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Abnormally low tender: change in case law?

Dutch courts are generally reluctant to vindicate bidders who believe that a competitor’s bid is abnormally low. Recently, the Court of Justice of the European...

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Dutch courts are generally reluctant to vindicate bidders who believe that a competitor’s bid is abnormally low. Recently, the Court of Justice of the European Union (‘the Court’) issued a ruling that may change this. This contribution discusses that ruling and provides practical tips.

Procurement of IT services: the case study

European Commission announces tender for IT platform development services in December 2019. Two consortia bid. The European Commission awards the contract to the tenderer with the lowest price. The rejected consortium opposes this outcome. Indeed, it has doubts about the price of the winning bid. This is “abnormally low” according to the consortium.

The losing consortium first communicated its doubts about the winner’s price to the European Commission. It argues that the winning price is so much lower than its own tender price, that performance of the contract is only possible through so-called ‘social dumping’ (in short, the use of low-paid staff from other countries) and that the continuity of the requested services is jeopardised by the low price.

The European Commission disagrees with the tenderer. It informs that it has examined the offer. A detailed financial analysis shows, the European Commission said, that it is in line with the market conditions of the countries from which the requested services would be provided. The price is therefore realistic, so implementation is also not compromised. The content of the financial analysis will not be shared with the complaining bidder. A substantive explanation of how the Commission arrived at this conclusion is thus lacking.

By doing so, the European Commission is effectively saying: ‘I have assessed the price and concluded that it is not abnormally low, take it from me.’ However, the substantive assessment itself is not transparent and thus not open to question by the losing bidder. This problem is common in practice. Contracting authorities often describe in general terms that they have assessed price. If the process of that assessment appears sufficiently reliable, that is a reason (so far) for a judge not to intervene. In doing so, courts often consider that the section of the law on abnormally low tender is intended to protect the contracting authority and not as a ground of appeal for an unsuccessful tenderer.

Initial proceedings: General Court of the European Union

The rejected party did not leave it at that and went to court. As this is an order of the European Commission, it is the General Court of the European Union (‘the General Court’). The General Court’s ruling finds that the European Commission breached its duty to state reasons. Indeed, the European Commission must inform the losing bidder of the characteristics and comparative advantages of the winning bid in the award decision, and further at its request. The General Court ruled that – as the consortium specifically expressed doubts about this – the European Commission should have given reasons why, in its view, there was no abnormally low price. Merely its own determination that the enrollment is not abnormally low is insufficient. The losing bidder is thus vindicated in the first instance.

Note that this does not take the award to the first winner ‘off the table’. The European Commission must now give reasons as to why it reached that award. This could therefore mean that the winning bidder retains the contract, if the choice of this bidder is at least still (better) justified. In that case, the Court’s judgment is a ‘paper victory’ for the losing bidder.

Appeal: Court of Justice of the European Union

The European Commission is not letting up and is appealing to the court. The court ruled on 11 May 2023. At the Court, too, the European Commission is proved wrong. What considerations lead to that judgement?

The Court notes, first, that the applicable Financial Regulation provides for the possibility for an unsuccessful tenderer to make a request to the contracting authority for an explanation of an award decision. That request may require the contracting authority to justify why the winning bid should not be considered abnormally low. Indeed, according to the court, the fact that a tender was not rejected implies that the contracting authority considered that the winning tender was not abnormally low. Otherwise, the entry would have been rejected. From the Financial Regulation, the Court infers – as is already the practice – that, in principle, a contracting authority only has to address the issue of abnormally low price when requesting specific explanations.

That request had been made here. Its purpose was to be able to test whether there is no arbitrary action by the contracting authority, and whether there is healthy competition. Indeed, the latter is the purpose of procurement law. The court noted in between that the tenderer had not used the term ‘abnormally low bid’ in so many words in its request for clarification here. According to the court, it is preferable to do so explicitly. So that is an immediate tip for practice: formulate objections clearly.

Because the request referred to two known risks of an abnormally low tender (social dumping and a risk of implementation), it was clear that it was a request relating to a potentially abnormally low tender.

Second, the Court addresses the extent of the contracting authority’s obligation to state reasons.

First, the Court reiterates the rules on testing a potentially abnormally low tender price. This can be divided into two phases. First, a contracting authority must assess whether a tender appears abnormally low. If the assessment is that the tender does not appear abnormally low, no further analysis of the price follows. So that leaves it at the first stage. If the tender does appear abnormally low, the contracting authority must examine the tender (in detail) to assess whether it is abnormally low. The tenderer concerned should therefore be given the opportunity to explain why the tender is not abnormally low. If the contracting authority then still considers the tender abnormally low, rejection should follow. Incidentally, in most cases exclusion follows, but the applicable Financial Regulation specifically talks about rejection. Thus, if the tender is not rated abnormally low, a thorough analysis has been done in the second stage. It is important to have a clear picture of the distinction between those phases. Only when an abnormally low price is suspected should the contracting authority conduct thorough follow-up investigations into a tender price.

This is also important for practice. Until now, in response to a question, a contracting authority could suffice to explain that it did not suspect an abnormally low price. Even if the losing bidder had substantiated its doubts about the price, for instance with a (proprietary) market-based offer. The contracting authority then usually replied that it did not share the doubts and sufficed. The court accepted this course of action as the rule.

The court changes that. According to the court, the first-stage price check (see above) is a summary check for internal use. This is not always enough. Indeed, the contracting authority itself may find that a bid does not appear abnormally low, but it ‘has to’ start having doubts because an unsuccessful bidder puts forward well-founded reasons for doubt. If these doubts are sufficiently substantiated, the contracting authority will still enter the second stage, where a detailed analysis of the winning price must be made.

The court added that the result of that detailed analysis should be shared in outline with the unsuccessful bidder. Because it may follow from that analysis that enrollment is not abnormally low. It would be contrary to the principles of EU law if an unsuccessful tenderer were then unable to review the substance of that analysis. Thus, a contracting authority cannot (any longer!) simply refer to the fact that it has carried out an analysis. It should share the content of that analysis in outline with the unsuccessful bidder. According to the court, this is particularly important in this case because the price criterion was decisive for the award and there were only two candidates. The context of the tender is therefore relevant to the development of these content lines.

One final takeaway is that the Court confirms that further justification of a decision is not possible only in proceedings. After all, the lawsuit is about the failure to properly justify the earlier decision. That cannot be remedied by supplementing that justification in court. This is in line with existing case law: the award decision must immediately include all reasons relevant to the decision.

Future?

It is obvious that this line of the Court will be emulated in European and Dutch case law on abnormally low tenders. This gives rejected bidders more leverage to have a competitor’s bid price tested. This improves legal protection for rejected bidders.

If it can be properly substantiated why a winning bid seems abnormally low, with this judgment in hand, it is more likely to entitle you to a thorough analysis of that winning bid as well as substantive information about that analysis. That substantiation may – at least in this case – consist of its own (market-based) offer. Something that is currently considered insufficient in Dutch case law to give the contracting authority grounds to start ‘doubting’. It should be noted, however, that the low number of bidders played a role in this ruling. So it is better to refer to a third party’s market-based quotation or analysis.

A small side note remains to be made. This was a European Commission tender. The Procurement Directive (elaborated in the Netherlands in the Procurement Act) does not apply to that. Other EU law applies to that. So the question is whether the interpretation of that internal EU law can be applied one-to-one to the interpretation of the Procurement Act. As the principles cited by the ECJ are also directly applied in case law on the Procurement Directive, we may cautiously conclude that this ruling is also suitable for proceedings on European procurement.

No paper victory for legal protection, then. The further interpretation of the contracting authorities’ obligation to state reasons given by this judgment is of great importance for the legal certainty of bidders in procurement procedures. That is where the lawyers at Wille Donker advocaten are happy to contribute.