Legal framework

Relevant legislation

What statutes or regulations govern procurement of defence and security articles?

Above the European Union thresholds public procurement for defence and security goods, services or construction works in Germany is governed by:

  • Directive 2009/81/EC of the European Parliament concerning the coordination of procedures for the award of certain works contracts, supply contracts and public services contracts in the fields of defence and security;
  • the German Act Against Restraints for Competition;
  • the Procurement Regulation for Defence and Security; and
  • the Procurement Regulation for Construction Works.

Below the EU thresholds public procurement for defence and security goods, services or construction works is governed by:

  • the corresponding federal or state budgetary law;
  • the Procurement Regulation for Contracts Below the EU Thresholds ;
  • the aforementioned Procurement Regulation for Construction Works; and
  • the corresponding state procurement laws.
Identification

How are defence and security procurements identified as such and are they treated differently from civil procurements?

Defence and security procurement are defined in the Directive 2009/81/EC as procurement of military equipment, including:

  • any parts, components or subassemblies thereof;
  • sensitive equipment, including any parts, components or subassemblies thereof;
  • works, goods and services directly related to military or sensitive equipment; and
  • works and services for specifically military purposes or sensitive works and sensitive services.

As with other procurement directives, the value of the relevant contracts must be above the EU financial threshold to fall within the scope of EU and national procurement law. The applicable thresholds are, as of 1 January 2020, €428,000 for goods and service contracts and €5,350,000 for works contracts. Contracts whose value is below these thresholds are not covered by the Defence and Security Directive.

It is precisely with regard to the structure and basic principles that the system is similar to the general rules on public procurement. Nevertheless, there are some differences, such as the fact that the contracting authority is free to choose between a restricted procedure and a negotiated procedure, while the possibility of an open procedure does not exist. Another special rule is that, in addition to the traditional grounds for exclusion and the lack of ability, there are further grounds for exclusion for bidders from public procurement procedures. They may also be excluded because they lack reliability and because exclusion is justified on grounds of national security. Specific rules also apply to protect classified information and to safeguard information and there may also be specific rules on security of supply.

Conduct

How are defence and security procurements typically conducted?

Defence and security procurement for the German military can be divided into three groups. The first group comprises of the procurement process for operational products, the scope for which is defined by the German military’s Customer Product Management Process. This is an internal framework guideline for the capability-based determination of requirements, the cost-efficient and timely procurement of operational products and services, and their efficient use. The industry is involved in all phases of the process, within the limits set by public procurement law. The second area involves the procurement of standard and military goods and services for military missions. The third area involves the procurement of complex services. The Federal Office of Defence Technology IT and In-Service Support, and the Federal Office for Infrastructure, Environmental Protection and Services of the Bundeswehr are ultimately responsible for central military procurement.

The Procurement Authority of the Federal Ministry of the Interior is in charge of non-military security procurement for federal institutions. This applies, in particular, to security procurement for the Federal Police, Customs and the Federal Administration in general. As far as security procurement at state level is concerned, the procurement office or the requesting body is generally responsible.

The restricted procedure and the negotiated procedure with publication of a contract notice are the standard procedures for defence and security contracts. In these two constellations, the contracting authority publishes a call for competition in the course of an EU call for tenders. Where the procedure is restricted, the contracting authority shall invite a limited number of candidates taking part to submit tenders. The corresponding bids are not subject to any further negotiation. A limited number of candidates shall be invited by the contracting authority to submit tenders in the negotiated procedure. These tenders then become the subject of negotiations.

Exceptionally, a negotiated procedure without publication of a contract notice is also permitted. The contracting entity may choose such a procedure in the following scenarios:

  • no or no suitable tenders have been submitted within the framework of a restricted procedure or a negotiated procedure with prior publication of a contract notice;
  • the contract may only be awarded to a specific supplier for technical reasons or reasons connected with the protection of exclusive rights;
  • the time limits for a restricted or negotiated procedure with publication of a contract notice are incompatible with the urgency of the crisis for which goods or services are required; or
  • the time limits for a restricted or negotiated procedure with publication of a contract notice cannot be complied with because of very urgent reasons caused by an unforeseeable event and not attributable to the contracting authority and, therefore, an exception is absolutely necessary.

In general, military and civil security goods or services may be procured without a public call for competition where the exemption of national security from EU or Agreement on Government Procurement (GPA) procurement rules applies, or for intelligence purposes. Instead, these contracts are awarded through restricted negotiated procedures in accordance with the specific security requirements for the goods and services concerned.

Proposed changes

Are there significant proposals pending to change the defence and security procurement process?

The Federal Ministry for Economic Affairs and Energy published a draft act with the intention to speed up procurement in defence and security. In the area of defence and security the military and civil authorities are facing new and difficult security challenges. The need to be able to respond quickly and effectively to security-related developments, both in Germany and abroad, is gaining in importance. The coalition agreement for the 19th parliamentary term, therefore, contains changes to streamline processes for the procurement of defence and security.

Information technology

Are there different or additional procurement rules for information technology versus non-IT goods and services?

There are no specific procurement rules, but there are nuances to the procurement of IT goods at a contractual level. Contracting authorities generally use standardised contract templates called EVB-IT contracts. The EVB-IT contracts are specifically standardised for the purchase of IT goods and services. To prevent the contractor from being subject to foreign laws, obliging the contractor to pass on confidential information to foreign government or security authorities, these contracts generally contain corresponding ‘no spy’ clauses. This confidential information may have been made available to the contractor in the course of the tendering procedure or the performance of the contract. In addition, to ensure that unauthorised third parties (eg, foreign governments or security authorities) do not have access to the system or the software, there are contractual conditions that guarantee that IT products are free of secret access points.

Relevant treaties

Are most defence and security procurements conducted in accordance with the GPA or other treaty-based procurement rules, or does this jurisdiction commonly use the national security exemption to procure them?

In addition to EU procurement rules, Germany is bound by the GPA procurement rules. German contractors have generally applied these regulations to military and non-military security contracts following the implementation of EU Directive 2009/81/EC on contracts in the fields of defence and security into German law. Nevertheless, the national security exemption and the arms exemption under article 346 TFEU are still applied in many cases, especially in the field of arms procurement. However, there has been a decline in the use of these exemptions, largely as a result of strict judicial interpretation and a changing political climate.

Disputes and risk allocation

Dispute resolution

How are disputes between the government and defence contractor resolved?

There are no arbitration clauses contained in either the standard contractual terms of the German military or in those of other German security authorities. Therefore, the civil courts usually deal with the disputes between the government and the contractors. For disputes during the procurement procedures, special public procurement tribunals exist.

To what extent is alternative dispute resolution used to resolve conflicts? What is typical for this jurisdiction?

The agreement of an alternative dispute resolution with the German military is only considered on an ad hoc basis due to the fact that the German military will not deviate from its standard terms for smaller contracts. On the other hand, for larger contracts, the German military may agree arbitration clauses on a case-by-case basis.

Indemnification

What limits exist on the government’s ability to indemnify the contractor in this jurisdiction and must the contractor indemnify the government in a defence procurement?

If the state breaches the contract with the contractor, German law requires the state, like any private client, to indemnify the contractor for the damage reasonably and foreseeably caused by the breach. On the other hand, if damages result from a breach by the contractor, the contractor has the obligation to indemnify the state for any damages.

Limits on liability

Can the government agree to limit the contractor’s liability under the contract? Are there limits to the contractor’s potential recovery against the government for breach?

Limitation of the contractor’s contractual liability can be agreed upon. However, in recent years the procurement authorities have been very strict on enforcing unlimited contractual liability clauses.

Risk of non-payment

Is there risk of non-payment when the government enters into a contract but does not ensure there are adequate funds to meet the contractual obligations?

Generally speaking, there is no legal risk of non-payment. German contracting authorities are bound by their contracts, as is the case for any private undertaking. Moreover, sufficient funds have to be achieved available before the contract is awarded.

Parent guarantee

Under what circumstances must a contractor provide a parent guarantee?

The cases in which a contractor is required to provide a parent guarantee are generally those in which the contractor itself does not meet the financial and economical requirements set out in the procedural documents. A parent guarantee might, therefore, be presented as an alternative. However, the adequacy of such parent guarantee as a way of attaining the financial requirements will be for the contracting authority to decide.

Defence procurement law fundamentals

Mandatory procurement clauses

Are there mandatory procurement clauses that must be included in a defence procurement contract or that will be read into the contract regardless of their actual inclusion?

There are no procurement clauses that must be included in a defence contract or that will be necessarily implied. However, there are a great number of varying standard terms and conditions and legal regulations that are commonly included in the contract by the contracting authority. In all cases, public contracts are also subject to the price control provisions of Price Regulation No. 30/53, which contains binding rules on the pricing of public contracts.

Cost allocation

How are costs allocated between the contractor and government within a contract?

Where contracts are awarded on the basis of a competitive procedure, the contracts in question generally contain fixed prices or a mix of fixed and variable price elements. Cost accounting elements can also be included. In the case of contracts that have been awarded without competitive procedures, most contracts contain cost-oriented fixed prices or extra cost prices, and the distribution of costs between the contractor and the state depends on individual agreements. The actual distribution of costs between the contractor and the state in these cases depends on the individual agreement.

Disclosures

What disclosures must the contractor make regarding its cost and pricing?

To verify that prices are reasonable, contracting authorities may require tenderers to explain their prices during the award procedure and during price controls and sometimes many years after the contract has been fulfilled.

Audits

How are audits of defence and security procurements conducted in this jurisdiction?

The Ministry of Defence reviews procurements for the military. On the other hand, in the case of non-military procurements, audits are the responsibility of the supervisory authority, (ie, usually the Ministry of the Interior). The relevant ministry also reviews procurements at ministerial level in internal audits. In other situations, the Federal Audit Office or the competent State Audit Office is responsible for audits.

IP rights

Who gets the ownership rights to intellectual property created during performance of the contract? What licences are typically given and how?

The ownership of intellectual property rights are individually governed by the contracts.

Economic zones

Are there economic zones or other special programmes in this jurisdiction commonly utilised by foreign defence and security contractors for financial or other procurement related benefits?

We are not aware of any such economic zones or programmes in Germany.

Forming legal entities

Describe the process for forming legal entities, including joint ventures, in this jurisdiction.

The limited liability company (GmbH) represents the most common form of commercial legal personality. A notarial shareholder agreement is a prerequisite for the formation of a GmbH, whereby the notary must verify the identity of the shareholders by means of valid identification documents at the time the agreement is notarised. Furthermore, the minimum share capital of a GmbH is €25,000 and the company must be registered in the commercial register. The entry in the commercial register requires the confirmation of the managing director to the effect that the share capital to be contributed by the shareholders is available to the company. This is usually combined with an account statement as proof. A list of shareholders signed by the managing director must also be submitted with the application for registration.

The Civil Code Partnership is a simple partnership based on the provisions of the German Civil Code and the simplest form of company under German law. It can be described as a simple and practical instrument suitable for temporary joint ventures, in particular for tenders or as an intermediate step in the formation of a permanent joint venture structure. There are no formal prerequisites for its formation. Furthermore, neither capital nor registration is required.

Access to government records

Are there statutes or regulations enabling access to copies of government records? How does it work? Can one obtain versions of previous contracts?

As a rule, government contracts are not published or passed on to third parties. However, everyone (including foreigners) has a right of access to official information held by public authorities under the Freedom of Information Act of the Federation and the states. It is generally believed that this should include records of previous procedures for awarding public contracts, including previous contracts. However, access may be denied, among other things, in cases where disclosure could prejudice international relations, the military, public safety or other security interests or to protect classified information and other official secrets or trade secrets (including confidential information and intellectual property rights of third parties). The disclosure of past government contracts will often be barred by one of these exemptions.

Supply chain management

What are the rules regarding eligible suppliers and supply chain management and anti-counterfeit parts for defence and security procurements?

There are no special defence and security procurement-related rules regarding eligible suppliers, supply chain management and anti-counterfeit parts.

Economic operators will be considered eligible to participate in public procurement procedures if they meet the eligibility criteria named by the tendering authority in the tender notice. Eligibility criteria in accordance with EU and national regulations may include requirements of professional suitability, financial and economic standing and technical or professional ability and certain compliance self-declarations. All criteria must be connected with the tendered goods, services or construction work. If the tendering procedure or the contract requires access to classified information in accordance with the German Security Clearance Act bidders must also fulfil certain security requirements.

Regulations on supply-chain management (especially commitments by the contractor to ensure the security of supply for the duration of the contract and even in the event of a crisis or war) are included on a case-by-case basis in the tendering authorities’ standard terms and conditions.

International trade rules

Export controls

What export controls limit international trade in defence and security articles? Who administers them?

Germany has very strict export control regulations, especially the German Foreign Trade Act, the Foreign Trade Regulation and the Military Weapons Control Act. These regulations govern the terms and procedures for the export of military equipment and dual-use products. The manufacture, trade, brokering and transport of military weapons and equipment, as well as certain dual-use goods, are subject to government permission. The licence under the KrWaffKontrG is issued by the Ministry of Economic Affairs, upon consultation with the Ministry of Defence and the Foreign Office. Export licences for weapons, military equipment and certain dual-use goods are issued by the Federal Office for Economic Affairs and Export Control (BAFA). Due to Germany’s history, the decisions to grant or withhold licences are often highly political. The German government pays particular attention to ensuring that the goods will not be misused to commit human rights violations or to exacerbate a crisis. Decisions on licences for exports of military equipment are primarily based on foreign and security policy considerations, and not on commercial or labour-market interests. These strict German rules also apply to parts of military equipment and often means that common European defence products cannot be exported to third parties, even if the contracting parties are not German. On 16 October 2019, Germany and France agreed on new common export regulations for common defence products.

Domestic preferences

What domestic preferences are applied to defence and security procurements? Can a foreign contractor bid on a procurement directly?

European and national public procurement regulations prohibit discrimination against economic operators purely on the grounds of their nationality. Therefore, in general, German public procurement procedures are open to all economic operators from the EU, the European Economic Area and GPA member states. However, on a case-by-case basis and due to the prominence of security and confidentiality concerns in defence and security matters, bidders from non-EU, non-EEA or non-Nato countries might by excluded from the tendering procedures.

Favourable treatment

Are certain treaty partners treated more favourably?

European and national public procurement regulations prohibit favourable treatment due to certain national or treaty statues. (See question 23.)

Sanctions

Are there any boycotts, embargoes or other trade sanctions between this jurisdiction and others?

Germany adheres to United Nations and EU boycotts, embargoes and other trade sanctions. A list of country and personal related weapon embargoes can be found on the BAFA website.

As of 6 December 2019, embargoed countries include:

  • Armenia;
  • Azerbaijan;
  • Belarus;
  • Central African Republic;
  • Congo;
  • Eritrea;
  • Iran;
  • Iraq;
  • Lebanon;
  • Libya;
  • Myanmar;
  • People’s Republic of Korea;
  • People’s Republic of China;
  • Russia;
  • Somalia;
  • South Sudan;
  • Sudan;
  • Syria;
  • Venezuela; and
  • Zimbabwe.
Trade offsets

Are defence trade offsets part of this country’s defence and security procurement regime? How are they administered?

Offset deals are not part of the EU and/or German defence procurement regulations, since they are generally incompatible with the procurement law principles of equal treatment and transparency.

Ethics and anti-corruption

Private sector appointments

When and how may former government employees take up appointments in the private sector and vice versa?

German Civil Service Law and the corresponding laws at state level require retired civil servants to notify the federal/state government if they intend to enter into any activity related to their former service responsibilities. The activity may be prohibited by government if official interests are in danger of being adversely affected.

Current and former government members must notify the government if they are planning civil activities in the private sector and if such activities might lead to a conflict of interests. If a politically neutral advisory board concludes that an interference with public interest exists, the government may prohibit the activity for up to 30 months at the most. The duty to notify expires 18 months after leaving governmental office.

Addressing corruption

How is domestic and foreign corruption addressed and what requirements are placed on contractors?

Corruption is punishable under different sections of the German Criminal Code. Criminal offenses include bribery of German and EU public officials and German soldiers, of members of parliament, commercial bribery and bribery of non-EU foreign officials. Though there is no true enterprise criminal law in Germany, economic operators may be subject to fines if their employees commit corruption offences on behalf of the company. Economic operators whose employees have been found guilty of corruption in a court of law are excluded from participation in public procurement procedures for a period of up to five years. However, before the bidder can be excluded from the procedure, it must be permitted to present its case and have the opportunity to set out measures it will take to prevent any further wrongdoing. A federal competition register of economic operators whose employees have been found guilty of corrupt practices will begin operation in 2020. Checking the register before awarding a contract will be mandatory.

Lobbyists

What are the registration requirements for lobbyists or commercial agents?

There are no formal registration requirements for lobbyists and commercial agents.

Limitations on agents

Are there limitations on the use of agents or representatives that earn a commission on the transaction?

There are no formal limitations on the use of agents or representatives. However, contracts issued by the Federal Ministry of Defence or its subordinates usually include standard terms requiring the approval of intermediaries and/or brokers. Approval will only be granted if it is commercially appropriate and there are no disadvantages for the contracting authority.

Aviation

Conversion of aircraft

How are aircraft converted from military to civil use, and vice versa?

Military aircraft may be converted to civil use if the armed services give up control of the aircraft and the aircraft is fully demilitarised. For civil use, the former military aircraft has to obtain or retain all necessary certificates and permits generally required for civil aircraft. The use of a civil aircraft for military purposes requires that the aircraft is under control of the armed services and certified by the German Military Aviation Authority.

Drones

What restrictions are there on manufacture and trade of unmanned aircraft systems or drones?

In general, the aviation laws and regulations governing the inspection and certification of aircraft also apply to unmanned air systems, both autonomous and remotely piloted. Systems that do not exceed a certain weight, use a type of special propulsion and are not or only used in certain areas are excluded from certain regulations.

Miscellaneous

Employment law

Which domestic labour and employment rules apply to foreign defence contractors?

Foreign defence contractors must adhere to German labour and employment regulations if they permanently operated in Germany or post employees in Germany. These regulations included provisions on equal treatment and non-discrimination, hiring and laying off employees, minimum wages, working conditions, health and safety measures and protective measures for pregnant women. Violations of these labour and employment laws may, besides other punishments, lead to an exclusion from further public contracting procedures.

Defence contract rules

Are there any specific rules that contractors, foreign or domestic, are bound by in defence contracts?

Foreign and domestic defence contractors must adhere to all applicable regulations on the production, handling, transport, export and use of weapons and other relevant military goods (see question 22). In addition, if the contract involves access to classified information, contractors must observe all applicable regulations regarding the security of such information (see question 21). However, foreign security clearances from EU and Nato member states might by accepted on a case-by-case bases.

Do contractors avail themselves of these rules when they perform work exclusively outside of the jurisdiction?

No. With the possible exclusion of labour and employment regulations, a contractor is usually bound to the aforementioned regulations as well even if they perform work exclusively outside Germany.

Personal information

Must directors, officers or employees of the contractor provide personal information or certify that they fulfil any particular requirements to contract with a government entity?

Economic operators participating in a public procurement procedure must generally declare, and possibly certify, that their directors, officers and leading employees have not been convicted of certain criminal offences. Usually a self-declaration by the bidder is sufficient. If the contract involves access to classified information, personal security clearances are required for all personnel who might be involved with the contract or have access to classified information (see question 21).

Licensing requirements

What registration or licensing requirements exist to operate in the defence and security sector in the jurisdiction?

Aside from the aforementioned regulations governing access to classified information (see question 21) and manufacturing, trade, brokering and transport of military weapons and equipment as well as certain dual use goods (see question 22), there are no additional general registration or licensing requirements to operate in the defence and security sector in Germany.

Environmental legislation

What environmental statutes or regulations must contractors comply with?

There are no specific environmental statutes or regulations for defence and security contractors. On a case-by-case basis exemptions might be available from general environmental statutes or regulations for defence goods or services.

Must companies meet environmental targets? What are these initiatives and what agency determines compliance?

There are no specific environmental targets for defence and security contractors. The contracting authority might choose, however, to include environmental targets either as performance requirements or as evaluation criteria in a public procurement procedure. The use of these requirements and criteria in the defence and security sector is currently very rare.

Do ‘green’ solutions have an advantage in procurements?

The contracting authority might choose to include environmental issues and requirements either as performance requirements or as evaluation criteria in a public procurement procedure; however, see question 39.

Updates & Trends

Key developments of the past year

What were the key cases, decisions, judgments and policy and legislative developments of the past year

Key developments of the past year 41 What were the key cases, decisions, judgments and policy and legislative developments of the past year?

The federal cabinet passed an Act on Accelerated Procurement in the Field of Defence and Security on 30 October 2019. The act specifically modifies the procurement regulations to enable accelerated procurement for the military and civilian security authorities. The clarifications and typical examples are designed to help ensure that procurement procedures can be used more quickly and consistently by the procuring agencies. The Act still requires parliamentary approval and it is expected that it will come into force in early 2020.