Could the Finn Frogne case law get any weirder? The strange case of the partial termination of a parking concession (Conseil d’État, N°s 409728, 409799)

© Erwin Wurm

In its Decision of 15 November 2017 in the case of the Commune d'Aix-en-Provence and the Societe d'économie mixte d'équipement du Pays d'Aix (SEMEPA) (N°s 409728, 409799, the ‘SEMEPA Decision’), the Conseil d’État applied the new French rules on the modification of concession contracts that transpose Art 43 of the Concessions Directive (Dir 2014/23/EU). In the SEMEPA Decision, the Conseil d’État followed an approach that resembles very closely that of the Court of Justice of the European Union in its Judgment 7 September 2016 in Finn Frogne, C-549/14, EU:C:2016:634 (see here, which the Conseil d’État does however not mention), and decided that the partial termination of a concession contract for the exploitation of street and underground parking sites in Aix-en-Provence in a way that changed the overall nature of the contract was illegal. The SEMEPA Decision leaves an important factual element unexplored—ie the potential existence of an in-house relationship between the contracting authority and the concessionaire—which raises some questions as to the scope and limits of the applicability of the modification and termination rules derived from the 2014 Public Procurement Package to in-house providing structures.

Regardless of that, in itself, the Decision of the Conseil d’État is remarkable (and puzzling) for the extreme brevity of the justification given for the conclusion that the partial termination of the concession contract was illegal. In my view, the only plausible explanation for this extremely brief justification by the Conseil d’État is the even weirder background of the dispute, which involves a rebellious rejection by the municipality of Aix-en-Provence of a legal reform that transfers the competence for the management of (certain types of) parking sites to a higher level of regional administration (the ‘métropole d’Aix-Marseille-Provence’). In this post, I briefly address these two aspects of a truly interesting case that Prof François Lichère brought to my attention—for which I am grateful.

The illegality of the partial termination of the concession contract

In the case at hand, the municipality of Aix-en-Provence had entered into a series of concession contracts with SEMEPA for the exploitation of street and underground parking sites in that city—the oldest of which dated back from 29 December 1986. SEMEPA is a mixed economy company in which the municipality holds a controlling stake and appoints the majority of the board of directors (ie a body governed by public law and, prima facie, an in-house entity). On 9 June 2016, the municipality decided to partially terminate one of the concession agreements, and this decision was brought under judicial review. On this specific point, the Decision of the Conseil d’État establishes that

Considering, in the first place, that under the terms of Article 55 of the Ordinance of 29 January 2016 on concession contracts, applicable by virtue of Article 78 thereof to the modification of concession contracts in force prior to the entry into force of the Ordinance: ‘the conditions in which a concession contract can be modified during its term without a new concession award procedure are established by implementing regulation. Such modifications cannot change the overall nature of the concession contract. / Where the execution of the concession contract cannot be carried out without a modification contrary to the terms of this Ordinance, the concession contract can be terminated by the conceding authority’; under the terms of Article of the Decree of 1 February 2016 which sets implementing rules for the application of this Ordinance: ‘A concession contract can be modified in the following cases: (…) 5 Where the modifications, of whichever value, are not substantial. / A modification is considered substantial where it changes the global nature of the concession contract. In any case, a modification is substantial where any of the following conditions is met: / a) it introduces conditions which, had they been part of the initial concession award procedure, would have attracted additional participants in the concession award procedure, or allowed for the admission of candidates or tenderers other than those initially admitted, or for the acceptance of a tender other than that originally accepted. b) it changes the economic balance of the concession in favour of the concessionaire in a manner which was not provided for in the initial concession (…);

Considering that it is proven that the agreement concluded on 29 December 1986 between the municipality of Aix-en-Provence and SEMEPA, which had as its object the concession of the management of a public service of off-street parking and a public service of on-street parking, constituted, in fact and notably from the characteristics of its financial equilibrium, a single agreement; that, even if the municipality of Aix-en-Provence and SEMEPA declared to have proceeded to the ‘partial termination’ of that agreement, the agreement of 9 June 2016 had as its object a modification of the initial concession contract; that this modification needs to be view, in regard to its extension [ie the fact that it covered a large number of the parking sites initially covered], as changing the global nature of the initial contract; that it [the modification] introduced, in addition, conditions which, had they been part of the initial concession award procedure, could have attracted additional participants, or allowed for the admission of candidates or tenderers other than those initially admitted, or for the acceptance of a tender other than that originally accepted; that, consequently, [the challenge] based on the fact that this modification of the agreement of 29 December 1986 was adopted in breach of the rules for the modification of concession contracts is such as to create serious doubts as to its validity (paras 19-20, own translation from French).

As mentioned above, the Decision of the Conseil d’État in SEMEPA seems aligned with the Finn Frogne Judgment of the Court of Justice in the sense that it considers that a material reduction of the scope of the concession contract is able to change its nature and thus determine the illegality of the modification. However, in Finn Frogne the change in the nature of the contract derived (at least partially) from the fact that the partial termination resulted in a supply (and installation?) contract, rather than a concession. This is not the case in SEMEPA and it is hard to disentangle the two reasons given by the Conseil d’État in the same para (20): that the material reduction was such as to alter the global nature of the contract AND one that, had it been part of the initial award procedure, would have created different competition conditions and possibly led to a different award decision. From that perspective, the SEMEPA Decision does not make much to contribute to a proper understanding of the several grounds prohibiting different types of illegal (concession) contract modifications.

Additionally, given that SEMEPA is an in-house entity (or at least that is what seems to derive from the discussion in the next paragraph of the Decision, see below), the Conseil d’État missed an opportunity to clarify whether the applicability of the rules on contract modification in this specific case result solely from an (expansive) interpretation of the domestic law, or rather derive from the rules in the Concession Directive and/or general principles of EU public procurement law—which is, however, a tricky issue best saved for another time.

Procurement law to the rescue? Background to the partial termination of the concession

Going back to the SEMEPA Decision, and as also mentioned above, the only plausible explanation I can find for the extremely shallow and formalistic analysis and the brief justification given by the Conseil d’État for the finding of illegal modification is the even weirder background of the dispute, which is described in the following terms:

Considering, in the second place, that in a communication of 20 June 2016, published on the [Aix-en-Provence] municipality’s website, it indicated that the City Council had sold eight ‘off-street’ parking sites to SEMEPA, which had until then been exploiting them in the framework of a public service delegation, that this sale would allow the municipality to ‘avoid the obligation of gratuitously transmitting its parking sites to the [métropole d’Aix-Marseille-Provence], which the law required’, that ‘such parking sites constitute an estate, which the municipality has created, that its inhabitants have paid for, et [which] it would have been abnormall to have to donate them [to the métropole d’Aix-Marseille-Provence]’, and that ‘to those who doubt that this sale contributes to take the parking policy from the elected, to transfer it to the non-elected, without any guarantee that such policy will be preserved, it will be put that the exact opposite will happen: SEMEPA is a mixed economy company managed by a board of directors in which the elected from the municipality are the majority. The tariffs will continue to be controlled by the municipality; this will form part of the contract between both partners. In addition, SEMEPA’s annual activity report is presented annually to the City Council’; … proceeding to the … modification of the [concession] contract of 29 December 1986, and to the transfer of the off-street parking sites to SEMEPA, the Municipality and SEMEPA had as the sole goal to prevent the exercise, by the métropole d’Aix-Marseille-Provence of the power to regulate parking sites which it is given with effect from 1 January 2018 … the [challenge] based on the fact that the [modification] of 9 June 2016 had an illicit object and had to be considered an ‘abuse of power’ is such as to create serious doubts as to its validity  (paras 21, own translation from French).

Now, that explains everything! Except the need to use public procurement law at all in a situation of such clear fraudulent use of contractual mechanisms to avoid mandatory public law duties …

In-depth discussions on contract modifications at the Danish Association for Public Procurement

I had the honour of being invited to speak at the workshop on "Contract Changes in a European Perspective" organised by the Danish Association for Public Procurement (Dansk Forening for Udbudsret), where I shared thoughts with academic colleagues that have been researching on the topic for a long time--such as Prof Steen Treumer, Dr Piotr Bogdanowicz and Dr Carina Risvig Hamer--as well as with practitioners, such as Erik Kjær-Hansen, facing the increasingly complex task of advising contracting authorities and economic operators.

In my presentation, I covered general issues concerning the interaction between contract modifications and competition for public contracts (slides below), Piotr concentrated on specific interpretive difficulties raised by Article 72 of Directive 2014/24/EU, and the general discussion raised interesting topics based on Danish practice--which is rather sophisticated, and also in a state of shock after the CJEU's Finn Frogne decision of last year (see here).

In my view, there are significant challenges derived from the extension of EU rules to the execution phase of public contracts and the pro-competitive logic that generally inspires the rules in Article 72 of Directive 2014/24/EU, as well as the previous case law of the CJEU, is limited and bound to continue hitting the wall of unnecessary inflexibility of procurement procedures unless some more commercially-oriented sophistication is introduced in future case law (which should limit, if not reverse, Finn Frogne).

In the meantime, there is notable pressure on lawyers involved in the drafting of contract modification clauses, which are after an impossible mix of flexibility and predictability. Definitely an area where further discussions are needed. If you want to get involved in the conversation, please feel free to email me at a.sanchez-graells@bristol.ac.uk (or comment below).

When does competition end? A staged approach to procurement modifications from Albert Sanchez Graells

CJEU ignores commercial reality and sets unjustified contractual boilerplate requirements for contractual modifications (C-549/14)

In its Judgment of 7 September 2016 in Finn Frogne, C-549/14, EU:C:2016:634, the European Court of Justice (ECJ) issued guidance on the requirements (and constraints) derived from the principle of equal treatment in situations where the difficulties in the performance of a contract are such that the contracting authority decides to settle its early termination in a way that implies a material amendment to the initial contract. This case is relevant in the early stages of the new rules on contract modification and termination in Articles 72 and 73 of Directive 2014/24. However, the compatibility between the Finn Frogne Judgment and these new rules raises several questions.

In Finn Frogne, and according to the rather limited facts given in the Judgment, the dispute concerned the contract for the supply of a global communications system common to all emergency response services and for the maintenance of that system for several years, which was awarded after a competitive dialogue. The execution of the contract was subsequently delayed due to difficulties for which neither the contracting authority nor the supplier accepted responsibility (in the terms of the ECJ, both parties disagreed "as to which party was responsible for making it impossible to perform the contract as stipulated", para 10), which eventually led them to enter into a settlement involving the reduction of the contract and each party waiving all other rights arising from the original contract (para 11).

The main point of contention was that the settlement not only included the supply of equipment initially covered by the original contract (a radio communications system), but also the sale of two central server farms which the contractor had itself acquired with a view to leasing them to the contracting authority in performance of the original contract (paras 11 and 19). The settlement was the object of a voluntary ex ante transparency notice and subsequently challenged by a third party.

The legal issue in front of the ECJ was "in essence, whether Article 2 of Directive 2004/18 must be interpreted as meaning that, following the award of a public contract, a material amendment cannot be made to it without a new tendering procedure being initiated, even in the case where the amendment is, objectively, a type of settlement agreement, with both parties agreeing to mutual waivers, designed to bring an end to a dispute with an uncertain outcome, which arose from the difficulties encountered in the performance of that contract" (para 27). Or, in simple terms, whether settling the disputes that had made the commercial relationship between the supplier and the contracting authority non-viable in a way that implied a substantive amendment of the initial contract breached the principle of equal treatment and the obligation of transparency.

In Finn Frogne, the ECJ first took the opportunity to clarify its case law in pressetext (C‑454/06, EU:C:2008:351) and in Wall (C‑91/08, EU:C:2010:182) in the sense of emphasising that a material reduction of the scope of a public contract is equally caught by the restrictions on contract modification as a material extension of the scope of that contract. The reasons for this are as follows:

an amendment of the elements of a contract consisting in a reduction in the scope of that contract’s subject matter may result in it being brought within reach of a greater number of economic operators. Provided that the original scope of the contract meant that only certain undertakings were capable of presenting an application or submitting a tender, any reduction in the scope of that contract may result in that contract being of interest also to smaller economic operators. Moreover, since the minimum levels of ability required for a specific contract must ... be related and proportionate to the subject matter of the contract, a reduction in that contract’s scope is capable of resulting in a proportional reduction of the level of the abilities required of the candidates or tenderers (C-549/14, para 29).

This makes logical sense and is generally linked with the discussion of the division of contracts into lots and how to manage volume-related restrictions of competition for public contracts. However, in the context of a contractual settlement aimed at terminating the commercial relationship between the original (larger) provider and the contracting authority, this would lead to the conclusion that, in a case of breakdown of the commercial relationship implicit in all public contracts, "the principle of equal treatment and the obligation of transparency imply that a contracting authority cannot consider entering into a settlement to resolve the difficulties arising from the performance of a public contract without this automatically giving rise to the obligation to organise a new tendering procedure relating to the terms of that settlement" (para 24), which the referring court considered problematic.

Indeed, in my opinion, taking this position would create situations where the contracting authority is simply in a catch 22 by having to either remain committed to a non-functioning contractual relationship that is not allowing it to perform its public functions to which the contract is instrumental, or having to spend significant funds in the creation of an alternative commercial relationship that may not be the best solution for its needs--particularly if there are economies to be had from preserving part of the original contract or the preparatory actions which the parties had already undertaken in view of its performance.

Regardless of this clear practical difficulty, the ECJ considered that

neither (i) the fact that a material amendment of the terms of a contract results not from the deliberate intention of the contracting authority and the successful tenderer to renegotiate the terms of that contract, but from their intention to reach a settlement in order to resolve objective difficulties encountered in the performance of the contract nor (ii) the objectively unpredictable nature of the performance of certain aspects of the contract can provide justification for the decision to carry out that amendment without respecting the principle of equal treatment from which all operators potentially interested in a public contract must benefit (C-549/14, para 29).

Consequently, it stuck to its previous line of case law in Succhi di Frutta (C‑496/99 P, EU:C:2004:236) whereby any material modification of a public contract requires a new tender (para 38), but placed significant emphasis on the fact that

Although the principle of equal treatment and the obligation of transparency must be guaranteed even in regard to specific public contracts, this does not mean that the particular aspects of those contracts cannot be taken into account. That legal imperative and that practical necessity are reconciled, first, through strict compliance with the conditions of a contract as they were laid down in the contract documents up to the end of the implementation phase of that contract, but also, second, through the possibility of making express provision, in those documents, for the option for the contracting authority to adjust certain conditions, even material ones, of that contract after it has been awarded. By expressly providing for that option and setting the rules for the application thereof in those documents, the contracting authority ensures that all economic operators interested in participating in the procurement procedure are aware of that possibility from the outset and are therefore on an equal footing when formulating their respective tenders (C-549/14, para 37, emphasis added).

Ultimately, the ECJ ruled that

Article 2 of Directive 2004/18 must be interpreted as meaning that, following the award of a public contract, a material amendment cannot be made to that contract without a new tendering procedure being initiated even in the case where that amendment is, objectively, a type of settlement agreement, with both parties agreeing to mutual waivers, designed to bring an end to a dispute the outcome of which is uncertain, which arose from the difficulties encountered in the performance of that contract. The position would be different only if the contract documents provided for the possibility of adjusting certain conditions, even material ones, after the contract had been awarded and fixed the detailed rules for the application of that possibility (C-549/14, para 40, emphasis added).

In my view, the Finn Frogne Judgment must be criticised, at least for two reasons.

First, because it is very difficult to coordinate with the functional approach of Art 72 (and to some extent, 73) of Directive 2014/24 and gives excessive deference to the creation of contractual modification mechanisms. Strictly on the coordination aspect, it is worth stressing that Art 72 seems to be concerned with extensions of the contractual object, but not with its reduction (Art 72(4)(c)), and with qualitative or technical changes that would have allowed other tenderers to participate (Art 72(4)(a)). In the Finn Frogne case, there would have seemed to be more reason to challenge the content of the settlement on the basis that it changed one of those conditions (sale rather than lease of the central server farms) rather than on the change of overall value of the contract. 

Moreover, it is worth stressing that Art 72 also provides significant leeway for the modification of contracts up to 50% of their value (per modification, without a maximum cap) where a diligent contracting authority could not have foreseen the circumstances leading to the need for the contractual modification. Implicitly, the ECJ seems to indicate that every diligent contracting authority needs to foresee the possibility of the commercial relationship breaking down (which may be fair enough), but it also goes on to require a full contractual regulation of how such termination of the contractual relationship needs to unfold.

In that regard, it must be stressed that the requirements for the inclusion of "general" contractual review clauses foreseen in Art 72(1)(a) demands them to be "clear, precise and unequivocal", which may or not be coincidental with the ECJ's requirement for the contractual arrangements to fix "the detailed rules for the application [of] the possibility of adjusting certain conditions"--and which may not be (feasibly) applicable to "termination through settlement" clauses, whereby the parties must necessarily engage in negotiations.

In my view, the ECJ has fallen in the same problematic assumption of the possibility to design "perfect contracts" explicitly and exhaustively regulating all consequences of their (un)foreseeable non-viability or imperfection that also affects the provision in Art 72(1)(a) of Dir 2014/24 [for criticism, see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 428], but with the aggravating factor of not acknowledging that they may also be totally ineffective in scenarios where the commercial relationship is broken and, consequently, the parties need to settle, mediate, arbitrate or litigate those consequences regardless of the prior inclusion of such contractual clause.

The second reason why the Finn Frogne Judgment needs to be criticised is because it does not make any effort to attempt to distinguish between settlement conditions that remain strictly within the scope of the original contract and, consequently, only entail its partial enforcement (in its own terms) from settlements which include substantive changes in either their scope or the conditions for (partial) performance. While the first imply a consolidation of the effects already (de facto) created by the original contract, the latter seem to indicate the appearance of different needs of the contracting authority and/or different ways of satisfying them by the supplier. And, in my opinion, while the latter may justify the imposition of strict restrictions and (depending on the circumstances and the proportionality of the requirement) a new tender, the former do not seem to warrant such an approach.

These are issues that will necessarily arise again in litigation concerning the termination of contracts under the combined effect of Arts 72 and 73 of Directive 2014/24 and I would hope that the ECJ will adopt a more analytically rigorous approach when that happens because following the path started in Finn Frogne does not make commercial sense.