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.

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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!

Golden nugget or poison pill? 'Clearly minor' breach of EU law in the Whistleblower Protection Directive

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The recently-adopted Directive 2019/1937 of 23 October 2019 on the protection of persons who report breaches of Union law (aka the ‘Whistleblower Protection Directive’ or WPD) explicitly covers reports of breaches of public procurement law (Art 2(1)(a)(i) WPD)—with a limited exception for defence and security procurement not covered by the relevant EU rules (Art 3(2) WPD and Annex, Part I(A) WPD).

The Whistleblower Protection Directive needs to be transposed towards the end of 2021 (with a further delay to 2023 for covered SMEs). The decisions made by Member States in the transposition of the Whistleblower Protection Directive may generate significant impacts on public procurement practice in the medium term. However, the likely future effectiveness of the Directive hinges on a problematic discretionary provision on ‘clearly minor’ breaches of EU law, on which this blog post will focus.

Background

Implicitly, the coverage of public procurement by the Whistleblower Protection Directive is a recognition of the limitations of the public enforcement of (EU) public procurement law, as well as their private enforcement through the procurement remedies system (despite the Commission’s recent decision not to reform the Remedies Directives…).

Indeed, the recitals of the Whistleblower Protection Directive stress that procurement coverage is necessary

… to enhance the enforcement of Union law on public procurement. It is necessary, not only to prevent and detect procurement-related fraud and corruption in the context of the implementation of the Union budget, but also to tackle insufficient enforcement of rules on public procurement by national contracting authorities and contracting entities in relation to the execution of works, the supply of products or the provision of services. Breaches of such rules create distortions of competition, increase costs for doing business, undermine the interests of investors and shareholders and, in general, lower attractiveness for investment and create an uneven playing field for all businesses across the Union, thus affecting the proper functioning of the internal market (rec 6 WPD, emphasis added).

Therefore, creating (or boosting) national mechanisms to enable whistleblowers to shine a light on potential infringements of EU public procurement law is expected to generate gains on procurement compliance and probity. This is largely aimed at reporting by ‘insiders’, to the extent that there are already other strategies to seek to increase the visibility of procurement information and trigger engagement by civil society and external stakeholders, eg through the new rules on eForms, due to be transposed by end of 2022.

Broadly, the Whistleblower Protection Directive seeks to enhance compliance with EU law, and in particular public procurement rules, by requiring Member States to mandate private and public entities to create new internal and external reporting mechanisms, as well as to afford specific protective measures to (good faith) whistleblowers that report internally or externally, or publicly disclose, breaches of EU law on the basis of information gained in a work-related context. The Directive creates rather granular requirements depending on the size of the private or public sector entity allegedly involved in the EU law breach.

‘Clearly minor’ breaches

In the context of external reporting of suspected breaches of EU (public procurement) law, Art 11(3) of the Whistleblower Protection Directive establishes that

Member States may provide that competent authorities, after having duly assessed the matter, can decide that a reported breach is clearly minor and does not require further follow-up pursuant to this Directive, other than closure of the procedure (emphasis added).

Different to other fields covered by the Directive (eg securities regulation or competition law), I think that this will be the crux of the whistleblowing system in the context of procurement, in particular if Member States opt to designate procurement review bodies as those competent to receive and/or process reports on potential infringements of EU public procurement law—which seems like a rather natural option. However, this would largely amount to a mere broadening of the active standing to launch procurement review procedures.

I would expect most Member States to avail themselves of the discretionary nature of this provision. Thus, I think that the effectiveness of the system will hinge on the provisions of Art 11(3) WPD because external reporting of non-obvious breaches is the most likely focus of (potential) whistleblower activity.

First, because internal reporting mechanisms are unlikely to gain much traction in either private entities (I find it difficult to see how a company that has taken a specific position in the context of a tender would be willing to reverse it due to an internal report, unless it had a very decentralised system to approve the offers) or public entities (again, as the mechanisms of control and decision-making should have already addressed any concerns and, failing that, would have galvanised the public buyers’ position).

It is hard for me to envisage a significant number of inadvertent breaches of procurement law that go undetected and can easily be fixed upon realisation, as is also hard to imagine the possibility of creating a multi-track system whereby concerns harboured by those ‘in the know’ within an organisation can be reported in a manner that results in a significant revision of the situation (barring, perhaps, in the context of very large organisations, or shared mechanisms for intermediate ones).

Second, because very major shortcomings in the probity of the procurement process (ie straight out corruption) or major deviations from procurement law (eg illegal direct awards or ‘cooking’ of the technical specifications or award criteria) should already be covered by other mechanisms, including criminal law. In that context, the main issue is not the administrative responsibility or liability of those involved in the illegality (criminality?), and probably also not (primarily) an issue of work-related retaliation against the whistleblower (which is the core coverage of the protective measures of Art 19 WPD, as far as I can see).

So, unless there is a fear that criminal behaviour is widespread and largely under-reported and under-detected in the field of EU public procurement practice due specifically to limited protections for whistleblowers (which I find a relatively implausible claim), in my opinion, the area of EU procurement law compliance that can probably be practically targeted is somewhat intermediate—ie that of relatively unclear rules of EU public procurement law, of the (mis)implementation of rules in non-observable manner (eg the ‘doctoring’ of evaluation reports), as well as deviations that fall within the area of discretion afforded to contracting authorities.

In those cases, and for the reasons indicated above, the most likely materialisation of any whistleblowing is an external report to the competent authority, which will then have to assess the extent to which the reported breach is (or not) ‘clearly minor and does not require further follow-up’ pursuant to the Whistleblower Protection Directive—ie, presumably, whether the issue of (strict) compliance can be left to the ordinary (if faulty?) enforcement mechanisms for EU (public procurement) law.

Why is public procurement different?

Against that practical backdrop, in my view, the importance of Art 11(3) WPD in the context of procurement stems from the long-lasting discussion of the types of infringements of EU law—ie ‘any breach’, a ‘sufficiently serios breach’, etc—that should trigger relevant consequences; eg the termination of the contract under Art 73 of Directive 2014/24/EU, the ineffectiveness of an awarded contract under Art 2d of the Remedies Directive, or more recently State liability in damages, in the context of the Fosen-Linjen saga (see here).

What constitutes a ‘clearly minor’ breach will need to be somewhat reconciled with the existing rules on procurement remedies. It would seem not only undesirable, but also counter-intuitive, for the Whistleblower Protection Directive to be interpreted in a more stringent way than other rules on procurement remedies. If a public entity could legally follow a course of action under regular administrative and liability rules, why would it be subjected to a more stringent threshold of compliance solely due to the origin of the information/report that prompts the review of its actions and decisions?

Moreover, the application of a common standard would seem a natural consequence of the accumulation of competences for the review of procurement complaints by the same authorities, where this happens. Therefore, as indicated above, it seems to me that the effect of the implementation of the Whistleblower Protection Directive is largely constrained to expanding the active standing to launch procurement review procedures. Whether this can make a significant difference remains an empirical unknown.

Other effects would only be generated if the choices leading to the domestic implementation resulted eg in the attribution of the competence to investigate procurement whistleblowing reports to authorities other than procurement review bodies—but this would create all sorts of practical complications in terms of expertise availability and two-track review procedures, eg in the case of a whistleblowing report concerning a tender in relation to which disappointed tenderers also launch ‘standard’ review procedures.

All in all, then, I think that the likely future effectiveness of the application of the Whistleblower Protection Directive in the field of procurement will hinge on the concept of ‘clearly minor’ breach and its relationship to the current standards triggering ineffectiveness of procurement procedures, awarded contract and/or liability in damages at the domestic level. This is thus perhaps an area where the European Commission could issue interpretive guidance ahead of the transposition deadline of 17 December 2021.