Settlement Agreements and the Procurement Rules

Article

24 January, 2017

The CJEU in the case of Finn Frogne A/S v Rigspolitiet ved Center for Beredskabskommunikationhas has ruled that a settlement agreement can amount to a regulated modification of a contract.

Facts of the case

The state of Denmark initiated a procedure to award a public contract through competitive dialogue for the supply of a global communications system for emergency response services and the maintenance of those for a number of years. The Centre for Emergency Communication of the National Police of Denmark (CFB) became the contracting authority and the contract was awarded to Terma for an approximate value of over €70 million.

Due to a dispute between CFB and Terma in relation to delivery deadlines the parties agreed to a settlement. Through the settlement the scope of the contract was to reduce the supply of communication systems worth approximately €4.69 million and CFB would acquire two central server farms worth approximately €6.7 million, which Terma had acquired with a view to lease them to CFB in performing the original contract.

CFB published a voluntary ex ante transparency notice (VEAT) in the OJEU (Official Journal of the European Union) of its intention to enter into a settlement agreement. Frogne, which had not participated in the pre-selection when the original contract was tendered brought an action before the national procurement body and first instance court, both of which dismissed its application. It then brought an action before the Danish Supreme Court, which referred the matter to the CJEU for a preliminary ruling.

The CJEU was asked to consider whether the settlement agreement required a tendering procedure where the original contract encountered difficulties.

CJEU

In dealing with this question the CJEU stated the following:

  • The principle of equal treatment and that of transparency prevent a contracting authority and a successful tenderer from amending the provisions of the contract in such a way that those provisions differ materially in character from the original contract,
  • A contract will differ materially in character if the proposed amendments would either extend the scope of the contract considerably or change the economic balance of the contract in favour of the successful tenderer, or
  • The changes call into question the award of the contract because had such changes been incorporated into the documents for original procedure either another tenderer would have been accepted or that other tenderers would have been admitted to that procedure.

As such a substantial amendment to a contract that has been awarded cannot be changed by direct agreement between the contracting authority and the contractor. This would require a new procurement procedure. However, a contracting authority and contractor would be permitted to make amendments if such amendments were permitted by the original contract.

The Court also considered that in certain circumstances there may be objective reasons for making a direct award due to the unpredictability of certain circumstances. However, the list of exceptions as provided in the Directive 2014/18/EC must be regarded as exhaustive. While some procurements may immediately be categorised as unpredictable in nature, it is for the contracting authority to use the most appropriate procurement method, take care when defining the subject matter of the contact and retain the possibility for making amendments to the contract to deal with such issues.

In relation to the case before the Court, it stated that as the amendments consisted of a reduction in scope, this may result in it being brought within the reach of greater number of economic operators and on this basis a new procurement procedure would be necessary. Further, even though the parties' intention to enter into a settlement agreement was to resolve objective difficulties and the objectively unpredictable nature of the performance of certain aspects of the contract neither reasons were objective justifications for the amendment.

As such the Court held that once a contract has been awarded, a material amendment cannot be made without a new tendering procedure. This is even where the amendment, objectively, is a type of settlement agreement with both parties agreeing mutual waivers with the intention of bringing an end to a dispute arising from difficulties encountered in the performance of a contract. The position would only be different if the contract provided for modifications, even material ones, post award and provided for the application of that possibility.

Comment

This decision is an important reminder to contracting authorities that a settlement agreement may amount to a modification of a regulated contract and prior to entering into any such agreement legal advice should be sought. Modifications of contracts post award can be made in certain circumstances provided that the provisions of Regulation 72 of Public Contracts Regulations 2015 (PCR) are respected. At the same time, as the Court has pointed out contracting authorities should take care when planning for a procurement that they are clear with regard to potential modifications that may be necessary in the course of the contract and how those would be applied in practice.

This decision is also an important one in relation to the use of VEATs. A contracting authority may use this method as part of its risk mitigation strategy, however, this may not be advisable in all circumstances especially where the modification has not been provided for within the contract documentation or cannot be justified for any other reason as provided for in Regulation 72 PCR.

Forbes Solicitors regularly advise contracting authorities on a range of procurements from advising on procurement strategy and procedure, drafting ITTs and contract documents to assessing modifications to contracts. If you have a questions, please contact Daniel Milnes.

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