposal of such power minimises the possibility of litigation by third parties and ensures that any violations are remedied with minimum costs and in the public interest.

However, the way Article 73 was implemented in the UK shows the problematic design of this measure. There is nothing to compel contracting authorities to terminate an existing contract even if, on the face of it, they have violated the relevant rules. To require compliance, you need some form of external enforcement or recommendation. Otherwise, who is to determine whether the prescribed rules have been violated or not and who may induce a contracting authority to terminate a contract?

The only way for the government to be compelled to terminate a contract which is the result of unlawful modification or other serious infringement is if the Commission brought a case before the CJEU under Article 258 TFEU. In the current, COVID-19, and Brexit environment, I very much doubt that this will happen.

What if the government decides to terminate a contract under Regulation 73?

A final issue that perhaps requires some attention, is how are consequential matters between parties treated where the government decides to terminate the contract based on Regulation 73.

The first point to note is that Article 73 Directive 2014/24/EU does not give any indication as to how such consequential matters are to be regulated by the Member States and this is another problematic aspect of the design of this provision at the EU level.

Indeed, if the purpose of this remedial measure is to correct violations by returning a contract to the status quo ante then surely any compensation to the contractor due to early termination should be reasonable and proportionate.

Therefore, any form of redress must in principle be based on restitution, that is, a contractor must not be able to recover anything further that the value of what has been performed and has benefited the contracting authority.

The Commission had indicated that this is a requirement for the ineffectiveness remedy. In particular, Recital 21 of the Remedies Directive states that the objective to be achieved where the Member States lay down the rules which ensure ‘that the rights and obligations of the parties under the contract should cease to be enforced and performed’.

It goes on to say that ‘the consequences concerning the possible recovery of any sums which may have been paid, as well as all other forms of possible restitution, including restitution in value where restitution in kind is not possible, are to be determined by national law’. Similar careful thinking and considerations were not given for Article 73.

In the content of the PCR, Regulation 73(2) provides that consequential matters in case of termination should be regulated by express contractual provisions. Hence, the provisions of a contract itself will stipulate how these matters are to be regulated between parties and not some contract or administrative law principle.

The Model Contract for Services by the Government Legal Department provides some signs as to how the government will treat consequential matters in case of termination pursuant to Regulation 73. For instance, clause 34.5 (b) provides that in case of termination due to a substantial modification any costs from this termination should lie where they fall. This seems to be an appropriate form of compensation.

Some final thoughts

The current crisis has triggered a conversation about the design of the procurement rules all over the world. Perhaps this is also a good time both for the EU and the UK to think harder as to the scope of the exercise of unilateral termination powers by contracting authorities.

This is an excellent remedial tool. It is less costly and more time-efficient than any other form of enforcement when a contract has been concluded unlawfully. However, various issues need to be considered carefully. The following are some suggestions:

1. Careful consideration of the type of violations that should give rise to termination. Legislators could consider the gravity of the violation and perhaps make a distinction between violations that require termination and violations for which a contracting authority can exercise discretion as to whether to terminate or not.

2. An independent body with powers to compel contracting authorities to terminate or at least make suggestions to consider termination. In the UK, for instance, such power may be exercised by the Public Procurement Review Service which current remit does not allow the exercise such powers.

3. Clear indication as to how consequential matters are treated. As argued above, any compensation in case of unilateral termination due to violation of procurement rules should be based on restitution to align with the purpose of this remedy, which is to restore the public contract market in the status quo ante.

Dr Aris Christidis

Dr Aris Christidis is a Lecturer in Law at Newcastle Law School, which he joined in January 2018. He previously taught at the University of Nottingham, where he completed his PhD in December of 2018 (without corrections). He currently teaches Introduction to Business Law and Contract Law. Aris’ current research lies in public procurement law and the interaction of public with private law in the context of public contracts. His research interests are in comparative law, the law of obligations, public procurement law and in the economic analysis of law.

* Guest blogging at HTCAN: If you would like to contribute a blog post for How to Crack a Nut, please feel free to get in touch at a.sanchez-graells@bristol.ac.uk. Your proposals and contributions will be most warmly welcomed!

A very expensive slip of the pen? GC takes hard line in assessment of debriefing letter and awards compensation for loss of opportunity (T-299/11)

In its Judgment of 7 October 2015 in European Dynamics Luxembourg and Others v OHIM, T-299/11, EU:T:2015:757, the General Court of the Court of Justice of the European Union (GC) has once again revised the conclusion of framework agreements that include a cascade mechanism for the allocation of call-off contracts within the framework (see previous case Evropaïki Dynamiki v EASA, T-297/09, EU:T:2015:184 and comments here).

On this occasion, the GC considered that OHIM infringed the applicable procurement rules and determined that European Dynamics is entitled to compensation for the loss of an opportunity to be awarded the framework contract as the contractor ranked first in the cascade. Looking at the reasoning of the GC can be of interest.

In the Judgment, the GC finds that OHIM incurred in several substantive and formal errors in the evaluation of tenders leading up to the eventually quashed award decision. In my view, some of the substantive claims result from the not very careful drafting of the debriefing letter sent by OHIM to European Dynamics, which is very unfortunate. The point that I consider more troublesome from a practical perspective is as follows.

In the tender documentation, and amongst (very!) many other technical issues, tenderers were informed that part of the evaluation would rely on their project management strategy. As the GC explains (T-299/11, para 6), this was formulated in award criterion 1, according to which

[Award] Criterion 1: based on its methodology and experience, the tenderer must present the tasks and activities he/she would perform in terms of project management. This includes in particular (but not exclusively):

a. Progress control [that is to say checking the progress of the work];

b. Issue management process;

c. Change management process;

d. Escalations;

e. Lessons learnt programme;

f. Communications plan;

g. Deliverable acceptance procedures

(maximum 40 points with a minimum threshold of 20 points);

European Dynamics did not receive the highest score under this criterion. When it requested further details of the evaluation under criterion 1 from OHIM, it received a letter whereby it was explained that "the offers with very good or excellent criterion 1 ... “Identified change management and communication as the two most essential tasks for the success of the project”" (T-299/11, paras 23 and 41).

On this particular point, and in view of this (possibly less than careful) drafting of the debriefing letter, European Dynamics complained that it was not clear "from the tender specifications that the two sub-criteria ‘change management’ and ‘communication’ were, in OHIM’s view, the ‘most essential’. Accordingly, the contracting authority introduced, a posteriori, a new criterion and gave a new weighting to those sub-criteria" (T-299/11, para 42, emphasis added).

The GC upheld this complaint of European Dynamics with the following reasoning:

48 ... the Court finds that the applicants rightly argue that the contracting authority indeed gave to the sub-criteria ‘change management’ and ‘communication’ a more significant weight than the other criteria set out in the first award criterion. The reasons unambiguously set out in OHIM’s letter ... according to which the bids from the other successful tenderers ‘identified change management and communication as the two most essential tasks for the success of the project’, cannot be understood otherwise. It demonstrates that the contracting authority endorsed the approach proposed by the other successful tenderers on the basis of a weighting of those sub-criteria which is not clear from the wording of the first award criterion ... the contracting authority cannot apply a weighting of sub-criteria which it has not previously brought to the tenderers’ attention (see, to that effect, judgment of 24 January 2008 in Lianakis and Others, C-532/06, ECR, EU:C:2008:40, paragraph 38).

49 In that regard, first, it should be noted that the ‘change management’ and ‘communications plan’ comprised only two sub-criteria among a set of seven sub-criteria which were listed at the same level and on a non-exclusive basis under the first award criterion, namely, progress control, issue management process, change management process, escalations, lessons learnt programme, communications plan and deliverable acceptance procedures, and in respect of which the contracting authority intended to award a maximum number of 40 points ... Nor is it apparent from the wording of that criterion or other relevant parts of the tender specifications that the contracting authority intended, where appropriate and for specific undisclosed reasons, to afford a different weight to those sub-criteria for the presentation of the project presented in Work Hypothesis No 1, or even to assign, when evaluating the bids submitted in the light of the first award criterion, higher or lower scores depending on whether those bids focused on either one or the other of those sub-criteria. That is particularly so, in respect of the sub-criteria ‘change management’ and ‘communications plan’, in respect of which it was not stated in the tender specifications that the contracting authority considered that they represented ‘the two most essential tasks for the success of the project’.

50 Second, in accordance with the general explanations, in the tender specifications, of the requirements which have to be fulfilled by the tenderers, those tenderers were invited to present ‘the tasks and activities to be executed to manage and successfully achieve the project presented in Work Hypothesis No 1’ which were set out in Annex 18 to the tender specifications and covered the establishment by OHIM of a ‘project to build an information system’. As a result, the description in the bids submitted of the tasks and the activities related to the various sub-criteria under the first award criterion referred necessarily to that project which was by definition the same for all tenderers.

51 In those circumstances, the phrase ‘identified change management and communication as the two most essential tasks for the success of the project’ can be understood only as comprising an absolute and general value judgment on the particular importance of the sub-criteria ‘change management’ and ‘communications plan’ (‘the most essential’) as part of the project envisaged by OHIM under Work Hypothesis No 1 (‘for the success of the project’), of which the bids of the other successful tenderers would have taken account, and, conversely, as a criticism of the first applicant’s bid for failing to have followed an approach similar to that proposed by those successful tenderers to that end.

52 In that regard, OHIM is not justified in claiming, in essence, that the reasoning referred to above should be understood as a value judgment on the sufficient quality of the bids of the other successful tenderers which was based on the identification of two specific sub-criteria, namely ‘change management’ and ‘communications’, since that judgment is not severable from a specifically abstract and preliminary upgrading of the sub-criteria as compared to the other five sub-criteria listed in the first award criterion. Moreover, if only for the reasons set out in paragraphs 48 to 51 above, it does not appear credible that the contracting authority failed to assign a specific number of points from the total of 40 points available to the various sub-criteria which were referred to therein ...

53 Thus, it must be concluded that the negative comparative judgment made by the contracting authority on the first applicant’s bid on that point has no support in the wording of the first award criterion. In particular, the weighting underlying that judgment did not appear to be sufficiently clear, precise and unequivocal from that criterion to enable all reasonably well-informed and normally diligent tenderers to understand their precise scope and to interpret them in the same manner. By applying, contrary to the requirements arising from the case-law ... a weighting of the various sub-criteria within that award criterion which was not provided for by the tender specifications or communicated in advance to the tenderers, OHIM therefore breached, to the detriment of the applicants, the principles of equal opportunities and transparency (T-299/11, paras 48-53, emphasis added).

Technically, the GC's argument is rather solid and, at least at a conceptual level, not much can be criticised. However, given its strong reliance on the specific wording of the letter and arguments concerning implicit underlying sub-criteria and their presumed weightings, it does not seem very persuasive because a more careful and nuanced drafting of the debriefing letter would have completely changed the assessment. 

Indeed, a worrying potential implication of the European Dynamics v OHIM Judgment is that it creates a very powerful incentive for contracting authorities to be disingenuous in their debriefing letters and, where several sub-criteria are listed in the tender documentation, to include references to all of them in the qualitative explanations of the superiority of the tenders chosen for award. 

Such 'holistic' approach to debriefing letter drafting would reduce the quality of the information disclosed--both for the tenderer (who is in any case probably not really seeking to understand the actual superiority of competing bids, but simply a way to litigate) and  also for the reviewing court (which will be receiving more general statements).

As an example, under the circumstances of the case, a debriefing letter with a statement such as ''the offers with very good or excellent criterion 1 ... [struck an appropriate balance between competing implementation needs and provided realistic strategies regarding] most essential tasks for the success of the project [including in particular (but not exclusively): progress control; issue management; change management; escalations; lessons learnt programme; communications plan; and deliverable acceptance procedures]”, would probably have sufficed to nullify European Dynamics' claim and, in my view, would not necessarily infringe the duty to provide reasons as it relates to qualitative technical assessments were technical discretion is rather wide (unless a disproportionately high burden of motivation was imposed, which cannot be completely discarded in view of previous decisions of the GC). In any case, this is just a rough and fast drafting and more considerate wording would probably strike a better balance between provision of reasons and avoidance of litigation.

However, such a debriefing letter would not be as good as the one provided by OHIM in the case at hand, where it naively (?) indicated the actual reasons it had considered to provide better quality management strategies, as it tried to explain to an unimpressed GC (para 52 above)--or, more simply, did not put a great deal of thought on the specific wording of the contentious paragraph of the debriefing letter, which it merely intended to provide qualitative feedback of a general nature. Thus, the European Dynamics v OHIM Judgment puts even more pressure on contracting authorities to be extremely careful in their debriefing (see here and here) and makes this task a nightmarish phase of the procurement process.

Given that such situations carry significant financial consequences (in this case, of an uncertain magnitude because the GC ordered OHIM and European Dynamics to agree between themselves the proper amount of compensation; see paras 149-157), this is an area of procurement practice where contracting authorities would be well advised to start investing more resources. 

At the same time, it is necessary to promote a change of mentality in courts and review bodies dealing with this type of cases, as decisions such as the GC Judgment in European Dynamics v OHIM clearly establish strong financial incentives to litigate and the position of the contracting authorities dealing with complex technical issues requiring qualitative/subjective assessments may be excessively weakened by taking such a hard line in the assessment of debriefing documentation.

Any State aid implications in Ofcom's 4G auction?

Ofcom has unveiled its plans for 4G auction of the airwaves--which will be the largest ever auction of spectrum for mobile services in the UK--laying the path for next-generation 4G networks to be rolled out in 2013 and fully implemented by 2017 (see Ofcom's press release: http://tinyurl.com/Ofcom4Gauction).

The auction process seems well designed from the standpoint of a competition lawyer completely foreign to technical issues, particularly because Ofcom has reserved a lot for a relatively small player or new entrant in the UK mobile telephony market, so that consumers benefit from future competition between four credible service providers rather than the current three (see relevant documents for the planned 4G auction: http://tinyurl.com/Ofcom4Gauctdocs).

However, such a complicated regulatory scheme--whereby Ofcom is shaping future competition in the UK communications industry--must not only tackle the complex issue of the number of licenses tendered and the foreseeable sizes (and relative strengths) of tenderers, but also the matter of ensuring universal access (or a public service obligation) to the next mobile telephony networks. Ofcom has decided to do so by earmarking one of the lots (actually, a "double-sized lot", since there are four "regular" lots numbered 1 to 4 and the earmarked lot is "5 & 6") for the imposition of a coverage obligation.

In terms of the draft license for lot "5 & 6", the coverage obligation implies that the licensee shall by no later than 31 December 2017 provide, and thereafter maintain, an electronic communications network that is capable of providing, with 90% confidence, a mobile telecommunications service with a sustained downlink speed of not less than 2 megabits per second when that network is lightly loaded, to users at indoor locations in an area within which at least: a) 98% of the population of the United Kingdom lives, and b) 95% of the population of each of England, Wales, Scotland and Northern Ireland lives.

Given the undertaking of such coverage obligation by the awardee of lot "5 & 6", that licence is planned to be tendered at a significantly reduced reservation price of basically 55.56% of the reservation price for a "regular" licence (which has half the bandwith)--with an implicit "discount" of £200 million.

The relevant issue from the State aid perspective and, particularly, concerning compliance with Articles 106(2) and 107 TFEU is whether that difference in license reservation prices (rectius, of the prices finally paid by licensees as a result of the 4G auction) does not amount to an excessive compensation of the public service obligation (ie coverage obligation) attached to lot "5 & 6".

On the one hand, a formalistic approach to this issue could be simply accept that, in the absence of anomalies in the tendering process, the design of the 4G auction in open and competitive terms suffices to exclude any element of aid because the "pro-competitiveness" of the mechanism would warrant that the award reflects (competitive) market conditions (in an "inverse" reading of the fourth condition in the ECJ's Judgment in Altmark--on which see my critical considerations at http://ssrn.com/abstract=2071655).

On the other hand, a refined and materially-oriented approach would allow for the scrutiny of the difference in actual prices paid for a "regular" 4G license (double its price, actually) and the license with coverage obligation (lot "5 & 6")--to see whether it implied any potential excessive remuneration to the universal access provider. In that regard, it may be useful to take into account that Ofcom has commissioned and published a study on the "Methodologies used for the analysis of costs relating to a coverage obligation" (available at http://tinyurl.com/Ofcom4Gmethod). Nonetheless, this methodological study does not offer an aggregate total cost of the coverage obligation, which is dependent on the pre-existing infrastructure of the future licensee.

However, the study "Spectrum value of 800MHz, 1800MHz and 2.6GHz" by DotEcon and Aetha (also commissioned by Ofcom and available at http://tinyurl.com/Ofcom4Gmoneys) has estimated the impact of the coverage obligation in the (broad) bracket of between £100 to £400 million (although some operators submitted higher cost estimates). Even if the cost could be reduced by Ofcom if pre-auction mobile coverage was extended by means of additional public investments, and based on the information supplied by potential bidders in the auction, the DotEcon and Aetha study considers that:

There seems to be significant room (and difficulty) in determining the actual cost of the coverage obligation imposed upon the future licensee of lot "5 & 6" in the UK 4G auction. However, there is exacty the same room for potential overcompensation of such universal access / public service obligation--which would infringe Articles 106(2) and 107 TFEU.

Hence, special care seems to be needed on the part of Ofcom at the end of the auction and prior to the award of the licenses, whereby it may want to include a condition in the award procedure (or licence terms) that allows it to require additional payments by the initial awardee of lot "5 & 6" in case the price differential with (double) the cheapest (or more expensive, if a lenient approach is preferred, or average) "regular" 4G licence indicates that there is excessive compensation for the coverage obligation.

Be it as it may, it seems clear that there are potential State aid implications in the UK's 4G auction as designed by Ofcom, which will be an interesting case study once the final prices for "regular" and coverage obligation licenses are set.

A reasonable estimate of the cost of a 98% population coverage obligation should range from £100m to £400m as the cost estimate provided by Vodafone (and supported by O2) of £540m may not reflect the cost of meeting the coverage obligation by an operator with a well maintained, efficient network: John Cresswell of Arqiva estimated that the [98%] coverage obligation will cost around £200m to £230m, with Guy Laurence of Vodafone stating that a further £140 million in operating expenditure would be required to achieve 99% coverage (emphasis added; please note that £200 million is precisely the implicit discount in the reduced reservation price for lot "5 & 6").