Do you need to think about public procurement when settling a commercial dispute?

Yes, apparently you do!

The ECJ has just handed down a preliminary ruling on request of the Danish Supreme Court in Finn Frogne A/S v Rigspolitiet ved Center for Beredskabskommunikation Case C-549/14.

In short, this is a surprising decision and one which may cause difficulty for contracting authorities and disputes lawyers. The inference from this decision seems to be that, unless the terms of a settlement, agreed between a contracting authority and a supplier who are embroiled in a commercial dispute over a public contract fall within the remit of:

(1) Regulation 72 “modification of contracts during their term”; or
(2) Regulation 32 “use of the negotiated procedure without prior publication”,

then it is possible for the terms of that settlement to itself constitute an illegal modification to a public contract which should have been advertised and procured under the procurement rules (with possible consequences of ineffectiveness of the settlement and damages to the aggrieved third party supplier).

Facts of the case

The Centre for Emergency Communication of the National Police in Denmark (CFB) awarded a contract to Terma for the supply and maintenance of a communications system for all emergency response services worth around €70m. A dispute arose between the parties relating to delivery times. The parties agreed a settlement of that dispute which involved reducing the scope of the contract to:

• the supply of a radio communications system for regional police worth under €5m;
• the sale of two central server farms to CFB worth under €7m (Terma had purchased the latter for the purpose of leasing the servers to CFB under the original contract).

The parties waived all other rights from the original contract as part of the settlement. CFB published a VEAT notice in respect of the settlement and Frogne (who had not been involved in the original procurement exercise at all) brought a challenge to the settlement on the basis that it constituted a material amendment to the original contract and should have been competed under the procurement rules.

The Danish Supreme Court then referred a question to the European Court of Justice (ECJ) for interpretation of the procurement rules, asking whether the procurement rules 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 where both parties agree 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.

Decision of the Court

The Court decided that:

• an amendment of a contract consisting in a reduction in its scope may result in the contract being brought within reach of a greater number of economic operators (particularly smaller economic operators who may not have otherwise qualified for the larger original contract);
• it was irrelevant that the settlement agreement did not arise from the desire of the parties to renegotiate the essential terms of the contract, but instead out of objective difficulties with unpredictable consequences encountered in the performance of that contract.  Contracting authorities can opt for a direct award of a contract, that is to say, negotiating the terms of the contract with a selected economic operator without prior publication of a contract notice, only in the circumstances expressly referred to in the procurement rules (in the UK these are contained in Regulation 32 “use of the negotiated procedure without prior publication”); and
• contracting authorities may retain the possibility of making amendments to a contract after it has been awarded, on condition that this is provided for in the documents which governed the award procedure. By expressly providing for the option and setting the rules for the application of them in those procurement documents, the contracting authority ensures that all suppliers interested in participating in the procurement procedure have been made aware of that possibility from the outset and are therefore on an equal footing when formulating their respective tenders. 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.

Comment

Our first thought on reading this case was to consider whether we should update dispute resolution clauses in public contracts to provide expressly for this kind of settlement, and thus try to ensure that any settlement is a "permitted modification" because it has been clearly precisely and unequivocally set out in the original contract. However we soon discounted this strategy as unfeasible: we don’t think a general term permitting modification as part of a settlement would be capable of ever being specific enough for the particular circumstances in which it was ultimately used.

This case also serves as a reminder that material changes to public contracts can relate to reducing the contract scope as well as increasing it.

This case was a reference for a preliminary ruling, which the Danish Supreme Court requested from the ECJ to aid the Danish Court’s interpretation of European derived law. Similarly in the UK, our courts must still refer to and use ECJ jurisprudence when deciding matters derived from European law, but once the UK has left the EU, the UK Courts may not still be bound and may decide not to follow the decision.

Finally, if you are wondering, “what is a VEAT?” you’ll find the answer here on our procurement portal.