Replacing a sub-contractor in public contracts
WALL v CITY OF FRANKFURT [2010]
The European Court of Justice (ECJ) held that a change of sub-contractor (even if there is contractual provision for such a change) may, in exceptional cases, amount to a material amendment to the contract where the use of a particular sub-contractor was a critical factor in awarding the contract. In those circumstances, all necessary measures must be taken to restore the transparency of the procedure (possibly by way of a new award procedure).
facts:
- FES was awarded a contract by the City of Frankfurt (Frankfurt). In its tender FES referred to Wall as a sub-contractor who would provide particular aspects of the services. Following contract signature FES received a more competitive offer from another supplier and informed Wall its services would not be required. FES sought Frankfurt’s consent in accordance with the contract to change its sub-contractor which was granted.
- Following the change of sub-contractor, Wall issued proceedings to stop FES performing its contract with the new sub-contractor claiming that a substantial contract change had been made in breach of the EU transparency obligations which require fair and equal treatment of all bidders.
decision:
- The ECJ held that an amendment to a contract may be regarded as substantial if it introduces conditions which, if they had been part of the original award procedure, would have allowed for the admission of tenderers other than those originally admitted or would have allowed for the acceptance of an offer other than that originally accepted.
- Even if the possibility of change was provided for in the contract, a change of sub-contractor may in exceptional circumstances constitute a substantial amendment to one of its essential provisions. This could apply where the use of a particular sub-contractor was a decisive factor in the award of the contract.
- Although the national court has to determine whether the change in sub-contractor amounted to a change to one of the essential terms of the contract and whether the choice of a particular sub-contractor was influential in the award, it appeared to the ECJ that FES had benefited from Wall’s reputation and technical expertise which had been instrumental in FES obtaining the award.
- By authorising the change in sub-contractor without opening up the contract opportunity to competition once again with an appropriate degree of advertising, Frankfurt had breached its obligation of transparency.
- A contract entered into in breach of the transparency rules does not necessarily have to be terminated. Nor does a tenderer whose offer has not been accepted have to be given the right to an injunction to prevent an imminent breach or to put an end to an existing breach of the transparency obligation. It is for the domestic legal system to provide appropriate remedies.
points to note:
- A nominated sub-contractor can be replaced without a re-tendering exercise provided the use of that sub-contractor was not a decisive factor in the initial award of the contract.
- Whether such ‘a decisive factor’ is established is up to the national courts but points which influenced the ECJ’s view were:
- it was clear from the documentation relating to the selection of the winning tenderer that FES was chosen as it obtained higher scores under the category of services Wall would have supplied than its main competitor. In other respects, the competitor gained the same or higher points than FES, which indicated that Wall’s inclusion in FES’ tender was a decisive factor in the award to FES;
- by not using Wall, FES was effectively operating under financial and technical conditions different from those set out in the tender; and
- FES had no legitimate reason to appoint a new sub-contractor in place of Wall.
- Hence, the potential repercussions for public authorities and prime/sub-contractors are:
- Authorities: even if there is a clause permitting a change of sub-contractor by a winning tenderer with consent, any such change might trigger the need for a re-tender where the outgoing sub-contractor significantly influenced the award in the first place. If so, the consequence would be severe since most contracts simply do not allow the authority to terminate in such circumstances. Even if they could, this would have major implications in relation to re-procurement costs not to mention consequent disruption and uncertainty. In reverse, it could potentially provide public bodies with an avenue through which to exit long term contracts that they already wish to re-negotiate or otherwise re-tender. Any purported exercise of such a right of termination is likely to be strongly challenged.
- Prime/sub-contractors: once a sub-contractor has been included in a bid, it may effectively have the prime contractor ‘over a barrel’ in terms of its negotiating position if it knows that it is a key player in the overall provision of the services - the prime contractor would either have to accede to the sub-contractor’s terms, however unreasonable, or effectively relinquish the prime contract opportunity. It is therefore important to ensure that when including sub-contractors within a bid you have sufficient commitment regarding key terms.