#23 - Mari Ann Simovart (University of Tartu)

Article 72 of Directive 2014/24/EU and limitations to contract modifications

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Interview with Mari Ann Simovart from the University of Tartu about Article 72 of Directive 2014/24/EU and limitations to contract modifications. For her PhD Mari Ann looked into the relations between national private and EU public procurement laws with regards to public contract terms, modification and validity. 

Transcript

In terms of the, the topics that we’re going to be talking today, it’s going to be modifications to public contracts so let’s start by trying to analyse, or describing at least, why do you think that it’s important to limit modifications to public contracts?

Well, to put it very simply, the situation is that if the parties to the public contracts, the contracting parties, had an absolute unlimited freedom to modify the contract as they would have if it would be a simple private contract then it would in fact make all the preceding public procurement procedure a complete joke, yes? Award of public contracts, as long as they are subject to the EU law, we know is always subject to the general principles of transparency, non-discrimination and pursuit of competition as well as elaborate specific rules that govern the process of awarding contracts. So as long as we agree that public contract must follow these principles and these more detailed rules, then they have to have certain restrictions to modification of the public contracts as well, otherwise all the efforts that we have before entering the contract will become futile and as a result there is no transparency, no equal treatment of tenderers, no competition that can be guaranteed in the process. Now, the other question is the level of these restrictions. While we agree that we can’t have public contracts freely modified whenever and however the parties might decide, it is somewhat difficult to draw the line where we have the modification that does not yet harm the transparency or equal treatment and where we have the modifications that can cause that harm. So this is the difficult part but necessary part of regulating contracts modifications. 

 

If you think about it, it’s almost like saying that we need to limit the modifications to the contracts because otherwise we would be subverting the system or at least allow the system to be subverted during the contract performance which is to actually perform a contract which was not contracted originally.  

Yes, I think you put it very well. That can undermine the system very easily.

 

But if you look at the level of restrictions in modifications, and I used to be a lawyer in this field and I worked a lot with complex infrastructure projects, it’s very hard to actually get everything right in the first attempt and from the beginning so there’s always the need to modify a contract as you keep performing it. Now, the point you raised here in your first comment is, or in the second comment, that you’ve made is that we need to know exactly where the modification actually harms the legal system and where the modification does not harm the legal system, so where do we find that boundary?

Yes, well, happily for us the Court of Justice of the EU has drawn that line and they have used the criterion of materially different modifications. What was said in the case of Pressetext was that when a contract is considered to be materially different in character from the contract that was originally entered into and when the modification thus shows the intention of the parties to renegotiate the essential terms of that contract, then we have to look at the modification not as just a change to the initial contract but in fact like a new contract. And as always a new public contract requires a new award procedure. So the criterion of material difference or substantial modification is what we have to focus on. 

 

And in your experience how easy and, or how difficult in the other sense, is it to actually gauge if a contract modification is materially different or not?

In my experience, when I was a practising lawyer, it is very difficult of course. It cannot be easy and that’s part of why I am very happy to have the new EU directives that actually try to elaborate these criteria in more detail.

 

Yes, because Pressetext is a case from a few years ago and predates the current directive from 2014 so if you look at the directive and if you look at Article 72 of the directive in terms of contract modification, what criteria will we find there that will help contract authorities guide their, the way that they manage the contract performance? 

Yes, well, Article 72 of the new directive, as I understand it, makes three different categories of modifications or three types of cases. Firstly, there are these cases where the directive says: these modifications are acceptable, you can make them without a new award procedure. These are the cases that we consider to be not substantial, or not material. Then if the modification that the parties want to make, or have made in case of a court dispute, if the modification does not correspond to any of these acceptable modifications, we have to look if it is maybe among those that are prohibited in Article 72, Section 4, I believe. And then there is the third type of cases that do not correspond to either of these types precisely and these cases we have to evaluate. So this is the part where the law requires to act as it does now. You have to evaluate the case. Now, the examples of the accepted, or acceptable, modifications one can make. Some of them are easier to establish, for instance under the de minimis rule, we have certain minor changes that are below certain financial thresholds. This is quite easy to establish and in this case you do not need to have a new award procedure.

Then there is Article 72, Section 1 (a) that allows to have review clauses in a public contract if those review clauses are clear and precise so they foresee exactly under what circumstances you can make what kind of change, then you can use these review clauses and make these changes if it is sufficiently clear - you have foreseen already at the beginning that there might be an occasion where you want to change the contract. The simple example of using the review clauses could be maybe an index clause. That’s the simplest example.

Also, the directive allows you to have modification for additional works or supplies under certain conditions and if they remain under certain financial value. Then you can make modifications if the need for that change has been brought about by outer circumstances that a diligent contracting authority could not foresee. Again, that must be under certain financial value and it cannot change the overall nature of the contract. For instance, you cannot say that because of unexpected circumstances you have to build, I don’t know, a school house instead of a hospital. I believe that would be outside the overall nature of the contract. And then you can replace the contractor, again under certain conditions. For instance, if that is necessary due to  corporate restructuring - take-over, merger -, insolvency or other type of succession cases, so these could be the examples where making the modifications has, has been made a bit easier.

 

A bit easier by highlighting exactly when they can happen. On the financial threshold side, I mean, I have to be careful with what I say here because I’m still bound by my ethics obligations as a lawyer in Portugal, but it’s very interesting because one of the things I saw in practice was that with infrastructure contracts, effectively there was a race to the bottom in terms of the price that contractors or economic operators would offer to do the job, obviously because it’s a winner takes all market and if they’re not competitive on prices it’s very unlikely that you’re going to be able to win the contract. And once they won the contract and once they started performing, then the incentives changed and turned to the other side which is they always tried to get as much money back from the contracting authority as possible so it was always a game of cat and mouse between what they could get extra in comparison with the original price. I remember knowing about a specific case where an economic operator was performing in the contract and the person that was leading that project actually had specific objectives on his contract that if he got more money than it was legally available, he would get effectively a good chunk of cash for himself. This was obviously beyond what was legally admissible but what became very clear over the years is as long as you knew how to do it on a steady way and you used any material changes to your advantage, so for example, the weather, I mean, I remember being on a contracting authority side and for the years that I was in Portugal every single year was the most, or the rainiest year over the last century, which is incredible, at least for the purposes of, the amount of rain that we usually get in Portugal, but one of those reasons that the economic contractors were claiming as justification to get more money out of the contract.

So even though we can actually create these legal rules which are clear and they are an improvement in comparison with the past, I still think that we have an issue with the enforcement and oversight because really difficult once the contract is being performed and if the economic operator knows how to do and how to play the game, it becomes really difficult to actually know what is happening and to detect any infringement to Article 72. But if you think about it in terms of the way that the criteria for modifications are set, it’s one thing what we have in the law and it’s one thing what we have in Article 72, it’s another thing what we have happening in real life in practice. So I remember when I was a lawyer back in the day in Portugal that it was very common for economic operators to submit bids that were unrealistically low at the tendering stage with the objective of actually winning the contract and then doing the performance of the contract to maximise the amount of revenue that they could get from it. Naturally, there were limits as there are now in the directive, there were limits under the Portuguese law of how much money you could try and increase the contract to but I know for a fact that in some circumstances even the project managers in certain projects would receive a nice bonus if they were able to actually bring the money or bring the total money above that legal threshold. You can question, is that legal or not. Probably it wasn’t legal but economic operators became very good at masking these kinds of operations in the sense that actually they do not trip any wires. In consequence, I mean, one of the important issues that we could perhaps look at is the difficulties of actually taking what is in the law nowadays, taking what is on the directive, and actually trying to apply it in practice and ensuring that there is oversight in terms of contract modification and the limitations that there are to contract modifications.

Yes, I know what you mean. I think the example of unrealistically low bids and then ordering additional works or supplies is a very common problem, at least, we have this problem very seriously in Estonia. In this light, well, I was a little bit disappointed in the rules of the directives that said that threshold for the acceptable amount of additional works for instance is so high as 50% of the value of the contract, so yeah, that can be criticised.

But of course generally speaking the oversight or the enforcement part of these rules is very important and it seems to me that right now it is a bit problematic. It has not been addressed by the latest changes to the directives or by the new directives. The oversight or the enforcement part of public procurement rules should be working through two types of means and that would be of course remedies or peer review on one hand, and then of course national public law remedies or the overview by administrating bodies on the other hand. And as I see it, the peer review part or remedies that are used by competitors has been the primary resort in public procurement law until now because most of the remedies have been used for breaches that took place before the award of contract. Now that we have in the directive the rules that concern contract modification, meaning rules that apply after the award of the contract, I don’t think these remedies work so well and that might mean that the public or administrative oversight, administrative review, should have a stronger position.

Or then it might mean that we need to seriously consider if the remedies directives need a review as well because at present all the remedies, all the review system, has been introduced based on the presumption that every breach takes place or at least most of the breaches take place before the contract is awarded. I think the review system works quite well for these breaches but they might not work so well for the breach of contract modification rules. For instance, as I understand it the primary remedy when contract is modified in a way that it shouldn’t be, the primary remedy seems to be contract ineffectiveness and there are lots of questions that come up if someone tries to use that remedy. Firstly, there is the issue of having information about the contract amendment. I don’t think that the competitors generally know what is going on in contracting relations between the competitor and the contracting authority. So there is not so big a chance that they will learn of the contract being modified at all or, even if they learn that, that it has been modified in a way that it shouldn’t be. So one can argue that perhaps the general principle of transparency obliges the contracting authorities to make such modifications or perhaps any decisions made in the performance phase to be public or at least to be publically available if you ask for them. But I don’t think it has been enforced that way, at least it hasn’t been in Estonia. It’s not generally known if somebody modifies a contract and if the modification is made, what are the terms of the modification. So that would be the first obstacle to using any remedy. It’s worth noting that for contract ineffectiveness we have a very strict limitation period - it’s a maximum of six months from when the modification was made. So I don’t think it will be used very often in case of these breaches.

 

I mean, we can also say that in addition to transparency we’ve got an issue, and I relate it with incentives, which is even if it’s public, who has incentive to actually challenge the contract modification? Because even if competitors get wind that a contract has been modified beyond what it was supposed to be modified, they’re going to be engaging the same practice themselves in the contracts they win so they may not be interested as a matter of fact, in a sense, to challenge any decisions or put the spotlight in those kinds of decisions because they may be on the receiving end in the future. So it may well be that they reserve all their, let’s say all their fighting spirit in a sense for the contract award phase and they will challenge that if they think that something was done wrong but once the contract has been performed, the contract has been performed, they move on to something else. So I think there’s an issue with incentives there. And if you take economic operators or potential competitors out of the equation, then that effectively just leaves us with, you know, the average citizen that maybe having a keen interest in a particular contract, would they go down the route of actually challenging it? I mean, in Portugal we’ve had a few challenges because the Portuguese law allows pretty much anyone to challenge a contract award and also a contract performance, but that’s pretty much it.  

Yes, I quite agree with you. It’s absolutely true that the competitors often don’t have the incentive to challenge contract modification cases. And speaking about average citizens taking control of contract modifications, there seems to be another issue. Even if we find these citizens that would be willing to fight for proper enforcement of EU public procurement law, then in many countries they wouldn’t have a standing to these claims.

 

Correct.

So that again leaves only the option to make a claim to the relevant office, the administration, who could maybe, maybe, look at these issues through administrative review.

 

Or the public prosecution office or something along those lines depending on the, on the country.

Yes. Of course in more serious cases the public prosecutor, yes, that’s true.

 

On that area as well, I mean, one of the things I think Article 72 brings to the table is actually now there is maybe an incentive for contract authority to declare the changes to the contract and that this was a theory that was presented by a lawyer at a conference that I was recently at and I don’t necessarily agree with it, but there’s now an incentive to declare and make public all the contract modifications that are clearly legal because they will be protected under some type of safe harbour rules. That is true for the ones that are legal but it doesn’t solve the problem with the ones that are illegal. When it comes down to, I think, Article 72 contract modifications if they are declared and they are clearly under the scope of Article 72, that limits the possibility of them being challenged and they are protected by some sort of safe harbour provisions. But I still think that the incentive will be, even if there is an incentive to actually comply with that obligation of publishing contract modifications on an electronic contract notice on the Official Journal of the European Union, any of the ones that are going to be clearly illegal, the contracting authority and the economic operator will still have an incentive of not making them public. 

Yes, of course, of course, naturally.

 

But that’s my point is I don’t think that you’re going to have a big change in terms of practice because it just protects what was already legal or what is legal under the law. Anything that is illegal will have yet another incentive to be kept under wraps.

Yes, I agree with you in part. Perhaps it will make a change or the new directive will make a change in the meaning that those law-abiding contracting authorities who want to make legal changes only, it is easier for them now. They don’t have to think or evaluate the changes so much by themselves. It’s made easier and it’s a good thing.

 

Do you think that will actually lead to a change in practice and make, improve at least the transparency of the whole process?

That might depend on the national laws. For instance in the case of Estonia, the new directive will make a huge difference because our regulation earlier was really, really restrictive. We didn’t allow making many changes at all, so now that there is a list of acceptable changes that is quite reasonable in fact, life for law-abiding contracting authorities and suppliers has been made much more efficient and easier. But of course in the countries that already had basically the same rules, there is really no difference.

 

In a sense, I mean, in terms of your career you’ve been over the last few years focusing on Article 72 and also contract modifications in general in EU public procurement law, at least in contract performance. What are you planning to do in terms of future research in this area?

Yes. In terms of future research I am slowly moving forward from Article 72 to Article 73. So, Article 73 claims that contracting authorities have the right to terminate public contracts in several cases, including the case when an unlawful contract modification has been made. To me, that right contains several fundamental risks, yes?

If you look at the Article, it gives a very broad right to terminate a contract that has been unlawfully modified and doesn’t restrict the option to use this right, doesn’t require any proportionality, doesn’t give a term for using this right, so the risks that we have here is firstly I’m afraid that contracting authorities might in a way start to abuse that right. We have the general principle of proportionality that is supposed to restrict using your rights in a manner or, or in a time that is not in balance with the purpose of the right but if a national law just transposes the Article as it is without restricting it further or prescribing any way to balance it in the actual situation, that might cause problems with regard to proportionality.

Then the other issue is that if we look at the traditional private law principles of good faith, legal certainty, then the right to terminate a contract really has a serious issue because under Article 73 the contracting authority is basically entitled to terminate a contract because of unlawful behaviour that it himself did, yes? Because of [its own] breach of law. So that’s quite a conflict with the principle of good faith and as well with legal certainty.

Then further, if the termination is in fact carried out and the contract is ended, what will happen to the contracting partner, the supplier or the contractor? Are they entitled to compensation and if then to what extent? Or should we regard them as being also a guilty party in this situation? This is another question. So I think there are a lot of fundamental issues that relate to enforcing Article 73 and that would be my next research project.

 

I think that’s a very good idea and research area to focus on in the next few months and years to come. Mari Ann, thank you very much for spending the time with us in the programme.

Thank you for having me.