With the new Hungarian Public Procurement Act (PPA) entering into force on 1 November 2015, companies regularly participating in tenders will need to fundamentally reassess their competition compliance strategies. This is so because the new rules provide for automatic mandatory exclusion from public procurement tenders as a consequence of any type of competition infringement (except for abuse of dominance violations). This is a major change compared to the previous regime where only hard-core bid-rigging cartels could result in exclusion, and even in case of such infringements disqualification was not automatic, but depended on the discretion of the contracting authority. With the new rules, things change fundamentally now.

The grounds for automatic disqualification

The new PPA contains more than a dozen disqualification grounds, competition infringements being only one of them. The spectrum for becoming debarred as a result of competition infringements is, however, construed exceptionally wide under the new rules. On top of that, disqualification is mandatory, as it no longer depends on the discretion of the contracting authority, but happens automatically.

Companies can get debarred as a result of competition infringements in three ways:

  • First, a company will face a three year long automatic disqualification if fined by competition authorities for any type of restrictive agreement (Art. 101 TFEU or its national equivalents). The sanction is triggered by a fining decision of the Hungarian Competition Authority, the European Commission, or any other EU or even non-EU competition authority (in case of court review, disqualification starts from the final and binding judgment). It is irrelevant for what type of conduct the fine was imposed. This means that disqualification kicks in not only in case of hard-core horizontal cartels, but – if a fine is imposed by the authorities – also in case of an anti-competitive information exchange as well as non-hardcore but anti-competitive horizontal cooperation arrangements (e.g. specialization, R&D, joint production, purchasing or commercialization agreements). Strikingly, disqualification can also be triggered by all types of vertical agreements, including hardcore restrictions (e.g. vertical price fixing, parallel trade restrictions, etc.) and also non-hardcore violations, where the conduct is considered unlawful only due to high market shares and/or an excessive duration (e.g. in case of exclusivity or non-compete arrangements). In sum, any type of competition infringement relating to a restrictive agreement will trigger exclusion from public procurement tenders, if it is sanctioned by any competition authority by a fine of any amount, even if fines are nominal. 
  • Second, automatic disqualification is triggered for a longer – five year period – if the directors, board members, other employees with powers of representation, or the sole shareholder of a company has been convicted by criminal courts for bid-rigging in a public procurement tender. The sanction can be triggered as a result of a conviction by either Hungarian or foreign criminal courts. Disbarment applies even if the convicted person has already left the company and, interestingly, it is also possible to “import” the risk for debarment, as the sanction also kicks in if a current official of the company is convicted for an infringement that occurred in the past, with a previous employer.
  • Third, automatic exclusion occurs even in the absence of any court or administrative decision establishing a competition infringement, if the contracting authority can prove that in the given public procurement procedure a bidder acted in violation of the cartel prohibition (Art. 101 TFEU and/or its Hungarian counterpart), unless the bidder – prior to submitting its final tender bid – obtained conditional immunity from the Competition Office on the basis of a successful leniency application.

Getting off the hook: self-cleaning

As a result of the very harsh rules on disqualification, companies making large part of their business through tender procedures will need to refocus their compliance strategy and make competition compliance – as a preventive measure – an absolute top priority. In some cases this may require uncovering internally any potential past infringements in order to make an informed choice on the best options to manage risk: if leniency is available for any anti-competitive conduct that occurred in the past, blowing the whistle and cooperating with the competition authorities may be the only secure option to avoid fines, and thereby automatic disqualification.

Notwithstanding the above, should a company face disbarment due to a competition violation that has been discovered and sanctioned, the new rules still allow some leeway to cure past misconduct and save the company from going out of business. The price to pay may, however, be expensive.

In order to escape disbarment, the new rules introduce the possibility to request “self-cleaning”. This allows companies to recover eligibility for participating in public procurement procedures despite the existence of grounds for disbarment (self-cleaning is not only available to heal competition infringements, but also certain other disqualification grounds, such as bribery).

Self-cleaning requires the company to submit a formal request to the Public Procurement Authority with sufficient evidence to demonstrate that the company is reliable and can be allowed to participate in public procurement procedures despite the existence of grounds for exclusion. In order to obtain a positive decision, the company must provide evidence of the following:

  • payment of compensation for the damage caused by the violation in an amount acceptable to the victim(s) or an undertaking to pay such compensation within a specific deadline;
  • active cooperation with the authorities to clarify the facts and circumstances of the offence in a comprehensive manner (e.g. by filing a leniency application);
  • the introduction of concrete technical, organizational, and personnel measures which are appropriate to prevent further violations.

When assessing the compliance measures, the Public Procurement Authority will take into account the gravity and particular circumstances of the violation. Accordingly, the more serious the violation, the more comprehensive the compliance measures must be in order to achieve self-cleaning.

The Authority decides swiftly, within 15 days on the self-cleaning request (although with possible extensions), and adopts a formal decision which is appealable before the courts. The decision can only be either positive or negative, it is not possible for the Authority to adopt clearing decisions that contain conditions or make binding commitments. However, in case of a rejection, the company can resubmit a self-cleaning request after having introduced additional compliance measures.

Concluding remarks

The new rules of the Public Procurement Act introduce very strict rules on automatic disqualification for competition infringements. The new regime on disqualification clearly requires any company doing a significant part of its business through tenders to revisit its compliance strategy, making competition compliance – also for the field of non-hardcore infringements – a top priority. In this regard, avoiding infringements for the future by introducing effective compliance measures will be just as important as assessing and actively managing risks relating to potential past infringements. This is particularly so, because even though disbarment can be healed by the new self-cleaning procedure, in case of serious competition infringements such as hard-core cartels, the cost of self-healing may be overwhelming, especially in light of the 10% damages presumption existing in Hungary for hard-core infringements.