Succession and effectiveness in public procurement

A European Court of Justice (ECJ) ruling from February this year (C‑461/20)   deals with the question whether contracts already awarded in a public procurement procedure can be changed “down the road” without the need for a new tender. Surprisingly, it is a relatively uncharted area of EU law which during the 2014 reform of the public procurement directives became subject to more thorough regulation. 

 The reform was inspired not least by the Pressetext-ruling[1] where the ECJ on the basis of general EU legal principles of equal treatment and transparency concluded that “…amendments to the provisions of a public contract during the currency of the contract constitute a new award of a contract (..) when they are materially different in character from the original contract.”

The point of departure in the EU public procurement directives is in other words that such changes in contracts require a new tender. Clearly, it would be too easy to circumvent the public procurement rules if there were open-ended possibilities for changing contracts following tender. This would effectively allow the competitive procedure to be reduced to pure ceremony. Significant contractual changes include according to the directive any change in economic balance between the parties, any significant extension of the scope of the contract or replacing of the winner of the tender with another contractor.  

This is exactly what happened in the present case where ECJ issued a preliminary ruling on questions submitted by a Swedish court. The specific case concerned IT framework agreements awarded by a Swedish contracting authority where one of the winners subsequently went into liquidation. The contract was then transferred to another enterprise, who as part of the tender procedure had been prequalified but not invited to bid. This meant changing the identity of the parties to the contract and therefore constituted a substantial contractual change.

 In fending off the complaints from competitors the contracting authority, who had approved the contract transfer, argued that the directive in fact allows this in one specific case, namely in case of (as the directive states) “…universal or partial succession into the position of the initial contractor, following corporate restructuring, including takeover, merger, acquisition or insolvency”. This is provided that this other succeeding contractor “… fulfils the criteria for qualitative selection initially established” and “… that this does not entail other substantial modifications to the contract and is not aimed at circumventing the application of this Directive”

The point made by the contracting authority was  that the insolvency of the winning bidder was such a case of succession/corporate restructuring that justified a transfer. This could be derived from the straightforward wording where “insolvency” is listed alongside takeover, merger and acquisition as merely another instance of succession. 

The contractor challenging the transfer argued that the transfer was made to an enterprise which did not succeed in anything other than the awarded contract. This could in his view hardly amount to what is normally understood as succession or for that matter corporate restructuring. The point was made that for insolvency to be in line with takeover, merger and acquisition it must necessarily include only cases of actual restructuring where the new contractor actually succeeds in not just a contract but also in at least some of the business activities and assets of the initial contractor.

The main point for ECJ to determine was therefore whether the directive required the new contractor to continue in not only the contracts concerned but also at least part of the initial contractor’s business. ECJ ruled that the directive included insolvency as a case of restructuring and should be understood as allowing transfer without new tender also in this case where the new contractor takes over only the rights and obligations arising from these contracts. 

The following describes and comments the reasons behind the ruling:

Existing ECJ case law concerning the matter is as already mentioned surprisingly scarce and includes especially the so-called Pressetext-ruling, which concerns change of contracting party but only as part of an internal reorganisation within the consortium of the initial contractor. The ruling therefore does not cover the present situation where there is no connection between initial and new contractor. 

The Court focused as basis for its decision mainly on the wording of the directive, especially that it includes also “partial succession” and unreservedly any kind of insolvency, including cases where there is no transfer of other assets or business activities to the new contractor. In this connection, the Court devoted a fair amount of time on clarifying ambiguities in the relevant texts and of the directive. 

Furthermore, the Court considered that limiting the application to cases where the insolvency is part of an overall transfer of assets/activities to the new contractor would lead to uncertainty, i.e. how many assets, how many activities? This would make the provision difficult to use due to the many shades of grey and in the opinion of the Court render the provision ineffective. 

Importantly, and as justification for a broad interpretation based on wording, the Court also highlighted the purpose of the provision, which it saw as introducing “.. flexibility in the application of the rules in order to respond pragmatically to all the extraordinary instances, such as the insolvency of the successful tenderer, which prevents it from performing the public contract at issue.” Insolvency was considered extraordinary in a procurement context not least because the evaluation of the economic and financial standing of bidders is a normal part of tender processes. 

 The Court also observed that the tender procedure, in other words the competition amongst interested enterprises, had in fact already taken place and that the objectives of the public procurement rules were in this manner safeguarded. The line of thinking was, that it would therefore be justified to change the contractor without renewed tender to avoid interruption in deliveries, in other words to “respond pragmatically”.

What can be derived from the ruling is that the “succession -provision” in the case of insolvency is applicable well beyond corporate restructuring as this is normally understood. What really seems to be the key issue for the Court is the extraordinary nature of insolvency and that orchestrating insolvency for the sake of circumventing the directive is unlikely. The Court also seems to take account of the transparency and “arms-length” character of insolvency procedures which would reduce any risk of abuse. On top of that, it might well have played a role that such procedures are easily verifiable and that transfer of on-going contracts from the estate would be a normal event. 

Any risk of abuse is in any case tempered by the other conditions that must always be fulfilled, namely that the new contractor fulfils the qualification requirements initially established for the tender and that no other significant changes of the contract have been made.

Incidentally, the Danish Public Procurement complaints Board was in 2017 dealing with the same problem and came to the same result as ECJ. The reasoning was based partly on the annotations to the Danish law implementing the directives, which include a.o.  the following: “..Such restructurings may e.g. include internal restructuring, acquisitions, mergers, acquisitions or insolvency. The contracting authority may thus accept that a company which is a party to a public contract and which is undergoing bankruptcy proceedings because it is insolvent may transfer the contract to a third party….”  The last sentence is clearly intended to emphasise that a transfer may include only the contract and thus a wide interpretation.

One of the above points made against a narrow interpretation of “insolvency” is based on the EU legal principle of effectiveness. This principle was traditionally understood to be focused on the enforceability of national legislation implementing EU law. The manner in which the ECJ applies the principle in the present case confirms the increasingly broader application reflected in case law and critical comments[2]. Thus, the principle is understood to apply also in cases where there is a choice between different interpretations of EU law itself. In such cases the principle requires that preference is given to the one in favour of the optimal effectiveness of EU law.

Concretely, the principle is in the present case being used to justify a broad interpretation of “insolvency”. In the perspective of the public procurement directives this leads to wider possibility for transfer of contracts without need for tender procedures. This is hardly a matter of safeguarding the efficiency of EU law where the point of departure is that contacting requires competitive procedures and where the principle therefore seems less appropriate.

[1] C-454/06, Pressetext Nachrichtenagentur

[2] See for example The principle of effectiveness of EU law: a difficult concept in legal scholarship by Prof. Elvira MENDEZ-PINEDO