5 August 2010 | David Gollancz and Joseph Ward

Does a public contract need to be retendered if a subcontractor involved is replaced?

The case

The City of Frankfurt ran a procurement for the award of a service concession for the operation of public lavatories. The terms of the concession contract (“the contract”), annexed to the invitation to tender, provided that a change in subcontractor was permitted only with the consent of the City.

Frankfurter Entsorgungs und Service Gmbh (FES) submitted the winning tender which included Wall, a company that specialised in public lavatory services, as its designated subcontractor. FES subsequently asked for and was granted the City’s permission to amend its subcontractor in relation to some of the services. Wall initiated proceedings in the German courts challenging both the City’s approval of the change of subcontractor and FES’s decision to amend its subcontractor.

A number of questions were referred to the European Court of Justice (ECJ). The key question considered was whether the obligations of transparency necessitate the re-opening of competition when a subcontractor, whose inclusion as part of a tenderer’s bid was a factor in that tenderer winning, is replaced.

While service concessions are not governed by any of the public procurement directives, public authorities concluding them are bound by the EU treaty principles such as transparency (which includes an obligation to advertise). Referring to cases such as Pressetext v Austria (Court report,24 September 2009), the ECJ ruled substantial amendments to provisions of a service concession contract could necessitate the running of a new competition, if the changes result in a contract that is materially different in character from the original.

The ECJ noted that the change of sub-contractor could, even if such a change was provided for in the contract, in exceptional circumstances constitute a material change where the use of one sub-contractor rather than another was a decisive factor in concluding the contract. If this was the case, transparency would need to be restored, which might require the procurement process to be re-run (although the precise remedy required would be a matter for national law).

What this means

Pressetext concerned a technical change of subcontractor without any real commercial effect, which was found not to amount to the award of a new contract. Most cases in which Pressetext has to be considered concern changes in conditions such as scope or pricing.

This case is significant because it confirms that where the specific choice of subcontractor has been a significant element in the tender, a change can amount to the award of a new contract. The issue of contract amendments is topical given the cuts the public sector will be exposed in the future. Contracting authorities may be under pressure to renegotiate existing contracts. If the changes they make are material then it may be necessary to run a new procurement process.

Failure to do so may, in the event of a successful challenge, prove costly, especially in light of the new remedies rules.

By David Gollancz, partner, and Joseph Ward, solicitor, Field Fisher Waterhouse