Session “Best Practice for the Procurement of Works - Market Considerations and Contractual Aspects” How to award additional works in construction projects Manfred Essletzbichler EBRD-Consultant, WOLF THEISS Kiev, September

Agenda  Contract amendments in general  Award of additional deliveries, works and services  Contract amendments  ECJ precedents on contract amendments  Original amendments  Derivative amendments  Change in contract partner  European Commission’s Proposals for PP-Directives 2

Contract Amendments 3  Is it permissible to amend a public contract during its term? When is an “amendment” really a re-tender?  What is a contract amendment?  Contract amendment  Price amendments  Amendment to subject  Amendment to amounts/extent  Extension/prolongation of contract  Change in contract partner  Does the initial contract have to provide for that possibility?  “original contract amendment”  “derivative contract amendment”

Additional deliveries, works and services (1)  According to the EU Public Procurement Directives (2004/18/EC and 2004/17/EC) a CA may purchase additional deliveries or works and services in a negotiated procedure without prior notice  Supply contracts (Art 31 para 2 classic directive)  additional deliveries by the original supplier  intended as a partial replacement of normal supplies or installations or as the extension of existing supplies or installations  where a change of supplier would oblige the CA to acquire material having different technical characteristics which would result in  incompatibility or  disproportionate technical difficulties in operation and maintenance; 4 Manfred Essletzbichler

Additional deliveries, works and services (2)  Works or service contracts (Art 31 para 2 classic directive)  additional works or services not included in the project initially considered or in the original contract  which have, through unforeseen circumstances, become necessary for the performance of the works or services described therein,  on condition that the award is made to the economic operator performing such works or services:  when such additional works or services cannot be technically or economically separated from the original contract without major inconvenience to the CA, or  when such works or services, although separable from the performance of the original contract, are strictly necessary for its completion 5 Manfred Essletzbichler

Additional deliveries, works and services (3)  Restrictive interpretation of exemptions!  Unforeseen circumstances:  Objective: could a diligent, orderly CA have foreseen the event  Technical or economic reasons:  Technical incompatibilities: adjustment of different technical systems is not possible (or only possible with disproportionate efforts)  Mere inconveniences e.g. invoicing or problems with the co-operation with other contractors (exploitation of synergies) do not constitute a “major” inconvenience  Strictly necessary for completion  Works necessary for the completion of the original contract  Not in case CA changes its “demand” 6 Manfred Essletzbichler

Contract Amendments 7  ECJ on the permissibility of contract amendments - two main precedents  ECJ , C-496/99 CAS Succhi di Frutta  ECJ , C-454/06 Pressetext

ECJ , C-496/99 CAS Succhi di Frutta (1)  Commission concluded contract for the supply of agricultural produce (from market interventions) to Caucasus region  contract stipulated compensation for certain amounts of fruit  Contract then was amended; included other fruits and specific compensation provisions – commission subsequently amended contract without the amendment being provided for in the initial contract  ECJ:  Remuneration/compensation/consideration is an essential condition of a public contract,  A contract amendment may not result in a change to the potential participants for the tender 8 Manfred Essletzbichler

ECJ , C-496/99 CAS Succhi di Frutta (2)  Requirements for amendments provided for in the terms of the original contract (derivative contract amendments)  Should the contracting authority wish, for specific reasons, to be able to amend some conditions of the invitation to tender, after the successful tenderer has been selected  it is required to expressly provide for that possibility  as well as for the relevant detailed rules  in the notice of invitation to tender which has been drawn up by the authority itself and defines the framework within which the procedure must be carried out  so that all the undertakings interested in taking part in the procurement procedure are aware of that possibility from the outset and are therefore on an equal footing when formulating their respective tenders 9 Manfred Essletzbichler

ECJ , C-454/06 Pressetext (1)  Decision refers to the question of permissibility of subsequent amendments to a contract.  General accepted opinion before “Pressetext”  Novation of contract implies intent to renegotiate agreement (thus, a new tender procedure)  Novation means modification of contractual obligations in the form of a change of the main subject of a contract (“essentialia negotii”)  If the original contract contains a provision regarding contract amendments a CA is not required to initiate a new tender procedure despite a change in the main subject of the contract (so-called “derivative contract amendment”) 10

ECJ , C-454/06 Pressetext (2) Facts of the case  In 1994 the Austrian Federation concluded an agreement (service concession) with an Austrian press agency (“APA”; legal form of a cooperative)  Subject was the delivery of recent information (press-releases) and the use of the agency’s archive  at the time of the conclusion Austria was not a member of the EC/EU; therefore the Public Procurement Directives were not applicable  in 2000 the contract was transferred to a 100%-subsidiary of the agency (called APA-OTS)  in 2005 the signees agreed to a(nother) contract amendment 11

ECJ , C-454/06 Pressetext (3)  The following contract provisions were amended  In 2001:  Change of the remuneration currency from ATS to EUR (resulting in a 0,3% discount for the annual fee; compensation for use per minute remained at same value)  Change of the index for revaluation (consumer price index)  In 2005:  Increase of the contractual discount on list price from 15% to 25%  waiver of termination rights until 2008 (the original contract contained such waiver until 1999;between 1999 and 2005 there was no waiver of termination)  in 2006: competitor “pressetext Nachrichtenagentur” files complaint to declare the amendments to the contract null and void because the amendment constituted an obviously illegal direct award 12

ECJ , C-454/06, Pressetext (4)  ECJ decision :  To ensure transparency of tender procedures and equal treatment of participants, amendments to a contract during its term have to be regarded as a new award of a contract, if  they are materially different in character than the original contract and  therefore demonstrate the intention of the parties to renegotiate the essential terms of that contract (ECJ C-337/98 Commission vs France).  Which amendments are “material”? 13 Manfred Essletzbichler

ECJ , C-454/06 Pressetext (5)  An amendment to a public contract during its term is material  when it introduces conditions which, had they been part of the initial award procedure, 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 (change in potential participants)  when it extends the scope of the contract considerably to encompass services not initially covered  when it changes the economic balance of the contract in favor of the contractor in a manner which was not provided for in the terms of the initial contract 14 Manfred Essletzbichler

ECJ , C-454/06 Pressetext (6)  Change in contractual partner (successful bidder) :  The change of a contractual partner is generally considered a modification of an essential term of the contract (material amendment)  Such a change is not material if  New partner is 100% subsidiary to original partner  former partner has the power to instruct new partner in management and conduct of its business  both companies are bound by a contract under which profit and loss are transferred to and assumed by the initial partner (e.g. mother company)  a declaration by a person with the power to represent former partner guaranteed joint and several liability and that there would be no change to the overall contract performance  Internal reorganization does not constitute material amendment (only in case a transfer of shares was already provided for – ECJ C-29/04) 15 Manfred Essletzbichler

ECJ , C-454/06 Pressetext(7)  Change in contractual partner (2)  Changes of ownership in a legal person do not constitute a material change (e.g. stock companies) – except for circumventions of procurement law  ECJ , C-91/08 Wall  Also change of subcontractor (!) may be a material amendment  even if the possibility of a change is provided for in the contract,  amendment to one of the essential provisions where the use of one subcontractor rather than another was, in view of the particular characteristics of the services concerned, a decisive factor in concluding the contract, which is in any event for the referring court to ascertain  In the case precedent, the subcontractor was relevant for bid evaluation 16 Manfred Essletzbichler

ECJ , C-454/06 Pressetext (8)  Conclusions from ECJ pressetext (1)  A price decrease is generally allowed (contractor “won” tender with higher price – therefore discrimination is impossible; except distort of competition)  amendments (in ECJ pressetext: conversion into another currency) are permissible  if they are immaterial or insignificant adaptions caused by external circumstances (see also German OLG Düsseldorf , VII- Verg 20/11 and OLG Brandenburg , Verg W 4/09)  an objective explanation for the amendment exists (e.g. for simplification of invoicing)  A derivative contract amendment (express authority to amend contract under the terms of the initial contract) is generally immaterial and therefore permissible (prerequisites cf ECJ Succhi di frutta) 17 Manfred Essletzbichler

ECJ , C-454/06 Pressetext (9)  Conclusions from ECJ pressetext (2)  Validity of contract – waiver of termination rights  Community law does not prohibit the conclusion of public service contracts for an indefinite period – “a clause by which the parties undertake not to terminate for a given period a contract concluded for an indefinite period is not automatically considered to be unlawful”  the waiver of rights to terminate is permissible regarding contracts with an indefinite period as long as  the period is not excessive  objectively justified  and it is no systematically re-inserted  Therefore, no risk of distortion of competition to the detriment of potential competitors 18 Manfred Essletzbichler

Commission‘s Proposal for Amendment of the PP-Directives (1)  European Commission proposal to amend current PP-Directives  Negotiations still at beginning; envisaged deadline for transposition is June 30, 2014 (doubtful)  Includes provision regarding post-tender contract amendments  Article 72 Proposal for Classic Directive /Art 82 Sector/Art 42 Concessions Directive – ”Modification of contracts during their term”  Substantial modification is to be regarded as new award – therefore requires new tender procedure  Substantial when (cf pressetext)  change in potential participants  changes the economic balance of the contract in favor of the contractor;  considerable extension to supplies, services or works not initially covered 19 Manfred Essletzbichler

Commission‘s Proposal for Amendment of the PP-Directives (2)  Replacement of contract partner is substantial except for the cases of succession or restructuring (cf pressetext)  If value of amendment can be expressed in monetary terms, modification is not substantial when  Value does not exceed the [EU-PPD] thresholds and is below 5 % of the price of the initial contract, provided that the modification does not alter the overall nature of the contract  Where several successive modifications are made, the value shall be assessed on the basis of the cumulative value of the successive modifications  Contract modifications shall not be considered substantial where they have been provided for in the procurement documents in clear, precise and unequivocal review clauses or options (derivative amendment)  Such clauses shall state the scope and nature of possible modifications or options as well as the conditions under which they may be used. They shall not provide for modifications or options that would alter the overall nature of the contract. 20 Manfred Essletzbichler

Commission‘s Proposal for Amendment of the PP-Directives (3)  Derivative amendment is not substantial (no new award) when  need for modification has been brought about by circumstances which a diligent CA could not foresee;  the modification does not alter the overall nature of the contract;  any increase in price is not higher than 50 % of the value of the original contract  The CA shall publish a notice on such modifications.  CAs shall not have recourse to modifications of the contract in the following cases:  where the modification would aim at remedying deficiencies in the performance of the contractor or the consequences, which can be remedied through the enforcement of contractual obligations;  where the modification would aim at compensating risks of price increases that have been hedged by the contractor.  Member states have to provide for the possibility to terminate contracts due to material amendment! 21 Manfred Essletzbichler

Contact 22 Manfred Essletzbichler, Mag. iur. Tel: + 43 / 1 / – 1350 Fax: +43 / 1 / – WOLF THEISS Attorneys-at-Law Schubertring Vienna Austria