Exciting verdict on negotiated procedure without prior announcement

Judgment of the European Court of Justice in case C-376/21 of 16 June 2022, Regioni v rastezh v. Obshtina Razlog. The judgment in its entirety can be found here .

Summary

In a negotiated procedure without prior advertising (with the support of Article 32.2 ai LOU directive or ch. 6 § 12 LOU) it is permitted to turn to only one supplier. This applies even if the object of the contract does not objectively justify that the specific supplier should be allowed to perform the contract.

However, in order to demonstrate that a contract has not been designed to escape the scope of the procurement rules, or procured contrary to the general principles, an authority must be able to demonstrate that the price resulting from the procedure is market-based and does not exceed the estimated value of the contract.

With "inappropriate" tender, which justifies that an authority may switch to a negotiated procedure without prior advertising under certain circumstances, also includes such circumstances which mean that tenders are considered "unacceptable" in the sense of procurement law (see article 26.4 b second paragraph LOU directive or Chapter 6 § 6 LOU).

Background

A Bulgarian municipality received EU funds to improve school and teaching infrastructure at a high school. The municipality therefore announced a public procurement, divided into four parts, regarding technology, equipment and furnishings for the high school. Only one tender was received, and it was for part 2 of the procurement. The bid was more than twice as expensive as the estimated value of the contract. The municipality therefore considered that the tender did not meet the contract conditions and canceled the procurement without awarding a contract. Instead, a negotiated procedure was launched without prior advertising, with the same contractual terms as in the original procurement.

In the negotiated procedure without prior advertising, the municipality contacted a supplier and entered into a contract with it. The procedure led to a complaint with the minister, which stated that the municipality had, without any justification, favored the supplier chosen and thus eliminated free competition. The complaint went to the Bulgarian Supreme Administrative Court, which turned to the European Court of Justice with two questions. In this analysis, we focus only on the second question.

The second question essentially meant that the Supreme Administrative Court asked the EU Court to rule on the following (see p. 37 (2)).

  1. Should the principles of transparency, proportionality, equal treatment and non-discrimination be interpreted so that they do not constitute an obstacle to a complete restriction of competition in the case of a negotiated procedure without prior publication, if the subject of the public contract does not exhibit characteristics which objectively require that this should only be carried out by the economic operator invited to negotiations?
  2. And is there an obstacle to a national provision, according to which the contracting authority - after a public procurement procedure has been closed because the only tender submitted was unsuitable - can invite only one economic operator to participate in a negotiated procedure without prior publication, if the subject of the public contract does not have specific characteristics that objectively require it to be performed only by the economic operator invited to negotiations?

The conclusions and analysis of the European Court of Justice

For the sake of clarity, we begin this analysis by briefly reviewing some of the provisions that the European Court of Justice refers to in the judgment.

  • Article 32.2 ai of the LOU directive contains provisions that a negotiated procedure without prior advertising may be used when the authority has previously carried out an open or selective procedure but no suitable tenders have been received in that procedure (equivalent to ch. 6 § 12 LOU).
  • Article 18.1 first paragraph of the same directive contains the general principles for public procurement (equivalent to ch. 4 § 1 LOU).
  • Article 26.4 b, second paragraph of the LOU directive regulates that a negotiated procedure without prior advertising may be used under certain conditions when only invalid or unacceptable tenders have been submitted according to an open or selective procedure (equivalent to ch. 6 ch. 6 and 16 §§ LOU).

It is up to the authority to decide how many suppliers shall be included in the negotiated procedure without prior announcement according to Article 32.2 a of the LOU directive

From the complaint to the Bulgarian minister, and from the minister's argument in the further case (pp. 28 – 33 of the judgment), the running point seems to be that the municipality only approached a single actor in the negotiated procedure without prior advertising. The minister referred, among other things to Article 160 of what is referred to in the judgment as the "budget regulation" (regulation 2018/1046 on financial rules for the general budget of the Union), where it appears that the principle of free competition must be observed in public procurement, which was interpreted to mean that it was impermissible to simply let a supplier participate in the procurement procedure.

Free competition as a principle for both procurement and financial budget rules is hardly controversial. And the European Court of Justice also states, in the answer to the first question that was put to the court, that the provisions of the Budget Regulation are not applicable in the case (see p. 38 – 50 of the judgment). However, the requirement of free competition may be considered to be fulfilled by the open or selective procedure that has preceded the negotiated procedure without prior advertising. The advertised procedure and the subsequent unadvertised procedure may be seen as an indivisible whole. This means that the economic actors who are potentially interested in the contract have had the opportunity to show their interest and the procedure has thus been exposed to competition (p. 67).

The EU Court also states that Article 32.2 a compared with Article 18.1 first paragraph of the LOU directive means that a procuring authority, within the framework of a negotiated procedure without prior publication, can turn to a single economic actor. This is provided that the procedure reproduces, without substantial changes, the original terms of the contract entered in a previous open procedure that was terminated because the only tender submitted was unsuitable. This applies even if the object of the contract does not objectively have special features that justify the implementation being exclusively entrusted to that particular actor (p. 57).

In our opinion, the conclusion is logical. There is no regulation in the LOU directive regarding how many suppliers an authority must turn to in a negotiated procedure without prior advertising according to article 32.2 ai of the said directive, that is, it is up to the authority to decide. If it were required that the object of the contract has objective characteristics that justify the authority inviting only one specific supplier in a negotiated procedure without prior advertising, the conditions for contacting only one supplier in such a procedure would approach the provisions on direct award due to exclusivity. However, such direct allocation is regulated in a separate provision in the LOU Directive (and LOU), and refers to a completely different situation than that regulated in Article 32.2 a of the LOU Directive. We therefore believe that it is absolutely right for the EU Court to adhere to a strict interpretation of Article 32.2 a LOU directive.

The requisites for using a negotiated procedure without prior announcement according to Article 32.2 ai of the LOU Directive

The EU Court then goes further and specifies the meaning of Article 32.2 a first paragraph of the LOU directive. The European Court of Justice states that the provision has three cumulative requisites, i.e. that negotiated procedure without prior notice of procurement may be applied

  1. if no tenders or no suitable tenders, no tender requests or no suitable tender requests have been submitted in an open or selective procedure (first requisite) ,
  2. provided that the original terms of the contract have not been substantially altered (second requisite) and
  3. that a report be submitted to the commission, if it so requests (third requisite) .

The props are the same as in chapter 6. Section 12 LOU. We concentrate here on the first requisite, although the ECJ makes a small statement about the second requisite (the third requisite is not addressed at all in the judgment).

Inappropriate tenders

The European Court of Justice notes that it follows from Article 32.2 a first paragraph of the LOU directive that a tender should not be considered suitable if it has no connection with the contract, as it is clear that it cannot meet the needs of the procuring authority without significant changes and requirements according to the procurement documents (p. 60). A tender must be considered inappropriate if it is unacceptable in the sense referred to in Article 26.4 b second paragraph of the LOU directive. According to the latter provision, among other things, tenders from tenderers whose price exceeds the budget decided and documented by the procuring authority before the procurement procedure begins are considered unacceptable (p. 61).

To clarify what the EU Court actually means, we can return to our Swedish legislation. In the LOU there are two possibilities to switch to a negotiated procedure without prior announcement.

  • According to ch. 6 § 12 LOU if no suitable applications or tenders have been submitted in an open or selective procedure.
  • According to ch. 6 §§ 6 and 16 LOU if, in an open or selective procedure, only invalid or unacceptable applications or tenders have been submitted.

The two possibilities to switch to a negotiated procedure without prior announcement have different prerequisites and requisites. For a transfer according to section 12, the original terms of the contract must not be changed significantly and a report must be submitted to the commission, if it requests it. So the same conditions as applied by the EU Court of Justice.

Transition according to §§ 6 and 16 requires nothing more than that the tenders submitted were invalid or unacceptable. On the other hand, section 16 states that the suppliers who are invited shall not be excluded according to the provisions in ch. 13. , meet the qualification requirements and selection criteria specified by the contracting authority and have submitted tenders that meet the formal tendering requirements of the previous open or selective procedure.

It has already been clear that tenders that exceed the procuring authority's budget can be considered unacceptable (see prop. 2015/16:195, p. 994 and article 26.4 b second paragraph of the LOU directive). In those cases, one can therefore switch to a negotiated procedure with the support of ch. 6. Sections 6 and 16 LOU. There has previously been some uncertainty about what should be considered unsuitable tenders, i.e. such tenders which give the right to switch to a negotiated procedure with the support of Section 12. In the constitutional commentary to the section it is said that "certain guidance can be taken from section 13 which states certain specific cases when a tender or a tender application is to be considered unsuitable" to find out what constitutes an unsuitable tender. But it is also stated that it is difficult to give a more detailed explanation than the one given in section 13, and that the concept must therefore become a matter for law enforcement to define (see prop. 2015/16:195, p. 997).

We therefore welcome the clarification from the European Court of Justice that unacceptable tenders should also be considered inappropriate in the sense of the LOU (p. 62). This means that an authority can choose to switch to a negotiated procedure without prior announcement, when all tenders received are too expensive, with the support of either ch. 6 § 12 LOU or ch. 6 Section 6 LOU. But if the authority bases the procedure on ch. 6. § 12 LOU, the requisites of the provision must of course apply in full and it is then not permitted, for example, to substantially change the original terms of the contract. To what extent is it possible to change the original conditions when transitioning to a negotiated procedure according to ch. 6. § 6 LOU is, however, unclear.

Bonus props – market price

The ECJ also states that the contracting authority must be able to prove that the price it has agreed with the winning tenderer corresponds to the market price and that it does not exceed the estimated value of the contract (p. 69). In this way, the procuring authority demonstrates that public funds have been used as efficiently as possible (p. 70).

The principle of managing public funds has been around for a long time and appears in slightly different contexts. However, we have not seen this reasoning in the context of contracts entered into as a result of a negotiated procedure without prior advertisement under Article 32(2)(a) of the LOU Directive.

In which situations the requirement applies is not entirely clear. An alternative is that it always applies when the procuring authority switches to a negotiated procedure without prior announcement - regardless of whether this is because the tenders/tender applications received are inappropriate or unacceptable. A second possibility is that it applies when the procuring authority switches to the unadvertised procedure and then only turns to one supplier. A third is that the requirement only applies when the procurement concerns things that are financed through the EU's structural and investment funds, such as in the national case.

We do not perceive that the Court intends to introduce any general principle of efficient use of public funds into procurement law. Economizing with public funds is a purpose behind the legislation as such, but the presumption is that if the rules of the directives are followed, it should - primarily through competition - lead to efficient use of public funds. We believe that the requirement applies precisely in situations when the procuring authority only addresses one supplier in the unadvertised procedure. This is an exceptional situation and there is a built-in risk of circumvention of the regulations when such an opportunity opens up.

What we want to send above all to procuring authorities is that it is important to make a real estimate of a contract's value, and to be able to justify the contract value that a negotiated procedure without prior advertising with only one supplier results in based on the estimated value. Whether this also applies to framework agreements is not explicitly stated by the EU Court of Justice, but for those framework agreements where a ceiling volume must be stated, the estimated volume can be used as a benchmark for what is the market price.