CJEU finds that the Terms of a Settlement Agreement can Constitute a Prohibited Contract Modification under Procurement Rules
The Court of Justice of the European Union (CJEU) has handed down its decision following a request for a preliminary ruling from the Danish Supreme Court. In Finn Frogne A/S v Rigspolitiet ved Center for Beredskabskommunikation (C 549/14), the CJEU held that the terms of a settlement agreement can constitute an illegal modification to a public contract which therefore would require a new tendering procedure.
This decision is relevant for both practitioners and businesses and will certainly add a new layer of complexity to negotiating settlement agreements when public contracts break down.
In 2007 the Centre for Emergency Communication of the National Police, (CFB) in Denmark tendered for a contract for the supply and maintenance of a global communications system for emergency response systems. The contract, worth €41m, was awarded to a company called Terma. During the performance of the contract, a dispute arose between Terma and the CFB relating to meeting delivery deadlines under the contract. The parties disagreed as to who was responsible and, following negotiations, a settlement agreement was reached between the parties.
Under the terms of the settlement agreement, Terma agreed to supply a radio communications system for regional police forces to CFB (worth approximately €4.69m). CFB then purchased two central server farms from Terma (worth approximately €6.7m) which Terma had purchased with the intention of leasing them to the CFB for the performance of the original contract. In addition, each party agreed to waive all rights arising from the original contract other than those arising from the settlement agreement.
The contracting authority published a VEAT notice in relation to the settlement agreement. A VEAT notice or a "Voluntary Ex-Ante Transparency Notice" is a voluntary notice under the Remedies Regulations which contracting authorities can publish indicating that a contract does not require prior publication of a contract notice in the European Journal (OJEU).
The contract was the subject of a challenge from another service provider (Frogmen). The case reached the Danish Supreme Court who referred a question to the CJEU as follows:-
By its question, the referring court asks, in essence, whether Article 2 of Directive 2004/18 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, with both parties agreeing 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.
The CJEU found that even though the amendment was a type of settlement agreement, a new tendering procedure should have been followed.
Even changes which reduce the scope can be material changes
The CJEU reiterated that a change which reduces the scope of a public contract can still constitute a "material change" within the meaning of the Pressetext case1. The CFB had argued that as the amendment consisted in a significant reduction in the services to be supplied, it was not governed by EU law. This was not accepted by the CJEU. This was because amendments which reduce the scope of a contract’s subject matter may result in the contract being of interest to a greater number of economic operators. It may also lead to other tenderers being eligible for admittance to that competition (since the minimum levels of ability required for a specific contract must be related and proportionate to the subject matter of the contract). It is interesting to note that the challenger in this case had not applied for pre-qualification in the initial competition.
Lack of intention to renegotiate was irrelevant
The CJEU held that the parties' lack of a deliberate intention to renegotiate the terms of that contract was not a decisive factor. The CJEU restated the principle outlined in the Pressetext case and held that it is not permissible to substantially amend a contract even if the "material" amendment arose not out of a desire of the parties to renegotiate the essential terms of the contract but out of "objective difficulties with unpredictable consequences encountered in the performance of that contract".
Although the concept of intention is referred to in the Pressetext case and in the case of Commission v France (C‑337/98), the CJEU confined this latter reference to the specific factual context of the case. The CJEU stated that the question of whether there has been a material amendment must be analysed from an objective point of view.
Unpredictable nature of contract is not a justification and CAs must think ahead
The CJEU also rejected the justification that the amendment related to the "objectively unpredictable" nature of the subject matter of the public contract. While Directive 2004/18/EC does provide for the option of awarding a contract using the negotiated procedure without a prior call for competition in various cases many of which are characterised by the unforeseeability of certain circumstances, the CJEU emphasized that these grounds can be applied only in the exhaustive list of specific cases and circumstances referred to expressly in Article 31 of the Directive. The situation before the court did not correspond to any of those cases.
The CJEU suggested that for contracts which "because of their subject matter can be categorised as being unpredictable in nature" and which therefore involve a "foreseeable risk that difficulties may occur at the implementation stage", it is for the contracting authority "not only to use the most appropriate procurement procedures, but also to take care when defining the subject matter of that contract".
Solved by a review clause?
The CJEU, in finding that a new procedure should have been followed, held that 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. (Emphasis added)
The CJEU continued:-
By expressly providing for that option and setting the rules for the application thereof in those documents, the contracting authority ensures that all economic operators interested in participating in the procurement procedure are aware of that possibility from the outset and are therefore on an equal footing when formulating their respective tenders (see, by analogy, judgment of 29 April 2004, Commission v CAS Succhi di Frutta, C‑496/99 P, EU:C:2004:236, paragraphs 112, 115, 117 and 118).
By contrast, where such contingencies are not provided for in the contract documents, the requirement to apply, in respect of a given public contract, the same conditions to all economic operators makes it necessary, in the case of a material amendment to that contract, to initiate a new tendering procedure (see, by analogy, judgment of 29 April 2004, Commission v CAS Succhi di Frutta, C‑496/99 P, EU:C:2004:236, paragraph 127).
Although the case was decided by reference to the 2004 Directive, the principles outlined in the decision will remain relevant to the interpretation of the new directives which have clarified the rules in relation to material change, largely based on the Pressetext case.
The CJEU arguably gives excessive deference to the creation of contract modification mechanisms. Review clauses must not only provide for the possibility for making such a modification but also set out the detailed rules for the application of that possibility. By so holding, the CJEU places the burden on contracting authorities to "think-ahead" in terms of procurement planning and contract drafting. It is difficult to envisage a clause which would have been precise enough to cover the situation which arose in this case.
The failure to take into account the parties' lack of intention to renegotiate is interesting. Although an objective test for material change makes sense, the concept of intention has been referred to in previous cases and is not completely alien to procurement law in general. Recital 117 of Directive the new procurement directive (2014/24/EU) specifically states in relation to material changes:-
A new procurement procedure is required in case of material changes to the initial contract, in particular to the scope and content of the mutual rights and obligations of the parties, including the distribution of intellectual property rights. Such changes demonstrate the parties’ intention to renegotiate essential terms or conditions of that contract. This is the case in particular if the amended conditions would have had an influence on the outcome of the procedure, had they been part of the initial procedure
The concept of intention also plays a rule in the classification of mixed contracts (see for example Recital 11 which refers to the expressed or presumed intentions of the contracting authority). It remains to be seen whether the intention of the parties will be given any consideration by courts in future case law in this area.
For further information, contact a member of A&L Goodbody's EU, Competition and Procurement Group.
Date published: 26 October 2016.
1 The Pressetext case (Case C-454/06) is the CJEU's seminal decision on permissible changes to procurement contracts. It provides 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 and, therefore, such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract. According to the ECJ, an amendment to a public contract during its currency may be regarded as being material when it:
i. introduces conditions which, had they been part of the initial award procedure, would have allowed for the admission of tenderers other than those initially admitted or would have allowed for the acceptance of a tender other than the one initially accepted;
ii. extends the scope of the contract considerably to encompass services not initially covered; or
iii. changes the economic balance of the contract in favour of the contractor in a manner which was not provided for in the terms of the initial contract.