A new decision by KOFA opens up for significant deviations to be negotiated away

The legal starting point and the uncertainty about the right to negotiate away significant deviations

When carrying out competitive procedures with negotiation, the starting point is that the contracting authority can negotiate on all aspects of the tenders, but that it is not permitted to negotiate award criteria or absolute requirements. This follows from the Norwegian Regulation on Public Procurement ("FOA") Section 23-7 (2) and a corresponding provision included in the Norwegian Regulation on Public Procurement in the Utilities Sectors ("Utilities Regulation").

It has been uncertain whether a contracting authority has the right to negotiate with tenderers who have submitted tenders with significant deviations (also referred to as reservations) with the aim of negotiating away these deviations, or whether such tenders must be rejected before the negotiations begin.

The uncertainty originates in the European Court of Justice's decision in case C-561/12 Nordecon, handed down in accordance with the previous procurement directive. The case concerned a competitive procedure with negotiation where the technical specification was changed by the contracting authority on the basis of a deviation in one of the tenders, and in such a way that the other tenderers could submit tenders in accordance with the changed requirement. The European Court of Justice concluded that the current directive "(...) does not allow the contracting authority to negotiate with tenderers tenders that do not comply with the mandatory requirements laid down in the technical specifications of the contract" (premises 38 and 39).

The decision has been interpreted in different ways, and it has been advocated that the decision must be understood as opening up for negotiating with tenderers who have submitted tenders with significant deviations, but that the contracting authority cannot accept the deviations with the consequence of entering into a contract that is significantly changed from the contract notice.

The right to negotiate with tenderers who have submitted tenders with significant deviations will have clear practical and financial advantages. Firstly, through the negotiations, the parties will be able to get a better overview of the risks and challenges of the project, which will often lead to the tenderer waiving the deviation in question. This will have a positive effect on the competition for the public contract, which again is in line with the objective of the procurement regulations. Secondly, the negotiations will be able to reveal that there is in fact no deviation. The latter will, to a certain extent, be carried out through legal clarifications, but with the entailed risk that one or more tenderers contest the legality of the clarification afterwards.

Certain decisions by the lower courts regarding the previous legal framework allow for significant deviations to be negotiated away (see e.g. decision TBERG-2012-94141 by Bergen District Court). Many had hoped for a final clarification of the right to conduct such negotiations with the adoption of the new legal framework. Instead, and on the contrary, we got a regulatory text that appears fragmented and unclear on this point, which has led to an increase in legal uncertainty.

More about the regulatory provisions and the guidelines

The provision on the timing of rejection in competitive procedures with negotiation can be found in FOA section 24-10 (2), and states that the contracting authority can "(...) postpone the decision on rejection according to section 24-8 first paragraph letters a and c or second paragraph until he has ended the negotiation or dialogue." (our translation)

The reference to letters a and c is in respect of cases where the tenderer has submitted a tender which cannot be considered binding or which is abnormally low. However, the provision is silent on whether the contracting authority can, in a similar way, postpone the decision on rejection in cases where the tender contains significant deviations, according to FOA section 24-8 (1) letter b.

It is unclear from the wording of the provision whether it is to be understood as meaning that tenders that contain significant deviations must be rejected before the negotiations are carried out, or whether the provision is to be understood as meaning that the legislature has not taken a position on whether the contracting authority can postpone a decision to reject tenders that contain significant deviations until the negotiations have ended.

In the Ministry of Trade, Industry and Fisheries' (NFD) guidelines on the rules on public procurement, at section 34.4.7.2, the Ministry clearly states that:

"There is no room for negotiating away significant deviations in the tenderers' tenders. (...) It follows from section 24-10 second paragraph that the contracting authority can postpone the decision on rejection of tenders in the events listed in section 24-8 until he has concluded the negotiations. This does not apply if the tenderer's tender contains significant deviations from the procurement documents, cf. section 24-10 second paragraph second sentence. In practice, this means that the contracting authority, before the negotiations, must clarify whether a tender contains significant deviations." (our emphasis and translation)

The Norwegian Agency for Public and Financial Management (DFØ) has followed the same line of reasoning, and states in its guidelines that contracting authorities "(...) cannot negotiate on tenders that originally contain significant deviations. As a starting point, you must therefore reject such tenders before you start the negotiations". (our translation)

This approach has been criticised in legal theory, where there seems to be relatively broad agreement that a rule preventing the contracting authority from negotiating away significant deviations in the tenderers' tender is unfortunate from a societal perspective.

Neither the courts nor KOFA have, following the entry into force of the new legal framework, explicitly taken a stand on whether there is a right to negotiate away significant deviations in tenderers' tenders when the procurement exceeds the EEA thresholds. However, with the new KOFA decision 2021/2139, we now have a statement that says something about KOFA's position on the matter.

New decision from KOFA

KOFA case 2021/2139 concerned a competitive procedure with negotiation for the acquisition of a new pedestrian and cycle bridge. The project was to be carried out as a collaborative EPC contract, based on the standard contract NS 8407. One of the tenderers had its tender rejected before the negotiations due to deviations in the tender.

The tenderer appealed the rejection decision to KOFA and claimed, firstly, that the deviations could not be considered to be deviations from the procurement documents, and secondly, that the respondent did not have the right to reject the complainant's tender without first giving the complainant the opportunity to waive the deviations that could not be accepted. The complainant claimed that the latter also applied if the deviations were considered significant, and that the contracting authority had undertaken a duty to negotiate the tenders in the procurement procedure.

The respondent claimed that the deviations were significant and that there was no obligation to negotiate the tenders.

KOFA agreed with the contracting authority that the tender contained significant deviations. The Complaints Board further agreed with the contracting authority that no obligation to negotiate could be derived.

The interesting part of this decision, however, is that KOFA provides guidance on the question of whether it is legally permissible to include tenders that contain significant deviations into negotiations.

KOFA states that the statements of interpretation from NFD and DFØ carry little weight in terms of legal sources, and are disputed. In what must be characterised as an obiter dictum in premise 38, KOFA expresses its disagreement with the statements of interpretation that NFD and DFØ have given on the topic, and states that "(...) the regulation does not immediately support the Ministry's understanding of the regulations." (our translation)

In its reasons for its decision, KOFA emphasises that according to the wording of FOA Section 24-10 (2), it does not prohibit the possibility of postponing rejection until after negotiations have begun, but before they have been concluded. In KOFA's view, the right to negotiate away the deviations ends only at the conclusion of the negotiations.

Furthermore, KOFA points out that the wording of the Directive 24/2014/EU on Public Procurement does not support the Ministry's understanding either. The provision states, among other things, that the contracting authority "(...) shall verify that the final tenders are in conformity with the minimum requirements (...)".

However, in the Complaints Board's view this "(...) does not mean that the contracting authority is precluded from giving a tenderer the opportunity to waive a significant deviation in a tender submitted before the final tender." (our translation)

What now?

It is unusual to see that KOFA so clearly states that the legal understanding of NFD and DFØ is incorrect. However, we welcome that the Complaints Board directs attention to an uncertain legal situation, especially as this is a very practical issue with great importance for both contracting authorities and tenderers. The solution KOFA outlines seems to be both practical and predictable at first glance.

However, the question is whether an understanding that the contracting authority can negotiate away significant deviations until the negotiations are concluded may raise new and unforeseen issues. For example, will the time of concluding negotiations be a sufficiently clear deadline?

From FOA section 23-7 (4) it is clear that the contracting authority must end the negotiations by setting a common deadline for receipt of final tenders, and it is not permitted to negotiate on the final tenders. However, the provision has not been interpreted strictly, and some contracting authorities conduct "final negotiations" in the period between the submission of the final tender and the award of a contract. Considerations of equal treatment, nevertheless, may entail that the final tender should be free of significant deviations by the deadline for receipt of final tenders, and that any final negotiations should be subject to only minor adjustments.

The provision concerning the deadline for receipt of final tenders is not found in the Utilities Regulation. The question of a deadline will therefore come even more to the foreground. In addition, the question also remains whether considerations of equal treatment are ensured where there is a reduction of tenders during the negotiations, and it later turns out that the contracting authority has chosen to proceed with negotiations on a tender containing significant deviations (which the tenderer does not wish to change) at the expense of tenders without such reservations.

Nevertheless, in our view, KOFA's approach has much to commend it. Although, viewed in isolation, it is correct that the guidelines published by NFD and DFØ are subsequent interpretive statements of little weight in terms of legal sources, the reality is that they fulfil a need for understanding the legal framework and are often used by contracting authorities and tenderers, as underlined by KOFA. When the guidelines make it clear that negotiations cannot be started based on tenders that contain significant deviations, it will take a lot for entities who apply the legal framework to think that this does not reflect the applicable law.

Consequently, the situation today is that there is an inconsistency between the various sources of law which, due to the aforementioned statements from KOFA, is challenging to deal with. We therefore encourage the NFD to come forward and give a statement on its view of KOFA's interpretation and, in extension of this, update the relevant guidelines and change the wording of the regulation to clarify the state of the law.

This article was first published in Norwegian on Anbud365.