This week the European Court of Justice (ECJ) handed down its judgment in Wall AG (C-91/08), clarifying the test to be applied when a contracting authority seeks to vary an existing public contract, particularly in regard to where a sub-contractor is replaced, prior to or following contract award.

The Facts: The decision concerned a service concession contract between the City of Frankfurt (CoF) and FES, a limited liability company - 51% of the shares being held by CoF and 49% by a private undertaking - for the provision of operating, maintaining, servicing and cleaning 11 public toilets in the CoF. Two of those 11 were to be newly built; Wall AG (Wall) being designated in the contract as FES's sub-contractor for the provision of advertising services and supplying cubicles (the Services).

In advance of any services actually being provided, FES competitively tendered the Services, awarding the sub-contract to another provider (DSM) and not Wall. Unsurprisingly, Wall asked the national court to prohibit FES entering into the sub-contract with DSM and/or the performance of any contract by a third party, alleging a change in sub-contractor represented a substantial change to the original concession contract, not only in breach of the EU procurement rules but also the fundamental obligation of transparency. The national court referred the case to the ECJ, asking a number of questions including: Does the duty of transparency require, in the case of an intended amendment to a service concession contract – including the substitution of a subcontractor whose identity was emphasised in the tender – that the negotiations on this point are again opened up to competition with an appropriate degree of advertising, and what would be the criteria for requiring such an opening up?

The Judgment: The ECJ said where amendments to a contract are materially different from those under the original contract awarded, such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract, a new award procedure may be required to ensure transparency of procedures and equal treatment of bidders. The ECJ also clarified a change of sub-contractor may result in such a material amendment in the circumstances where the use of a particular sub-contractor was an influential factor in entering into a contract with a particular bidder; therefore potentially requiring a new award procedure.

Separately, the ECJ also considered the application of the procurement rules to private-public bodies, particularly whether mixed entities are to be treated as contracting 15 April 2010

This week the European Court of Justice (ECJ) handed down its judgment in Wall AG (C-91/08), clarifying the test to be applied when a contracting authority seeks to vary an existing public contract, particularly in regard to where a sub-contractor is replaced, prior to or following contract award.

The Facts: The decision concerned a service concession contract between the City of Frankfurt (CoF) and FES, a limited liability company - 51% of the shares being held by CoF and 49% by a private undertaking - for the provision of operating, maintaining, servicing and cleaning 11 public toilets in the CoF. Two of those 11 were to be newly built; Wall AG (Wall) being designated in the contract as FES's sub-contractor for the provision of advertising services and supplying cubicles (the Services).

In advance of any services actually being provided, FES competitively tendered the Services, awarding the sub-contract to another provider (DSM) and not Wall. Unsurprisingly, Wall asked the national court to prohibit FES entering into the sub-contract with DSM and/or the performance of any contract by a third party, alleging a change in sub-contractor represented a substantial change to the original concession contract, not only in breach of the EU procurement rules but also the fundamental obligation of transparency. The national court referred the case to the ECJ, asking a number of questions including: Does the duty of transparency require, in the case of an intended amendment to a service concession contract – including the substitution of a subcontractor whose identity was emphasised in the tender – that the negotiations on this point are again opened up to competition with an appropriate degree of advertising, and what would be the criteria for requiring such an opening up?

The Judgment: The ECJ said where amendments to a contract are materially different from those under the original contract awarded, such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract, a new award procedure may be required to ensure transparency of procedures and equal treatment of bidders. The ECJ also clarified a change of sub-contractor may result in such a material amendment in the circumstances where the use of a particular sub-contractor was an influential factor in entering into a contract with a particular bidder; therefore potentially requiring a new award procedure.

Separately, the ECJ also considered the application of the procurement rules to private-public bodies, particularly whether mixed entities are to be treated as contracting authorities. Assessing the constitution of FES, the ECJ concluded that it failed to satisfy two conditions required for it to be a contracting authority. FES was not effectively controlled by the CoF and it also operated competitively in the wider market deriving a large part of its income from other authorities and private undertakings. So, the ECJ found that the obligation of transparency will not generally apply to an undertaking if that undertaking: (a) is set up by regional or local authorities but also operates competitively in the market, (b) belongs to a local authority with a majority shareholding but a ¾ majority vote at a general meeting is required for decisions to be taken, (c) has only a ¼ of its supervisory board appointed by the local authority, and (d) receives more than ½ of its turnover from bilateral contracts.

Conclusion: The requirement to carefully consider whether an amendment constitutes a new award is not new. Indeed, the ECJ has previously put down a test in Pressetext, which is to be applied when an authority wishes to vary an existing contract stating an amendment might be material if it would have resulted in a different outcome if included originally, extends the scope of the contract, and/or changes the economic balance of the contract. Wall now builds on that test.

Of course not all variations will be unjustifiable, but considerable care should be taken when proposing changes to an existing contract including in relation to a supply chain. This is especially so where the identification of a specific sub-contractor was a material consideration in the authority determining that a participant had sufficient capacity to deliver the contract. MacRoberts have considerable expertise in advising on contract variations and the public procurement rules. For more information, please contact us.