The announced 2018 Federal Procurement Act will bring about numerous significant changes relevant to both contracting authorities and bidders. The revision of the existing law will focus on dealing with conflicts of interest. Unfortunately, due to the use of vaguely defined legal terms, the law may prove very difficult to interpret. This will pose further challenges to contracting authorities and external advisors regarding compliance in public procurement law as they, more often than not, act as contract-awarding bodies.

Even before procurement procedures actually begin, contracting authorities are already required to examine whether potential conflicts of interest with a view to its employees may occur and to take adequate preventive measures (within the scope of compliance and control systems). If a conflict of interest related to the contracting authority’s employees and their relation to the bidder is suspected, the bidder might be excluded from the procurement procedure.

Vague definition of the term ‘conflict of interest’?

Pursuant to the changes in section 26 BVergG 2018, contracting authorities, “are from now on obligated to take appropriate steps towards efficiently preventing, uncovering and resolving conflicts of interest that occur in the course of procurement procedures”. The first difficulty in this respect occurs already regarding the definition of the term ‘conflict of interest’ in section 26 (2). Based on this definition, each situation in which “the employees of a contracting authority or contract-awarding body participating in the procurement procedure or being in the position to influence the outcome of the procedure, have a direct or indirect financial, economic or other personal interest that might affect their impartiality and independence regarding the procurement procedure” is to be considered a conflict of interest.

‘Employee’ means all persons working on the procurement procedure or influencing its outcome, as well as all persons acting on behalf of the contracting authority. The above definition applies irrespective of whether the employment relationship with the contracting authority is governed by public or private law, the employees are members of a management or supervisory body, or the term refers to external service providers and/or their employees.

With a view to the revision’s general focus on ensuring fair competition and equal treatment of bidders as well as fighting fraud and corruption, at least the provision on the employee’s (direct or indirect) financial or economic interest appears comprehensible and (at least to some extent) precise. The alternative prerequisite of the “other personal” interest, on the other hand, appears to be nearly limitless and will lead to many uncertainties if it is not narrowed down and further defined by case law. The comments to the government bill on the revision of BVergG 2018 do not make interpreting the new provisions any easier. In an attempt to further define the term ‘other personal interest’, existing literature mentions aspects such as family-based or private relationships, similar political beliefs or shared nationality, and/or common interests shared with the potential beneficiary. Still, the above propositions do not define the term in any useful way.

The situation becomes even more delicate considering that already a suspicion that impartiality and/or independence might be affected, suffices for a conflict of interest to be deemed existent. This in particular against the backdrop that a conflict of interest constitutes grounds for a mandatory exclusion of the bidder from the bidding process, insofar as “the conflict of interest as defined in section 26 cannot be avoided by other, less radical measures” (see section 78 (1) (7)).

Measures to prevent, identify and resolve conflicts of interest

As the contracting authority is obligated to actively set measures to prevent conflict of interest risks, it is required to take steps towards preventing conflicts of interest and to implement control mechanisms to identify and resolve existing conflicts of interest. Possible preventing measures mentioned in the comments to the government bill include preventive campaigns on notification obligations in case of conflicts of interest, compliance systems, internal audit and control systems as well as (anonymous) notification systems. Within the scope of an effective compliance management system, all employees involved in a procurement procedure will, in the future, have to undergo an examination and sign declarations of impartiality, the latter applying in particular also to external service providers.

As the exclusion from a procurement procedure is considered a last resort, (uncovered) conflicts of interest should be resolved by taking less radical steps where possible. The comments to the government bill call for the least drastic steps to be taken, which, however, must be suitable for effectively resolving the relevant conflict of interest. Possible measures in this respect include repeating parts of the procurement procedure or making changes in personnel (removal of biased employees, etc.).

Summary

Above all, it is the vaguely defined legal terms such as the employees’ ‘other personal interests’ that make the contracting authorities’ obligation to prevent conflicts of interest difficult to grasp. It remains to be seen how low the threshold for conflicts of interest will be set by case law.

In any case, it is highly recommendable for both contractual authorities and bidders to adapt or, if they have not done so yet, implement appropriate compliance systems regarding public procurement law. If not, both sides will be exposed to new procedural risks, at the latest after the Federal Procurement Act 2018 has entered into force.