In February, the Norwegian Supreme Court issued a judgment which has spurred debate among procurement lawyers. However, it is difficult to see that the judgment reduces the likelihood of compliance with the legislation.
In the aftermath of the Supreme Court's judgment in case HR-2023-206-A, it has been advocated that the Supreme Court's approach may lead to reduced compliance with the procurement legislation due to reduced incentives for tenderers to claim for damages.
This begs the question: Does the Supreme Court's judgment lead to a risk of reduced compliance with the procurement legislation? And by extension: What should the primary function of the rules on damages be? To protect injured parties from financial loss or to contribute to regulatory enforcement?
In 2019, two municipalities published a contract notice for a competitive tendering process for a four-year framework agreement on the emptying of sludge from private septic systems. The two undertakings Perpetuum and Stoklands submitted tenders, and Perpetuum was expected to be selected as the successful tenderer. However, due to ambiguities in the tender document, the tendering process was cancelled. Subsequently, when a new tendering process was conducted, Stoklands won.
Perpetuum stated that the first tendering process was wrongfully cancelled and thus claimed expectation damages for loss of profit (positive contractual interest). The Supreme Court dealt with the case on the assumption that there was an obligation to cancel the tendering process, despite the legal basis for cancellation was different than the basis relied upon by the municipalities when cancelling the tendering process.
The key question for the Supreme Court to assess was whether Perpetuum was entitled to expectation loss damages in spite of the obligation to cancel the first tendering process that Perpetuum was perceived to win.
Illegal tendering processes
The ruling of the Supreme Court asserts that a tenderer does not have a right to damages based on an expectation of obtaining a contract that cannot legally be entered into. Consequently, when a tendering process has to be cancelled due to it not being carried out in line with the applicable legislation, there is no justified expectation of being awarded the contract.
As an extension of this, the Supreme Court emphasised that any errors in the contracting authority's original grounds for cancellation do not change this assessment. Thus, the tenderer will only be able to claim expectation loss damages where the contract could legally be entered into.
There is no doubt that the concept of damages play a role in the enforcement of the legislation, i.a. due to the tenderers being the most equipped to detecting and addressing any potential breaches of the rules.
It is also true that tenderers must perceive there to be certain benefits in order for them to take legal action and pursue regulatory breaches before the courts. The lack of these incentives is likely the reason why lawsuits are rarely brought with a claim to shorten a contract or declare it ineffective according to sections 13 and 14 of the Procurement Act. Even if a tenderer is successful in its claim, the benefit for the tenderer is limited to the termination of the illegal contract - which only provides them with the opportunity to submit a new tender for the potential new tendering process.
However, these considerations are not decisive for the deciding who enjoys protection under Norwegian contract law.
The importance of deterrence considerations
Perpetuum argued to the Supreme Court that the need for effective sanctioning of the procurement rules argues for awarding expectation loss damages in cases such as this. However, the Supreme Court did not agree and stated (paragraph 61):
"It is probably the case that the preventive effect of the right to damages will vary in line with the amount of damages awarded. But in my view, consideration of deterrence cannot weigh so heavily that damages can be awarded for losses based on an expectation of obtaining a contract that could not legally have been entered into. The consideration of reparation is adequately taken care of by the award of reliance damages [negative contractual interest] – i.e. costs incurred as a result of errors that lead to liability. In my opinion, if damages are awarded for expectation loss, one departs too far from traditional Norwegian contract law thinking." (our translation)
The approach of the Court appears to be both reasonable and sensible.
Whether the legal situation should be the same in cases where the contracting authority did not have to, but mainly could, cancel the tendering process, is still an open question. The Supreme Court does not seem to take a stand on this.
In our opinion, the judgment is also sensible as it provides contracting authorities incentives to follow the procurement rules. The effect of a potential finding by the Supreme Court that a claim for damages for expectation loss was present in spite of the obligation to cancel the tendering process, could be hesitation on the part of contracting authorities to cancel a tendering process that have been carried out in breach of the procurement rules in the fear of large claims for damages.
Other ways to ensure compliance?
Overall, it is difficult to see that the Supreme Court's judgment reduces the likelihood of compliance with the procurement legislation.
Nevertheless, it may be appropriate to consider adjustments to other parts of the legislation in order to ensure that tenderers are given sufficient opportunities to test the legality of tendering processes.
The ultimate reason for the establishment of the Norwegian Complaints Board for Public Procurement ("KOFA") was precisely to give tenderers an effective opportunity to pursue (potential) regulatory breaches, as an alternative to the courts. The processes before KOFA have however become rather extensive. Thus, we welcome the steps KOFA has taken for a more active management of cases and for reduction of processing time.
In addition, the legislature could consider whether complainants should be awarded coverage of the necessary legal costs for cases heard by KOFA where its claims are upheld. The fee to appeal is usually reimbursed when an appeal is successful, but in regard to legal costs, there is no automatic coverage. Disputes concerning the legal costs give rise to further incurred costs and risks.
Consequently, a solution whereby complainants are entitled to coverage of their legal costs when their claims are upheld, can help ensure that regulatory breaches are addressed by the tenderers, even when the possibilities for obtaining damages are limited.