Ineffectiveness etc. in relation to specific contracts based on a framework agreement under reg.103 Public Contracts Regulations 2015

Reg.103 of the Public Contracts Regulations 2015 (PCR2015) establishes rules on ineffectiveness and shortening of duration in relation to specific contracts based on a framework agreement. This regulation alters the rules of regs.99 to 102 in relation to specific contracts based on a framework agreement. However, most of the comments made in relation to those regulations apply here as well (see Pedro's comments here).

Reg.103(1) PCR2015 determines the scope of application of these special rules and clarifies that  the “specific contracts” it covers are those which are based on the terms of a framework agreement; and were entered into before a declaration of ineffectiveness (if any) was made in respect of the framework agreement on which they are based. The need for these special rules derives from reg.103(2) PCR2015, which determines that a specific contract is not to be considered to be ineffective merely because a declaration of ineffectiveness has been made in respect of the framework agreement. 

Ineffectiveness of 'relevant' specific contracts

In that case, following reg.103(3), where a declaration of ineffectiveness has been made in respect of the framework agreement, the Court must make a separate declaration of ineffectiveness in respect of each relevant specific contract. Therefore, regs.103(2) and (3) clearly decouples the (in)effectiveness of contracts awarded within a framework agreement before the declaration of its ineffectiveness from the ineffectiveness of the latter itself. 

For these purposes, a specific contract is relevant only if a claim for a declaration of ineffectiveness in respect of that specific contract has been made within the time limits mentioned in reg.93 PCR2015 as applicable to the circumstances of the specific contract; regardless of whether the claim was made at the same time as any claim for a declaration of ineffectiveness of the framework agreement [reg.103(4) PCR2015]. 

This is bound to limit the issue of ineffectiveness of specific contracts within the framework to those that are actually litigious, and is in line with the option for a restriction of the consequences of a declaration of ineffectiveness only for the future, or ex nunc, under reg.101(1) PCR2015. 

General interests excluding ineffectiveness of 'relevant' specific contracts

When determining whether a relevant specific contract should be declared ineffective on top of the ineffectiveness of the framework agreement it is based on, reg.100 PCR2015 (general interest grounds for not making a declaration of ineffectiveness) applies insofar as the overriding reasons relate specifically to the circumstances of the specific contract [reg.103(5)].  

Ineffectiveness of (non-'relevant') specific contracts due to general grounds

Moreover, reg.103(6) coordinates the rule in reg.103(3) and (4) with those in reg.95 PCR2015, to the effect of preventing the contracting authority from entering into specific contracts based on a framework which effectiveness has been challenged. That obligation is implicit and, consequently, where a claim form has been issued in respect of a contracting authority’s decision to award the framework agreement, the contracting authority has become aware that the claim form has been issued and that it relates to that decision, and a/any specific contract(s) have not been entered in, the contracting authority is required to refrain from entering into any such specific contracts based on the litigious framework agreement--and, failing that, it will be considered to have infringed the requirements of reg.95 PCR2015 and the Court will be able to declare the ineffectiveness of any such specific contracts. The same applies in relation to interim measures altering or restoring such suspension of the contract-making powers of the contracting authority.

In terms of reg.103(6)(b), thus, the regulation not prejudice the making of a declaration of ineffectiveness in relation to a specific contract in accordance with other provisions on the basis of the second ground of ineffectiveness set out in reg.99(5), where (i) the relevant breach of the kind mentioned in reg.99(5)(a) is entering into the specific contract in breach of regs.95 or 96(1)(b) PCR2015, and the relevant 'additional' breach of the kind mentioned in reg.99(5)(b) relates specifically to the award of the specific contract and the procedure relating to that award, rather than to the award of the framework agreement and the procedure relating to it. Further to this, and even if the clarification is quite circular and unnecessary, under reg.103(6)(a), the third ground of ineffectiveness set out in reg.99(6) and (7) also applies to the entering into of specific contracts based on a framework agreement.

No other grounds for ineffectiveness of specific contracts

Reg.103(7) PCR2015 limits the possibilities to declare the ineffectiveness of a specific contract based on a framework agreement other than in accordance with reg.103(3) (separate declaration of ineffectiveness in respect of each relevant specific contract) or on a basis mentioned in reg.103(6)--which, basically, comes to exclude the possibility of declaring the ineffectiveness under the first ground foreseen in reg.99 PCR2015. 

Effects derived from the ineffectiveness of specific contracts

According to reg.103(8) PCR2015, where a declaration of ineffectiveness is made in respect of a specific contract in accordance with reg.103(3), reg.101 (the consequences of ineffectiveness) applies, but reg.102(1) (requirement to impose a civil financial penalty) does not apply. This makes sense and avoids the imposition of excessive penalties when the ineffectiveness of a relevant specific contract derives from or comes in addition to the ineffectiveness of the framework agreement it is based on--which will already have triggered the imposition of penalties under reg.102 PCR2015.  

A contrario, where the ineffectiveness of a (non-'relevant') specific contract derives from other grounds, as foreseen in reg.103(6) PCR2015, the full remedies foreseen in reg.98 are available and regs.101 and 102 need to be applied strictly.

Reg.103(9) foresees that, where the Court refrains from making a declaration of ineffectiveness which would otherwise have been required on the basis of general interest grounds, the Court must order that the duration of the contract be shortened to the extent specified in the order. The extent by which the duration of the contract is to be shortened is the maximum extent, if any, which the Court considers to be possible having regard to what is required by the overriding reasons of general interest [reg.103(10)]. For these purposes, “duration of the contract” refers only to its prospective duration as from the time when the Court makes the order [reg.103(11) PCR2015].  

It is interesting to note that these considerations are not exactly parallel to those derived from shortening of contracts which ineffectiveness is excluded by general interest grounds under reg.102(2)(a) and (3) PCR2015, where the limits to the shortening of the contract derived from the general interest grounds are not expressly referred to. However, in my view, there is no reason not to apply these rules analogously to that case.

Penalties in addition to, or instead of, ineffectiveness under reg.102 Public Contracts Regulations 2015

Reg.102 of the Public Contracts Regulations 2015 (PCR2015) determines the penalties that the Court must impose in addition to, or instead of, the ineffectiveness of a contract awarded in violation of any of the grounds set out in reg.99 PCR2015, which are fundamentally limited to a shortening of the duration of the contract and/or the payment of civil financial penalties by the contracting authority (see Pedro's remarks here). It is important to stress that the Court has no discretion to decide not to impose any of these penalties, given that reg.98(2)(b) PCR2015 requires it to impose some penalty when the conditions of reg.102 are met--which cover two different cases.

Firstly, the Court must impose the payment of civil penalties where it declares the ineffectiveness of the contract [reg.102(1) PCR2015].

Secondly, the Court must impose penalties even if it does not declare the ineffectiveness of the contract because either (a) it is satisfied that any of the grounds for ineffectiveness applies but does not make a declaration of ineffectiveness because reg.100 requires it not to do so; or (b) the Court is satisfied that the contract has been entered into in breach of any requirement imposed by regs.87, 95 or 96(1)(b) and does not make a declaration of ineffectiveness, whether because none was sought or because the Court is not satisfied that any of the grounds for ineffectiveness applies [reg.102(2) PCR2015]. 

In these cases, the Court must order at least one, and may order both, of the following penalties: (a) that the duration of the contract be shortened to the extent specified in the order [in which case, “duration of the contract” refers only to its prospective duration as from the time when the Court makes the order; reg.102(16) PCR2015]; or/and (b) that the contracting authority pay a civil financial penalty. 

If the Court imposes the payment of a civil financial penalty in either of these cases, in determining its amount, the overriding consideration is that the penalties must be effective, proportionate and dissuasive [reg.102(4) PCR2015; for a comparative view of the level of such penalties in other EU jurisdictions, see the report recently published by the Commission on "Economic efficiency and legal effectiveness of review and remedies procedures for public contracts" (April 2015)]. 

Reg.102 PCR2015 establishes two additional general rules. Firstly, in determining the appropriate order, it is made explicit that the Court must take account of all the relevant factors, including the seriousness of the relevant breach of the duty owed in accordance with reg.89 or 90; the behaviour of the contracting authority; and, where the order is to be made without a declaration of ineffectiveness, the extent to which the contract remains in force [reg.102(5) PCR2015]. Moreover, it is also established that, where more than one economic operator starts proceedings in relation to the same contract, the determination of the  effective, proportionate and dissuasive character applies to the totality of penalties imposed in respect of the contract [reg.102(6) PCR2015; ie a sort of ne bis in idem].

Civil financial penalties

Reg.102(7) to (11) establishes specific the rules concerning the payment of civil financial penalties and, in particular, whom the penalties are payable to. This may be of interest to public lawyers. However, from a public procurement perspective, this does not deserve any further comments.

Contract shortening

More interestingly, reg.102(12) to (16) establish specific rules for the shortening of the contract that cannot be declared ineffective. The regime is quite similar to the rules governing the consequences of a declaration of ineffectiveness under reg.101 PCFR2015. In that regard, the Court may make any order that it thinks appropriate for addressing the consequences of the shortening of the duration of the contract [reg.102(12)] and such an order may, for example, address issues of restitution and compensation as between those parties to the contract who are parties to the proceedings so as to achieve an outcome which the Court considers to be just in all the circumstances [reg.102(13)].

Reg.102(14) foresees the possibility for the parties to have previously regulated contractually the consequences of an order shortening the contract and, consequently, reg.102(15) determines that, in those circumstances, the Court must not exercise its power to regulate the shortening of the contract in any way which is inconsistent with those provisions, unless and to the extent that the Court considers them incompatible with the primary order to shorten the contract. The same issue of (in)existence of compensation for loss or damage resulting from the shortening of the contract arises as in relation to effectiveness, so the comments made in relation to reg.101 PCR2015 to the effect of excluding any such compensation apply here as well.

Consequences of ineffectiveness under reg.101 Public Contracts Regulations 2015

Reg.101 of the Public Contracts Regulations 2015 (PCR2015) determines the consequences of the ineffectiveness of a contract declared under reg.99 PCR2015. According to reg.101(1) PCR2015, the declaration of ineffectiveness determines that the contract is to be considered to be prospectively, but not retrospectively, ineffective as from the time when the declaration is made and, accordingly, those obligations under the contract which at that time have yet to be performed are not to be performed.

This means that the effects of the declaration of ineffectiveness are ex nunc or from now on, which is a possibility allowed for under Art 2d(2) of Directive 89/665 as amended by Directive 2007/66 (here). In this case, though, the limitation of the effects of the ineffectiveness to the future triggers an obligation to impose additional penalties, which are dealt with by reg.102 PCR2015. Pedro concurs.

Given that such decision can be appealed and, consequently, the declaration of ineffectiveness can be stayed, reg.101(2) PCR2015 clarifies that, in case of exercise of any power under which the orders or decisions of the Court may be stayed, at the end of any period during which a declaration of ineffectiveness is stayed, the contract is to be considered to have been ineffective as from the time when the declaration had been made. Consequently, the practical effects of the declaration of ineffectiveness need to be adjusted to the time of the adoption of such declaration, even if that means that it gains some retrospective effectiveness upon confirmation (or lift of the stay).

In practical terms, reg.101(3) PCR2015 allows the Court making a declaration of ineffectiveness to make any appropriate order addressing the implications of the declaration of ineffectiveness and any consequential matters arising from the ineffectiveness. Such order can be made at the same time of the decision on ineffectiveness, or at any time after doing so. Reg. 101(4) PCR2015 further clarifies that such an order may, for example, address issues of restitution and compensation as between those parties to the contract who are parties to the proceedings so as to achieve an outcome which the Court considers to be just in all the circumstances.

Reg.101(5) PCR2015 regulates the possibility that the contracting authority and the contractor may have self-regulated the consequences of a declaration of ineffectiveness. In that case, for the contractual regime to have effect, it is necessary that the parties to the contract have agreed before the declaration of ineffectiveness and by contract any provisions regulating their mutual rights and obligations in the event of such a declaration being made. That is, the contractual regime applicable to the ineffectiveness needs to pre-exist the declaration of ineffectiveness so as to avoid strategic behaviour between the parties. 

In any case, should there be a contractual regulation of the consequences of the declaration of ineffectiveness, reg.101(6) PCR2015 determines that the Court must not exercise its power to make an order under reg.101(3) in any way which is inconsistent with those provisions, unless and to the extent that the Court considers them incompatible with the requirements in reg.101(1) or (2)--that is, unless they restrict the future ineffectiveness of the contract, considered from the date of the declaration.

One of the issues that is likely to trigger more litigation concerns any sort of compensation for loss or damage derived from the ineffectiveness of the contract (either contractual, or as a result of an issue of compensation under a Court order)--which, in my view, would run contrary to the effectiveness of the remedies Directive and, consequently, should not be allowed [in similar terms, see J Arnould, "Damages for performing an illegal contract: the other side of the mirror - comments on the three recent judgments of the French Council of State" (2008) 17(6) Public Procurement Law Review NA274-281]. 

This was an unresolved issue in the CJEU Judgment in Commission v Germany, C-503/04, EU:C:2007:432, para 36: "even if it were to be accepted that the principles of legal certainty and of the protection of legitimate expectations, the principle pacta sunt servanda and the right to property could be used against the contracting authority by the other party to the contract in the event of rescission, Member States cannot rely thereon to justify the non-implementation of a judgment" declaring the ineffectiveness of a public contract (emphasis added). 

  

In my view, such compensation of damages should not be allowed because it would entail a payment derived from an infringement of EU law that actually benefits a party intimately involved in the infringement. Moreover, the grounds for ineffectiveness are extremely limited and the infringements that trigger ineffectiveness are clear-cut and easy to monitor by the contractor, so that it is impossible for it to seriously claim lack of knowledge of the infringement (bad faith) for the purposes of claiming compensation [in similar terms, see S Treumer, "Towards an obligation to terminate contracts concluded in breach of the E.C. Public procurement rules - the end of the status of concluded public contracts as sacred cows" (2007) 16(6) Public Procurement Law Review 371-386, 381: "if for example the contract party has been fully aware or should have been fully aware that the public procurement rules have been disregarded, this will presumably reduce the consideration given to the interest of the contract party in maintaining the contract. It might even lead to the exclusion of consideration to this interest of the contract party in cases where they have been fully aware of violation of the rules combined with very active participation in the violation". For a slightly different approach and a discussion of the standard of diligence required from a contractor considering claims in this setting, see MA Simovart, "The new Remedies Directive: would a diligent businessman enter into ineffective procurement contract?" (2009)].

General interest grounds for not making a declaration of ineffectiveness under reg.100 Public Contracts Regulations 2015

Reg.100 of the Public Contracts Regulations 2015 (PCR2015) transposes Art 2d(3) of Directive 89/665 as amended by Directive 2007/66 (here), and establishes the general interest grounds for not making a declaration of ineffectiveness that would otherwise derive from reg.99 PCR2015. Under reg.100(1) PCR2015, where the Court is satisfied that any of the grounds for ineffectiveness of reg.99 applies, it must not make a declaration of ineffectiveness if the contracting authority or another party to the proceedings submits such a request, and the Court is satisfied that overriding reasons relating to a general interest require that the effects of the contract should be maintained. Pedro discusses it here.

For these purposes, the general interest grounds for not making the declaration of ineffectiveness should, in principle, not be of an economic nature. Where the reasons adduced to oppose the declaration of ineffectiveness are of an economic nature, the additional conditions of reg.100(2) to (4) PCR2015 need to be complied with. In that regard, it should be stressed that economic interests in the effectiveness of the contract may be considered as overriding reasons only if in exceptional circumstances ineffectiveness would lead to disproportionate consequences [reg.100(2)]; and, in any case, economic interests directly linked to the contract cannot constitute overriding reasons relating to a general interest [reg.100(3)]. 

Reg.100(4) PCR2015 clarifies that such economic interests directly linked to the contract include (a) the costs resulting from the delay in the execution of the contract; (b) the costs resulting from the commencement of a new procurement procedure; (c) the costs resulting from change of the economic operator performing the contract; and (d) the costs of legal obligations resulting from the ineffectiveness. Therefore, the scope for purely economic interests to be taken into account in order to bar ineffectiveness is rather limited although, to the best of my knowledge, there is no guiding case law that clarifies this provision [for general discussion of the practical application of this provision, see K Struckmann & P Hodal, "Private Enforcement of Contract Ineffectiveness: A Practitioner's Point of View" (2014) 1 European Procurement & Public Private Partnership Law Review 27-35].