Amendments to Procurement Contracts: Estonian Law in the Light of the Pressetext Ruling

Author:Mari Ann Simovart
Position:LL.M., Lecturer of Civil Law University of Tartu

1. Introduction - 2. Exclusion of de facto new procurements - 2.1. The Pressetext ruling: Prohibition of material amendments - 2.2. Change concerning the other contracting party - 2.3. Change of price of a procurement contract - 2.4. Change of procurement contract term - 3. A critical analysis of the current Estonian regulation on amending procurement contracts - 3.1. A prohibition... (see full summary)

1. Introduction

The traditional approach divides the Estonian legal regulation of procurement contracts into two distinct parts: relationships preceding the award of procurement contracts are subject to national public law-to the Public Procurement Act 1 that is implementing EU procurement law-while following the award, procurement contracts are equalled to any private law contracts without substantial exceptions2.

However, by now a significant shift in the sphere of influence of European procurement law has occurred. Namely, recent decisions of the European Court of Justice-especially in the Pressetext 3 and Commission v. Germany 4 cases-have indicated that general principles of the EU procurement law also apply to private law relations and have, in case of a conflict, supremacy over the national private law5. Therefore, even though (procurement) contract law falls within the competency of Member States, formation and application of national private law to procurement contracts must follow the general principles of procurement set out in procurement directives 6 as well as the fundamental principles arising from the EC Treaty7.

The freedom to amend procurement contracts and restrictions applicable to that freedom provide a characteristic example of the interaction of national private law and EU-law-based public law norms in private law relations of procurement. On the one hand, the private law principle of freedom of contract, including the freedom to amend a contract, applies to procurement-contract-related relationships. A key characteristic of modern contract law is the concept of contract as a dynamic phenomenon- as opposed to the classical approach's considering of contracts to be static8. The option to amend a contract may not, therefore, be considered merely a threat to the results of a properly conducted procurement but rather as an inevitable need. Amending provides for the flexible and dynamic contractual relations and as such (a) helps achieve the end result at a reasonable price, (b) promotes fairness in contractual relations 9 , and (c) avoids obstructions upon performance that may arise from an overly restrictive and rigid legal regime10. With regard to the above, the option to amend procurement contracts cannot be completely excluded.

On the other hand, an unlimited freedom to amend a procurement contract may easily conflict with the general principles of procurement (e.g., the principles of equal treatment and transparency). Excessive freedom to amend a procurement contract would also create a controversy with the significant public interest (mainly to avoid corruption) that is present on the national level11. That is why many countries, including Estonia 12 , have established rules for preventing arbitrary amendment of procurement contracts13.

Following, I will analyse the possible criteria for balancing the freedom of amendment of a procurement contract and the restrictions arising from public interests, in order for the regulation of contract amendments to be consistent with the EU general principles of procurement.

2. Exclusion of de facto new procurements
2.1. The Pressetext ruling: Prohibition of material amendments

Under the general principles of procurement, a contracting body (authority or entity) is prohibited from amending a procurement contract if the amendment will essentially, or de facto, constitute a new award of a contract. If facing such a situation, the contracting body must, instead of making the amendment, award a new contract. The procurement directives do not specify when an amendment is prohibited in consequence of this rule. A communication of the European Commission 14 stipulates that a new contract must be awarded only in the event of a material amendment to a contract. The decision of the European Court of Justice in the Pressetext ruling sheds some light on what kind of amendment is deemed to be significant enough to constitute a new procurement15.

The latter case involved amendments to the other contractual party, the price and the period of the contract concluded in 1994 between the Republic of Austria and the Austria Presse Agentur (APA) agency16. In 2004, Pressetext Nachrichtenagentur GmbH, a competitor of APA, unsuccessfully proposed to conclude a procurement contract with the contracting body. Pressetext then contested the lawfulness of the amendments by referring to them as de facto awards. The Bundesvergabeamt (the Federal Procurement Office of Austria), in turn, referred questions to the Court of Justice for a preliminary ruling, asking, inter alia, in which circumstances amendments to an existing procurement contract might be regarded as awards of new contract.

The ECJ noted that "[i]n order to ensure transparency of procedures and equal treatment of tenderers, amendments to the provisions of a public contract during the currency of the contract constitute a new award of a contract [...] when they are materially different in character from the original contract and, therefore, such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract" 17 . Therefore, a new contract should be awarded instead of making an amendment to the initial one if the amendment is materially different from the initial contract and demonstrates the intention of the parties to renegotiate the essential terms of that contract. The court gave the following examples of when an amendment may be regarded as being material 18 :

- "an amendment [...] introduces conditions that [were] not part of the initial award procedure and that would have allowed for the admission of tenderers other than those initially admitted or would have allowed for the acceptance of a tender other than the one initially accepted",

- "an amendment extends the scope of the contract considerably to encompass services not initially covered" or

- an amendment "changes the economic balance of the contract in favour of the contractor in a manner that was not provided for in the terms of the initial contract".

Next, the issue of acceptability of amendments to procurement contracts is studied separately in cases of change to a contractual partner, the price and the term (time period) of a procurement contract.

2.2. Change concerning the other contracting party

As a rule , acceptance of a new contractual partner instead of the one to which the contract had initially been awarded must be regarded as constituting a change to one of the essential terms of the procurement contract, unless that substitution was provided for in the terms of the initial contract19. However, in the Pressetext ruling, joining the procurement contract by a new party was not regarded as a material amendment to the contract, as the new contractual partner (APA-OTS) was an affiliated company of the initial one and wholly owned by it; the initial contract partner (APA) had the right to instruct the new partner, they had concluded a contract of profit and loss transfer, and the initial contractual partner together with the new partner remained jointly and severally liable before the contracting body20. The ECJ held that this was an internal reorganisation of the contractual partner, not a material amendment to the initial contract.

For the purposes of the Estonian private law, joining in obligation took place in the case of Pressetext (Law of Obligations Act 21 , hereinafter 'LOA', § 178 (1)), i.e., the initial contracting party assumed a joint and several obligation before the contracting body (§ 178 (4) and § 65 (1) of the LOA). Even though, as a result of joining in, a third person, who may not meet the qualification requirements, is joining the procurement contract, the initial-i.e., qualified-person will also remain liable. An absolute prohibition on joining in obligation would therefore not be justified, as it may create an unfounded prejudice to the constitutional freedom of enterprise as well as to the fundamental principle of free movement. However, a contractual obligation to notify the contracting body of such an intention in good time and with sufficient thoroughness would probably be justified.

As an exception, a contracting body may occasionally have a valid interest in refusing to accept the joining in obligation-for example, if personal performance by the initial party is warranted on account of the object or nature of the procurement contract. Joining in could also be excluded if the third party (intended new contracting party) fails to meet the mandatory qualification requirements set forth by the law, e.g., has participated in a criminal organisation or money laundering)22.

The ECJ found that if a contracting party remains the same but goes through an internal reorganisation or a change concerning the holding of the company, this is not deemed to be a material amendment23. As an exception, internal reorganisations may be unacceptable if carried out for the purpose of circumventing Community rules governing public contracts24. For example, the court noted that if, in the circumstances of the Pressetext ruling, the shares of the joined-in party were transferred to a third party during the currency of the procurement contract, there would be an amendment to the essential terms and hence an award of a new contract (unless the substitution of a party had been planned already during transfer of the relevant...

To continue reading