Regulation 73 – Termination of contracts

Commentary

Regulation 73 PCR2015 transposes the  rules on contract termination set out in Article 73 of Directive 2014/24/EU. The provision transposes the rules in the Directive in a way that, from a contract law perspective may require some comments. We split our comments in two parts. The first one addresses the issues raised by Directive 2014/24/EU itself, which apply equally to Regulation 73(1) PCR2015. The second one focuses on the contract law aspects under Regulation 73(2) and (3) PCR2015.

New EU rules on termination of contract

The restrictions on the admissible renegotiation of the basic or substantial elements of a contract sometimes leave the contracting authorities with limited alternatives for the cancellation of the tendering procedure or the termination of the contract, and its subsequent re-tendering [on the different, although related, issue of the obligation of contracting authorities to terminate contracts concluded in breach of public procurement rules—ie, of termination as a remedy, see Case C-503/04 Commission v Germany [2007] ECR I-6153 25–42; see also, with numerous references, S Treumer, ‘Towards an Obligation to Terminate Contracts Concluded in Breach of the EC Public Procurement Rules: The End of the Status of Concluded Public Contracts as Sacred Cows’ (2007) 16 Public Procurement Law Review 371, 377–78; and P Delvolvé, ‘Note à Trstenjak, Verica, Conclusions sur CJCE, 18 juillet 2007, Commission v Allemagne, affaire C-503/04’ (2007) 5 Révue française de Droit administratif 972, 975 and ff].

Given that the principles of non-discrimination, competition, objectivity and diligent administration (other than additional principles such as the duty of contracting authorities not to depart from their previous acts) restrict the circumstances under which the cancellation of a tender can take place—while the principle of legal certainty and of the protection of legitimate expectations, and the principle pacta sunt servanda, should be adapted so as not to impair the objectives of the public procurement directives and the rules of the TFEU [Case C-503/04 Commission v Germany [2007] ECR I-6153 33–36. For a critical view, see Treumer, Towards an Obligation to Terminate Contracts Concluded in Breach of the EC Public Procurement Rules (2007) 377 and 381–82]—it is submitted that the decision of the contracting authority as regards the termination of the contract and its subsequent re-tendering cannot be adopted freely [maybe the only exception to this rule is that of contracts entered into for an indefinite period of time, which should be looked at with disfavour, following the dictum of the Case C-454/06 Pressetext Nachrichtenagentur [2008] ECR I-4401 73]. 

Therefore, termination decisions should comply with the same general principles restricting the discretion of contracting authorities to cancel a tender procedure. This has now been supported in broad terms in Recital 113 of Directive 2014/24/EU, which recognises that contracting authorities are sometimes faced with circumstances that require the early termination of public contracts in order to comply with obligations under Union law in the field of public procurement, and requires Member States to ensure that contracting authorities have the possibility, under the conditions determined by national law, to terminate a public contract during its term if so required by Union law. This general approach to the termination of contracts has been further specified in the rules of Article 73 of Directive 2014/24/EU. 

Under this new provision, contracting authorities must have the possibility to terminate a public contract during its term, at least in three cases. Firstly, and in support of the restrictions on the modification of contracts, where the contract has been subject to a substantial modification not exempted under Article 72 and, consequently, would have required a new procurement procedure [see JM Hebly and P Heijnsbroek, ‘When amending leads to ending: a theoretical and practical insight into the retendering of contracts after a material change’, in G Piga and S Treumer (eds), The Applied Law and Economics of Public Procurement: the economics of legal relationships (London: Routledge, 2013) 163–84]. Secondly, where the contractor should have been excluded from the procurement procedure because, at the time of contract award, was affected by one of the situations imposing its mandatory exclusion under Article 57(1) of Directive 2014/24/EU. And, finally, where the contract should not have been awarded to the contractor in view of a serious infringement of the obligations under the Treaties and Directive 2014/24/EU that has been declared by the CJEU in a procedure pursuant to Article 258 TFEU. 

Regarding the first ground, Regulation 73(1)(a) provides a ground for termination only if the contract modification was substantial under Regulation 72(9). This is problematic for two reasons. First, Regulation 72(9) does not refer to substantial modifications, but to a subsidiary ground to consider a modification illegal. Second, Article 73 of Directive 2014/24/EU states in no uncertain terms that any substantial modification under Article 72, gives rise to the possibility of contract termination. Had Article 73 been correctly transposed, Regulation 73 would have mentioned paragraphs 1(e) and 8 of Regulation 72 in addition to 9. An example of crafty transposition or just a typo? It might have been that the cross-reference was intended to paragraph 8 instead of 9, which would render the point almost moot. However, Regulation 73 was not amended by the Public Procurement (Amendments, Repeals and Revocations) Regulations 2016.

In any case, it is worth stressing that these are all very grave breaches of the rules of Directive 2014/24/EU (and the TFEU), but there seems to be no difficulty to expand the grounds for termination of the contract to other situations with identity of function, such as where the contractor is affected by domestic mandatory exclusion grounds, or by discretionary exclusion grounds where there is no good reason not to take them into account, or where the infringement of the TFEU or Directive 2014/24/EU is found by other jurisdictional bodies (either as a result of a case where a preliminary reference under Article 267 TFEU is posed to the CJEU, or otherwise). Overall, however and as already stressed, a general restriction on the use of termination rights should be found in the requirement that contracting authorities discharge the same duties of good administration implicit in decision to cancel tenders.

The UK (Eng & W) adaptation through (implied) contract terms

It strikes us as slightly odd that the regulatory option adopted in Regulation 73 PCR2015 combines a mix of contract requirements and implied contractual terms, rather than an alternative statutory power to terminate that would be more easily aligned with continental approaches.

On the one hand, Regulation 73(1) PCR2015 imposes a duty for contracting authorities to “ensure that every public contract which they award contains provisions enabling [them] to terminate the contract“, whereas Regulation 73(2) further indicates that “[t]hose provisions may address the basis on which the power is to be exercisable in those circumstances, for example by providing for notice of termination to be given and by addressing consequential matters that will or might arise from the termination“. On the other hand, and as a catch-all clause, Regulation 73(3) PCR2015 establishes that “[t]o the extent that a public contract does not contain provisions enabling the contracting authority to terminate the contract on any of the grounds mentioned in paragraph (1), a power for the contracting authority to do so on giving reasonable notice to the contractor shall be an implied term of that contract“. This apparently establishes an unnecessary duplication. Why the complexity?

Given that Regulation 73(3) PCR2015 sorts out the problem and Regulation 73(1) + (2) still fall short from imposing specific means of ensuring termination powers and ways of determining its consequences, it seems unnecessary to have included the latter provisions in the PCR2015. It would have sufficed to establish the provision on implied terms and simply have allowed contracting authorities to agree explicit terms provided they did not limit the contracting authority’s power to terminate.

Additionally, the provisions of Regulation 73 PCR2015 are at the same time insufficient, since they do not indicate what are the consequences of the termination (on the basis of the implied term) and this lack of regulation triggers significant questions that revive old discussions on the scope of ineffectiveness under the remedies Directive. For instance, can/should/must the rules in reg.101 PCR215 [CROSSREF] on the consequences of ineffectiveness be applied in these cases (ie is the contract to be considered to be prospectively, but not retrospectively, ineffective) or can retrospective effects be determined? Can the contractor be compensated? Can the contracting authority avoid termination on the basis of public interest as per Regulation 57(6) PCR2015 [CROSSREF], particularly if Regulation 73(1)(b) is applicable? The final two paragraphs of Regulation 73 do not have parallel in the Directive and are purely national law provisions to enable the application of paragraph 1. For example, paragraph 2 also pushes the burden of how the notice of termination should be given to the contracting authority as well as dealing with “consequential matters that will or might arise from the termination.” Again, could the lawmakers not have provided a simple set of rules for these instead of leaving the buck with the contracting authorities? This is another instance of insufficient regulation (not improper transposition), where the UK legislator would have been well-advised to take some more time to think before enacting the PCR2015 as is. For further discussion on this topic, listen to our episode of the Public Procurement Podcast.

Last modified: December 5, 2016 by Pedro Telles

73.—(1) Contracting authorities shall ensure that every public contract which they award contains provisions enabling the contracting authority to terminate the contract where—

(a)the contract has been subject to a substantial modification which would have required a new procurement procedure in accordance with regulation 72(9);

(b)the contractor has, at the time of contract award, been in one of the situations referred to in regulation 57(1), including as a result of the application of regulation 57(2), and should therefore have been excluded from the procurement procedure; or

(c)the contract should not have been awarded to the contractor in view of a serious infringement of the obligations under the Treaties and the Public Contracts Directive that has been declared by the Court of Justice of the European Union in a procedure under Article 258 of TFEU.

(2) Those provisions may address the basis on which the power is to be exercisable in those circumstances, for example by providing for notice of termination to be given and by addressing consequential matters that will or might arise from the termination.

(3) To the extent that a public contract does not contain provisions enabling the contracting authority to terminate the contract on any of the grounds mentioned in paragraph (1), a power for the contracting authority to do so on giving reasonable notice to the contractor shall be an implied term of that contract.