Excluding Bidders for Poor Prior Performance

This entry is authored by Peter Curran, Partner in the Projects Group at Eversheds Dublin office.

Contracting authorities often ask for advice on whether it is permissible to exclude certain organisations or individuals from tendering when it is known that they have a track record of performing poorly under other contracts.

Public authorities may have direct experience of working with under-performing contractors; they may also have learned about the unhappy experiences of other authorities with particular suppliers through press coverage or word of mouth. In either case, it can be difficult for management to understand why such contractors ought to be given an opportunity to tender for new contracts and there may be a temptation to ‘black-list’ certain suppliers who have a particularly bad reputation. However, how easy is it to exclude organisations with a track record of poor contract delivery under the European procurement regime?   

Public Sector Directive of 2004
EU procurement law generally provides for open competitions to be conducted when contracts for goods, services or works of a certain value are to be awarded by public authorities. EU law requires such contracts to be advertised widely. The obligation of transparency requires that all undertakings in the EU have access to appropriate information regarding such contracts before they are awarded, so that, if they so wish, they can express an interest in tendering. There are very limited circumstances in which a public authority can avoid openly advertising significant contract opportunities to the entire market or can avoid an opportunity being presented to a supplier even though the latter might be considered undesirable because of its poor track record in contract delivery.
The principal opportunity to consider the prior performance of operators occurs at the selection stage of the competition when the ability and capacity to perform the contract is assessed. As the European Court of Justice has made clear, prior performance should not be evaluated at the award stage, which ought to be focussed on assessing how the contract will be performed (see Lianakis v Dimos Alexandroupolis (C-532/06) and Commission v Greece (C-199/07)).
Under the Public Sector Directive 2004/18/EU (the “2004 Directive”, now repealed) contracting authorities were obliged to exclude prospective bidders in certain circumstances (typically where they had been convicted of serious criminal offences). Authorities also had a discretion to exclude operators from the process in other situations, including where they were bankrupt, had failed to pay taxes or social security obligations, had been convicted of any offence concerning professional conduct or “been guilty of grave professional misconduct proven by any means which the contracting authorities can demonstrate” (Article 45(2)(d)). There was no clear and specific basis for excluding operators for poor contract performance in Directive 2004/18/EU. The absence of an express provision entitling awarding authorities to eliminate operators on this ground was often a source of frustration.
Advocate General Gulmann in Commission v Spain (C-71/92) suggested that a deliberate omission to perform a contract would amount to grave professional misconduct, however the Court of Justice in that case did not address the issue specifically. It was not until the case of Forposta (C-465/11) in 2012 that the European Court confirmed that contractual performance could be assessed under the rubric of ‘grave professional misconduct’ provided for in Article 45(2)(d)1. The Court held (at paragraph 27 et seq.) that:
…the failure of an economic operator to abide by its contractual obligations can, in principle, be considered as professional misconduct… Nevertheless, the concept of ‘grave misconduct’ must be understood as normally referring to conduct by the economic operator at issue which denotes a wrongful intent or negligence of a certain gravity on its part. Accordingly, any incorrect, imprecise or defective performance of a contract or a part thereof could potentially demonstrate the limited professional competence of the economic operator at issue, but does not automatically amount to grave misconduct.”
Despite the welcome clarification of the position in Forposta (and later cases2), other weaknesses inherent in the regime under Directive 2004/18 limited the extent to which non-performance or poor performance could be used in practice against an economic operator. In particular, the regime relied to a large extent on operators admitting to awarding authorities that they had committed an act of ‘grave professional misconduct’; unsurprisingly, very few ever did. Even when authorities were aware of prior contract performance issues which concerned them (through their own experience or otherwise), they were still limited by the over-arching requirements to exercise their discretion reasonably and proportionately and to treat all operators equally. In reality, the extent to which authorities could safely eliminate operators on this basis without fear of legal challenge was quite limited, even after Forposta
New Public Sector Directive of 2014
The new Public Sector Directive of 2014 (2014/24/EU), which replaces Directive 2004/18, addresses specifically (and for the first time in EU procurement legislation) the issue of poor contract performance.
The new Directive retains (in Article 57(4)(c)) the right to exclude an economic operator where the authority can demonstrate ‘by appropriate means’ that the economic operator is guilty of grave professional misconduct, although it adds that this misconduct must ‘render [the operator’s] integrity questionable’.
However, the new Directive also expands upon the discretionary grounds on which an awarding authority can eliminate an economic operator from a competition, adding a new ground for exclusion which is specific to contractual performance.
Recital 101 states:
“They [Contracting Authorities] should also be able to exclude candidates or tenderers whose performance in earlier public contracts has shown major deficiencies with regard to substantive requirements, for instance failure to deliver or perform, significant shortcomings of the product or service delivered, making it unusable for the intended purpose, or misbehaviour that casts serious doubts as to the reliability of the economic operator.”
The recital leads to Article 57(4)(g) which recognises the discretion that awarding authorities have to eliminate an operator from a competition in the following circumstances:
“where the economic operator has shown significant or persistent deficiencies in the performance of a substantive requirement during a prior public contract, a prior contract with a contracting entity or a prior concession contract which led to early termination of that prior contract, damages or other comparable sanctions”.
No doubt awarding authorities will welcome the issue being addressed expressly for the first time in legislation, however, Article 57(4)(g) also has its limitations3.
To be considered for exclusion the economic operator must have shown ‘significant or persistent’ deficiencies in the performance of a ‘substantive’ contract requirement. It is not clear from the Directive what these terms mean exactly or whether more than one deficiency is necessary. It makes sense that the provision is not triggered by minor acts of non-compliance, given that the proportionality principle must always apply, however, there may be scope for argument as to whether any particular breaches are ‘significant’ or ‘persistent’  and whether they relate to a ‘substantive’ requirement or not.
There is an additional requirement that the deficiencies must have led to early termination of the contract, damages or ‘other comparable sanctions’. It is not clear what this latter term refers to (for example, would the imposition of liquidated damages or service credits be sufficient?), although one suspects that the provision is intended to be reserved for the more serious situations.
The regime still suffers from the weakness that the awarding authority is largely relying on economic operators to admit their past ‘sins’, although it is the case that an authority can also exclude operators who are found to have been less than truthful in their submissions to the authority - Article 57(4)(h) provides a discretionary ground for exclusion where the operator has made serious misrepresentations in the information it supplies to the authority.
Another persisting weakness is that unless the authority itself witnessed the deficiencies of the operator under a prior contract between the two, it will have to rely on third parties for information about the precise circumstances which gave rise to the sanctions. Often, the grounds for invoking those sanctions will be disputed (and they may even be the subject of on-going litigation) in which case the basis for relying on Article 57(4)(g) will be less certain.
It may also be plausible for an operator to argue that the prior contract and the contract being tendered are not comparable or that the personnel within the operator who were responsible for the prior contract will not be involved in the new one.
A residual concern about the application of prior misconduct rules is that ultimately the authority must treat (and be seen to treat) all operators equally. If an authority proposes to exclude an operator for poor prior performance of a contract, that operator might legitimately ask what steps the authority has taken to ensure that none of the other operators who have been invited to participate in the competition have performed poorly in the past. The limits of the authority’s duty to conduct due diligence in this regard are a little unclear.
Ultimately, the contracting authority always has to act reasonably and proportionately in the exercise of a discretion to exclude. Under the previous regime this meant that the authority had to assess the seriousness of the issues which arose under the prior contract and it could probably only make a decision to exclude in cases where the prior behaviour of the operator indicated that it presented a significant risk of not satisfactorily performing the contract being tendered. Under the new Directive, this duty to act reasonably and proportionately has evolved into a form of ‘self-cleansing’ mechanism for operators, which suggests the new regime is as much about forgiveness as punishment.
Article 57(6) provides that where an operator provides evidence to the effect that measures taken by it “are sufficient to demonstrate its reliability”, the contracting authority will not be entitled to invoke any of the mandatory or discretionary grounds for exclusion in Articles 57(1) and 57(4). For this purpose, the operator is required to prove that it has:
  1. paid or undertaken to pay compensation in respect of any damage caused by the criminal offence or misconduct;
  2. clarified the facts and circumstances in a comprehensive manner by actively collaborating with the investigating authorities; and
  3. taken concrete technical, organisational measures that are appropriate to prevent further criminal offences or misconduct.
The measures taken by the operator shall be evaluated, taking into account the gravity and particular circumstances of the criminal offence or misconduct. If the contracting authority considers that the measures are insufficient, it must provide the operator with a statement of reasons for this decision.
It will be interesting to observe the extent to which these provisions will be used in practice under the new Directive. There does appear to be a mechanism for operators to buy their way out of trouble, and in highly-publicised cases where compensation has been paid and steps taken to improve performance, the provisions of Article 57(6) may well be relied upon. However, in many cases of prior misconduct, no compensation will have been paid at all, which will mean that the statutory self-cleansing mechanism will not be available to the operator. Although it is not entirely clear, it may be possible in those circumstances for an operator to invoke the general principles of reasonableness and proportionality in pleading with the authority to admit it to the competition.
It has always been difficult to exclude tenderers from participating in competitions for public contracts on account of their alleged poor performance of other contracts. Things may not change dramatically under the new Directive, despite the specific new ground for exclusion having been added.
It remains the case that, in order for a contracting authority to be confident its decision to exclude will not be successfully challenged, there will need to be a serious and undisputed issue concerning the tenderer’s past reliability and a clear risk of future unreliability. The authority must also act reasonably and proportionately and be certain that no other tenderer poses a similar risk.
  1. Although the term ‘grave professional misconduct’ was not defined in Directive 2004/18, the recitals to the Directive suggested that non-compliance with employment, health and safety, environmental or equal treatment legislation would fall under this provision.
  2. For example, on 18 December 2014 in Generali (C-470/13) the European Court of Justice  elaborated on the concept of ‘professional misconduct’. A company entered into arrangements which were in breach of national competition law and was fined for the breach. When it subsequently tendered for a national insurance contract it was excluded from the procedure on the basis that a violation of competition regulations was a breach connected with its commercial or professional activity. The Court held that the concept of ‘professional misconduct’ covers “all wrongful conduct which has an impact on the professional credibility of the operator at issue and not only the infringements of ethical standards in the strict sense of the profession to which that operator belongs”.
  3. Where poor prior performance does not for any reason trigger the application of Article 57(4)(g), there may still be a sufficient basis to take action under Article 57(4)(c) and therefore the ‘grave professional misconduct’ test and jurisprudence remains relevant in this context.

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We discuss judgments from the European Court of Justice and their influence on the interpretation of public procurement law in Poland. We follow and comment on legislation in the European Union. We address current issues in Polish case law.

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