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Risks imposed by breaches of contract in public procurement – key take aways from current case law

09/11/2020 - Reading time: 5 minutes

Author

Rudolf Pekar

Partner

The Federal Procurement Act 2018 ("BVergG 2018") has been in force for about two years and has, among other things, brought new reasons for the exclusion of bidders. 

Current case law shows that bidders must carefully evaluate contractual relationships with public contractors if irregularities in the contractual relationship become apparent. If such a contract is violated and the contracting authority imposes sanctions, this can justify an exclusion from other award procedures - even procurements from other contracting authorities.

For the contracting authority, this creates - in addition to the obligation to set up a corresponding contract management system - new, sometimes difficult obligations of evaluation. For bidders, the only remaining option is to take immediate measures of "self-cleaning" in order to prevent exclusion from future award procedures.

Performance of previous contracts as a reason for exclusion

The new reason for exclusion pursuant to § 78 BVergG 2018 stipulates that bidders must be excluded from the award procedure if the bidder has revealed substantial or continuing deficiencies in the performance of previous contracts which have resulted in a sanction by the contracting authority (early termination, damages or comparable sanctions, such as substitute performance, invoice reductions, etc.).

In a recent decision, the Austrian courts have for the first time (as far as can be ascertained) dealt with the exclusion of a bidder on the grounds of deficient performance in an earlier contract. It is noteworthy that it is not a matter of an earlier contract of the conractting authority that was decisive for the exclusion. In the application for review, the contracting authority issuing the invitation to tender was made aware of breaches of contract by the excluded bidder in the performance of a contract with another contracting authority.

In its decision of 9 March 2020 (LVwG 443.8-2976/2019-43), the Administrative Court for Styria stated that the contracting authority issuing the invitation to tender would be obliged to carry out a corresponding review as soon as it became aware of the allegations of poor performance of the contract with another contracting authority. However, this would require knowledge and proof of the relevant breach of contract.

However, bidders themselves are already obliged, at least when submitting a European single procurement document, to disclose any previous formally established breaches of contract when participating in award procedures (ECJ 3.10.2019, C-267/19, Delta).

The fact that the bidder's offer should ultimately have been excluded from the award procedure is also justified by the fact that the bidder was unable to provide evidence of sufficient measures of "self-cleaning".

The court's ruling thus confirms the legal requirements both for the contracting authority with regard to contract management and assessment of the bidders' suitability and for the bidder with regard to the handling and disclosure of breaches of contract and the implementation of remedial measures within the company.

Requirements on the procurement organization of contracting authorities

The procurement organization of public purchasers must be designed accordingly with regard to the requirement to examine the (poor) performance of contracts. As confirmed in the case law of the Styrian Provincial Administrative Court, breaches of contract in the execution of contracts of other contracting authorities may also possibly result in the (mandatory) exclusion of a bidder. Therefore, at least for one's own organization, the execution of the contract and possible breaches of contract as well as sanctions imposed from previous contracts with the respective bidders must be sufficiently documented. Only in this way can it be ensured that the responsible employees have the relevant information available to them during the evaluation of the bidder's suitability in order to be able to assess a possible exclusion of the bidder.

At the latest as soon as the contracting authority has been informed of possible contractual violations of a bidder or otherwise becomes aware of them, it is obliged to carry out appropriate investigations. In doing so, the contracting authority must itself determine whether a bidder ( in any case if it is the possible successful tenderer) has breached material obligations in this contractual relationship; the contracting authority must therefore assess the significance of the less performed part of the contract and clarify whether the breach had a negative impact on the contractual relationship (cf. ECJ 3.10.2019, C-267/19, Delta).

The ruling of the Styrian Administrative Court also states, with reference to the legislative materials for the Public Procurement Reform Act 2018, that the contracting authority would be obliged to examine whether the clarification of the legality of a sanction imposed is pending in court, as otherwise these grounds for exclusion would not apply. However, this view is no longer valid. In its judgment of 19 June 2019, the European Court of Justice (ECJ 19.6.2019, C 41/18, Meca) confirmed that even a pending court case does not preclude an exclusion, as the contracting authority may not be dependent on the legal opinion of a third party when examining a bidder's professional reliability. 

Therefore, contracting authorities must assess, if they are aware of breaches of contract, whether these (must) entail an exclusion of the tenderer or not. In particular, it depends on the respective contract whether a defect is to be qualified as "substantial" or "permanent", whereby it is decisive for the fulfilment of the exclusion reason whether the defect has entailed a corresponding sanction. In addition, certain time limits pursuant to § 83 BVergG 2018 must also be observed, which specify the maximum period of up to five years for a contracting authority to take the reason for exclusion into account. 

Measures by the bidder to avoid exclusion

For the bidders, too, the reason for exclusion of poor performance of contracts creates new challenges for procurement and contract management. 

If the contracting authority identifies a significant breach of contract, it must then examine whether the bidder has taken sufficient "self-cleaning" measures to prevent exclusion.

In doing so, the bidder must prove that he has taken technical, personnel, organizational or other measures to prevent further misconduct. In addition to active cooperation with investigating authorities and compensation for damages, the bidder must also take effective measures, such as setting up a reporting and control system or auditing bodies.

As the current decision of the Styrian Provincial Administrative Court also clarifies, merely superficial measures or declarations by the bidder are usually not sufficient to be successful in "self-cleaning". Depending on the respective organization, quite extensive control and organizational measures may also have to be taken, such as the "removal" of the persons committing the misconduct from the company and the implementation of suitable personnel reorganization measures and the introduction of corresponding control and audit systems.

In contrast, the public client is obliged to weigh up the often not so simple balancing act between the seriousness of the misconduct, the effects of exclusion and the suitability of the measures taken. 

Summary and conclusion

According to Sec 78 BVergG 2018, contracting authorities are obliged to exclude bidders from award procedures if they have performed previous contracts poorly and sanctions such as damages, termination of contract or comparable sanctions (e.g. invoice reductions, penalties, substitute performance) have been imposed. It does not matter that an earlier contract of the respective contracting authority issuing the invitation to tender is poorly fulfilled. 

Provided that the relevant information is available, breaches of contract in connection with contracts awarded by other contracting authorities may also be decisive for the applicability of this exclusion. In a recent judgement, the Styrian Administrative Court has considered the corresponding argument in an application for review of the award decision to be sufficient for the contracting authority issuing the invitation to tender to be aware of this fact. 

Corresponding information provided by a bidder in the course of an award procedure thus triggers the obligation of the contracting authority to examine the reason for exclusion. However, a contracting authority will still not have to investigate completely unsubstantiated or blanket accusations, especially since a corresponding obligation to review may not be overstretched. Bidders are, however, required by current ECJ jurisprudence to ensure transparency and are obliged to disclose such violations in future award procedures.

If the contracting authority has reliable information about previous misconduct in the performance of the contract as well as sanctions imposed, it must then examine whether this requires the exclusion of the bidder. 

To this end, the contracting authority itself must assess the conduct of the tenderer and the circumstances in order to determine whether, in its view, the breach of contract constituted a substantial or permanent shortcoming in the fulfilment of an "essential requirement" of the earlier contract.

Before excluding a tenderer, however, the contracting authority must in any case still examine and evaluate whether the tenderer has taken sufficient measures of "self-cleaning". By taking such measures, tenderers can prevent the (ongoing) exclusion from contract award procedures on the basis of the reason for exclusion that has been realized before the end of the period for suspension from participation in contract award procedures, which can last up to five years. The bidder must at the very least prove that he has actively cooperated with the investigating authorities, has compensated damages, and has taken effective measures, such as the introduction of reporting and control systems or auditing and personnel measures.

The current case law on the new grounds for exclusion for poor performance of previous contracts confirms the measures to be taken by the contracting authorities and bidders in the procurement organization. 

Contracting authorities must ensure that, by means of precise documentation of the contract execution and the passing on of information to the awarding body in the course of the assessment of the bidder's suitability, it is possible to react accordingly if there are any breaches of contract. This also applies in the event that other contracting authorities may require information with regard to the performance of previous contracts.

Bidders, on the other hand, are obliged to disclose any relevant breaches of contract in award procedures. It is therefore essential for bidders to take appropriate self-cleaning measures in due time and to a sufficient extent in order not to risk a - possibly years-long - suspension from participation in contract award procedures.

Author

Rudolf Pekar

Partner