Contractual ineffectiveness in public procurement
Interview with Kirsi-Maria Halonen, Senior Lecturer in Law at the University of Lapland. Kirsi worked previously for Hansel Ltd, the central purchasing body of the Finnish Government. She concluded in August 2015 her Ph.D at the University of Turku on the consequences of contractual ineffectiveness in public procurement.
Let’s dive in, straight into your research, you finished your PhD last year on contractual ineffectiveness in public procurement, so could you tell us a little bit more about that research?
Yeah, sure. So I think I wasn’t concentrating that much on the remedy of contractual ineffectiveness. Of course I looked at the rules concerning contractual ineffectiveness as well but my focus was merely on the consequences of the remedy itself between the contracting parties, so I was interested on whether the contracting authority can be held liable towards the contractor, for example, in cases where they have infringed severely public procurement rules which have led to contractual ineffectiveness. Then I also looked at what kind of liability regimes could be applied on this kind of liability, if there is any, and what are the possible ways to manage risks of contracting authorities, is there a possibility to mitigate the damages somehow and are the rules of contributory negligence applicable to this kind of liability.
So what did you find?
What did I find? I think you can divide those conclusions in three parts. So firstly, I think the most important conclusion was that at least according to Finnish law, Finnish private law, the trust towards the actions, the rightfulness or lawfulness of the actions of public authorities is very strong. As the contracting authorities are the ones actually responsible to comply with the public procurement rules, and if they infringe those rules they can be held liable if the other party is not aware or should not have been aware of this infringement. So there is a certain risk for liability in these cases. And the second conclusion that I found was concerning the liability regimes. If the contract is declared ineffective there is no contractual liability available for the parties so merely the liability regimes that could be applied here are based on extra contractual liability such as principles of culpa in contrahendo or the general law on damages. And then the third part of my conclusions relate to the ways of risk management or liability mitigation so I looked at the limitation of liability clauses and whether these are considered binding and effective. Then I looked also the rules concerning contractor’s bona fide so whether or not and on what grounds we can decide on if the contractor was actually aware or should have been aware of this infringement and what effects it has on the contracting authority’s liability. Also the general rule of duty to limit your own damages is applied here and I concluded that actually EU law doesn’t prevent the application of such rules and therefore it’s based on national law whether or not these kind of rules are applied here.
And did you look only at Finland or did you cast a gaze as well to other jurisdictions?
Yes, my main focus was in Finland and I also conducted my research and published my dissertation in Finnish but as in Nordic legal studies often it’s done, at least in Finland, you also look at the neighbouring countries, the other Scandinavian countries, especially Sweden and Norway where the legal systems are quite similar to ours. Usually in Sweden you can find some quite interesting thoughts in the legislative preparatory works. Then I looked at France because they have a long tradition with contractual ineffectiveness. Also the other southern European countries do have similar traditions, like Spain and I believe also Portugal and Italy have a tradition of nullity of public contracts that may be ordered by a Court, which we didn’t have up in north before the rules of contractual ineffectiveness were transposed. It was interesting to find out that there was actually a previous case law also relating to procurement contracts on these kind of remedies, so that’s why France was interesting. And then I also looked at the UK a bit because there the attitude is very business oriented in a sense that there is lots of freedom for the parties to agree on things, for example, to agree on risk sharing for the event of contractual ineffectiveness which is explicitly stated in the UK’s procurement rules. This has created a lot of discussion on whether or not that kind of legislation could be possible also in other countries. So there were interesting details that I found in looking at other countries.
Why is the interplay between national contract law and public procurement rules important?
Well I think it is important for the reason that without looking at things on several perspectives you are not finding true answers. So if you are looking at the consequences of contractual ineffectiveness solely from public procurement rules perspective, you are not finding a complete answer. In Finland traditionally public procurement has been viewed as a part of public law, administrative law and as an administrative procedure to choose a winner in a certain contract award. But if we are looking at the rules as an administrative procedure to choose a winner, then we don’t get the whole picture of what happens afterwards because we’re actually buying something, we’re making a commercial transaction and we’re not applying public procurement rules for the reason that we want to just comply with these rules as such but as a mean to purchase something. That’s why I think it is important to also take private law into account, meaning the contract law commercial law in general, as public procurement contract in Finland is considered as a private contract. It is utmost important from a buyer’s perspective to realise how these private law rules should be interpreted in the context of public procurement where EU law, and especially its principles, are actually limiting the interpretation which usually in private law is considered to be a freedom of the parties to agree on anything and here EU law has, and the public procurement rules have a lot to say on how to look at things.
I think that’s a very important point and it’s intimately connected with one of the issues that I’ve found over the years in public procurement which is that there’s a huge emphasis and focus from EU rules on the procedural part of things but when it comes down to the actual contracts, the rules that are applicable to the contract are left for the national member states.
I have not done any research on this, but this is just my gut feeling, my take on this is that in consequence economic operators find it more difficult to actually apply for contracts in other member states because they don’t know what will be the contract law that is going to be applicable to that contract. They know that in terms of residual rules they’re going to be entitled to certain rights and certain protections but even if they’re awarded a contract then they’re subject to national law.
Yes, you are absolutely right and I know that you have a background as a procurement lawyer in practice as well, as I do, so yeah, often also research in public procurement is done via the principles of EU law and the public procurement rules as such. But somehow I think it is very important to always keep in mind that this is the reality, this is actually business and we need to look at public procurement rules as a toolkit to get the best possible result. And here, as you pointed out, if we are wanting to create a single market then it should be clear for all the players at the market what are the common rules and where comes the line after which the national rules are applied. And this is not clear for me, not even in Finland, nor I think that it is necessarily clear in UK or Portugal for example, If you think about private companies, I believe that this might create some obstacles to participate for sure.
Yes, indeed and just by coincidence yesterday I was watching a programme on Euronews about the strategy by the commission for the digital single market and one of the actual legs of that particular stool that the commission wants to set up was to uniform or have some sort of harmonisation at least for contract law that is applicable to cross border online contracts. And if you think about it in general, online contracts or online contracts for consumers, involve very low amounts of money so if the commission understands that for that specific sector it makes sense to uniform or at least harmonise contract law. Why aren’t we thinking about the same for public procurement?
Oh that’s a very good question and I, unfortunately I don’t have the answer to that question but I think that that could really speed up the progress of opening the borders in public procurement. One other thing that comes to my mind relating the differences of contract laws in different countries is the binding effect of an offer. So basically there are different rules in different countries on the binding effect: a company submitting an offer to a contract award in Spain might be able to cancel it if it wants to but in Finland I am not able to cancel a bid after it has been opened. In Finland actually according to the basic contract law rules, not though in public procurement anymore, a contract is considered concluded when the offer is accepted but already before this moment the offer itself is binding and it can lead to similar consequences, similar liability issues as if you would cancel a contract.
That's a common discussion in contract law in various jurisdictions which is each jurisdiction has defined its own way of interpreting the moment when the contract is formalised, so is this acceptance or the sending of the offer, if the offer contains all the necessary elements, so on and so forth. But again in the field of public procurement that is one of the areas that’s perhaps at a level we have not spent enough energy and attention in trying in sort and solve. On that note what do you think should be done at a level in the future that we could consider to be a potential solution for the differences that we are finding in the treatment of contractual ineffectiveness in public procurement in the various member states?
Well I think it is important that EU public procurements rules don’t go too far in limiting the applicability of national public or private contract law or national public procurement rules, but at the same time we should have some clarity on which rules or on what aspects EU law are applicable. So that could help the national systems to develop their own legislation and argumentation relating thereto and to provide similar results even though the legal systems behind these rules are quite different. So I would want to know what are the actual conditions of liability for example in certain issues. I would also like to know whether EU law is actually giving any protection to ex-contractors when the contract is considered ineffective. I think now the European Commission’s point of view is that there is no protection provided towards ex-contractors because they have participated in the infringement even though they wouldn’t be aware of the infringement but it is assumed that they must have been aware of it. I think there are questions concerning remedies and then there is also a question of clarity so that the companies involved could really know what are the conditions of liability and what is the proof they need to provide in this context? So it wouldn’t always be a matter of national law to interpret, it’s according to their own principle. But as an answer to your question, I think there are several small things that could be developed but I’m not saying that something should be done or something shouldn’t be done but at least we should know what are the exact rules that are applied. It is a bit ambiguous at the moment where goes the line between EU law and national rules? But, at the same time, this is very interesting from a researcher’s point of view, so if we bring here too much clarity then probably I need to get another hobby.
Do you reckon that in a future review of the remedies directive perhaps we’ll see something along those lines or do you reckon it’s not going to happen?
I think maybe, though I think now it’s all about principle of effectiveness, especially the length of judicial procedure that is on the table. I still think that EU legislators are not that worried on the parties of the contract, the ex-contractors and their rights, as the interest is focused on removing unlawful or infringing decisions and bringing back the contract to the markets which is what the remedies are mainly designed for. The main focus lies on the remedies for those who have suffered from contracting authority’s infringement and not the rights of those who have been part of it. I think those companies are not going to get a lot of support in the remedies directive in future either..
I think it’s a shame because as we were saying before, if you don’t tackle some of the outstanding differences in terms of contract law, in terms of consequences, I feel that uncertainty, the uncertainty that is generated by these different systems, actually probably deters economic operators from participating in the first place and obviously if they don’t participate they cannot win the contracts in other jurisdictions, in other member states. So I think it’s a shame that the discussion is still very much focused on what I would call formalistic approaches to remedies, saying “Oh do you have access to the Courts and only the Courts and nothing else, do the Courts decide quickly enough?” That is important but at the end of the day that is only one part of the discussion.
Yes, yeah, yeah, for sure, I agree with that.
But we are where we are.
Speaking about research and speaking about interest, you spent a lot of time over the last few years looking at this interplay between public procurement and contract law, looking at the contractual ineffectiveness in public procurement, where do you want to focus your research going forward?
Well as you said, I have been quite involved in public procurement and private law matters, I really like it, so I don’t plan to entirely abandon it but lately I have been more and more interested on the requirement of transparency, quite classical subject I would say. But as a broader phenomenon combining lots of different goals and objectives, maybe controversial towards each other, either fighting corruption, securing the access to remedies in a public procurement process and at the same time its potential adverse effects on creation of innovations as a commercial interest protection issue. And perhaps we will see an empirical research relating to these aspects during the few years. And I’m also currently discussing with different multidisciplinary research groups, one of the potential projects that we’re planning on is on looking at Finnish corruption, especially in public procurement in more detail and another one is relating to creation of innovations. So hopefully these projects will go forward and I’m also very anxiously waiting to hear what the European Commission is planning for the new Remedies Directive because that is something, the remedies I mean that I have always been interested at so probably I will look at that as well when we have more information on what are the changes to be made in future.
Well I think that’s a great way to finish the programme. Thank you very much Kirsi.
Thank you Pedro.