Introduc
Russia’s attack on Ukraine has far-reaching consequences for the lives of Ukrainians and other parts of the world. In reaction to the attack by the Russian army, the Council followed several sets of sanctions,[1] the last of which came into force on 3 June 2022. With those sanctions, the EC needs to disrupt the Russian economy in an attempt to end the war. Inevitably, sanctions will affect the internal market, not least public spending and how the government can spend EU money. agencies. The sanctions also relate to the law of public procurement, that is, the contracting government is prohibited from acting on a contract awarded to tfinishers affiliated with Russia, or in. [2]
Several countries have also taken steps to impose sanctions or to combat the spillover effects of war on government procurement. Most of the measures followed concern, for example, the disruption of global supply chains and, consequently, value volatility.
In this article we will describe the direct consequences of the new sanctions on public procurement procedures and the award of contracts through public administrations, as well as some of the measures followed by Member States and the United Kingdom.
Russia Sanctions – Government Procurement
The sanctions followed in reaction to the Russian military’s attack on Ukraine in early 2022[3] add to the existing measures imposed on Russia for its annexation of Crimea and its non-compliance with the Minsk agreements (which aimed to end aggression in portions of the Donbass). [4] As things stand, sanctions range from specific restrictive measures imposed on Russian-Americans to a blanket ban on the import and export of certain goods and services.
Public procurement is covered by the fifth sanctions package that followed in April 2022. Since then, Article 5k of Regulation 883/2014[5] explicitly prohibits a contracting authority from awarding or carrying out a public or concession contract covered by the public contract. Guidelines for or with, essentially, Russian Individuals, Companies and those strongly affiliated with Russia.
The ban covers all users of herbs of Russian nationality, legal users, entities and other bodies established in Russia. In addition, non-Russian or non-Russian corporations are covered by the ban, i. e. legal users, entities or bodies whose property rights are held directly or through more than 50% of a Russian user or entity. In other words, contracting governments are prohibited from awarding contracts to companies whose majority shareholder or ultimate beneficiary is a Russian citizen or company. The prohibition also applies to the conclusion of contracts with representatives of the users or corporations mentioned above. Last but not least, the prohibition also applies to parties invoked through a tenderer where that party carries out or is expected to carry out more than 10% of the contract.
The prohibition on awarding a public contract or on the performance of a contract extends to contracts explicitly excluded from the scope of the Public Procurement Directives. production and broadcasting, electronic communications and arbitration, conciliation and judicial to those falling within the scope of article 5k of Regulation 883/2014. [6]
For contracts and concessions already concluded, Article 5k(4) of Regulation 883/2014 provides for a transitional period. All contracts concluded before 9 April 2022 are exempt from the ban until 10 October 2022, after which the contract will be terminated or suspended indefinitely. and unconditionally, in accordance with the national legal regime. [7]
The prohibition on awarding contracts or concessions to Russian citizens and companies is not absolute because the competent national authority[8] would possibly authorize the award or further execution of a limited number of contracts, such as contracts for intergovernmental cooperation in area programmes, the import or shipment of fuel and herbal oil, and the import or shipment of coal to the EU. The authorisation shall be followed by notification to the other Member States within two weeks. [9]
How do you know if a bidder or a subcontractor is subject to the ban?
The ban on awarding contracts to Russian citizens and corporations is aimed at contracting with the government. Therefore, if a contracting authority fails to comply with the prohibition, it may be subject to prosecution and sanctions[10]. Therefore, it is very important that the contracting government find out if the bidders are prohibited from participating. A contracting authority will want to diligently investigate the background of a bidder and, in all likelihood, that of any subcontractors or other parties the bidder wishes to rely on. Background research can be tricky because the more intermediaries involved, the more likely it is that the contracting government will want to consult Russian resources to find out who a bidder’s beneficial owner is. It can be difficult for a contracting government with limited resources to conduct a background check on a bidder. To assist the contracting government, the EC suggests requesting a declaration from the bidder stating that none of the sanctions are applicable. [11] In case of moderate doubt about the data received, the contracting authority is requested to request additional data. The only logical consequence of not receiving the mandatory data after a request is the exclusion of the bidder or the termination of the contract.
In addition to the contracting government, bidders have a role to play in ensuring the effective implementation of sanctions. Where the contracting government itself may have difficulties in investigating the tenderer’s background, the role of other tenderers may be indispensable. In addition to an ethical incentive, a competing bidder has an advertising reason to report bidders who meet the conditions of the ban. After all, by declaring that a bidder is covered by the ban, the bidder showing the bid is more likely to win the contract.
Regardless of the reason, we recommend following 4 steps to know if a bidder or subcontractor is prohibited from winning a contract:
(I) Establish whether the Bidder is a Russian citizen, or whether a legal user (all types of entities) is incorporated in Russia or has its registration in Russia;
(II) Establish whether the ownership of a legal user belongs, directly or (in more than 50%), to a user or entity in question in (I);
(III) Establish that the Bidder is represented through herbal users or legal users acting on behalf of a user or entity referred to in points (I) or (II);
(IV) Establish whether a subcontractor or supplier, who meets criteria (I) or (II), performs or is expected to perform more than 10% of the total contract price. [12]
How to identify that a bidder belongs to a Russian company or individual?
The sanctions exclude any legal user from participating in a tender if it is owned, directly or indirectly, by more than 50% through an herbal user or a Russian company. At first sight, this criterion seems simple. However, if the corporations are only partially “Russian”, it can be difficult to identify whether the ownership of a company is, in fact, more than 50% Russian. For example, how is a company prohibited from participating in a tender if 30% is owned by a Russian individual and the remaining 70% through a company identified in the EU, even though this EU company is owned 40% by through a Russian company? The EC responds to this question in its FAQs. [13] According to the EC, it is mandatory to calculate what proportion of the bidder is owned directly or indirectly through a Russian herbal or legal user, regardless of the point of ownership. In the example given, this means that the bidder is 30% owned through a Russian herbal user, plus 40% of the remaining 70% ownership is owned by a Russian company, which equals 28%. ownership totalArray Add 28% to 30% through Russian individual and Bidder is directly and indirectly owned 58% through Russians and is therefore prohibited from participating in a tender.
How to identify if a subcontractor or participates in a contract through more than 10% and what are the consequences?
In its Frequently Asked Questions, the EC provides guidance on how a “Russian” subcontractor or supplier is executing or is expected to perform a contract for more than 10% of its value. [14]
First, the EC clarifies what the terms “subcontractor” and “supplier” mean. The terms are intended to cover all parts of a supply chain, i. e. not only a bidder’s subcontractor or direct supplier, but also additional parts outside the bidder. . Similarly, it does not matter if the subcontractor or supplier supplies services, paints or any other type of source. Finally, the EC clarifies that the criterion is met if a bidder potentially uses a subcontractor or supplier to meet the bidding conditions, even if it does not yet depend on it.
The EC also provides guidance on how to deal with a prohibited subcontractor or supplier, i. e. replacement is the preferred route. [15] Only when substitution is not feasible does the EC suggest terminating the contract. The EC also stresses that the replacement of a subcontractor or supplier shall be carried out in accordance with the principles of non-discrimination and equivalent treatment. .
What to do when a contract already concluded is incompatible with sanctions?
Contracts that are already in position can, in principle, be implemented or executed until October 10, 2022. After that date, all contracts incompatible with sanctions must be terminated. The EC recommends that the contracting government award a new contract well before this deadline.
The termination of a contract on the basis of Regulation 883/2014 is considered due to a fortuitous event. However, this alone is not sufficient to award a new contract following a negotiated procedure without the prior publication of a contract notice. the contracting authority may award a contract on the basis of that procedure. In principle, the award of a new contract should be carried out in accordance with a general procedure or an accelerated procedure.
To learn more about the implementation of the accelerated procedure, the EC refers to its rules published after the asylum crisis and COVID-19. [16] The Guidelines refer to the use of the negotiated procedure without prior publication provided for in Article 32 of Directive 2014/24/EU. This procedure allows the contracting authority to negotiate directly with potential contractors and then award a contract directly. In particular, the EC refers to situations for the use of the negotiated procedure without prior publication as set out in Article 32(2)(c) of Directive 2014/24/EU. Such situations are such that cases are strictly mandatory for reasons of excessive urgency motivated by unforeseen circumstances for the contracting authority, and where the time limits of the general procedure cannot be respected. In other words, direct award to a pre-selected economic operator remains the exception, applicable if only one commitment is to deliver within the technical and temporal limitations imposed by excessive urgency.
Measures followed across individual countries
The war in Ukraine has had a disruptive effect on global supply chains, which were already under heavy pressure due to the COVID-19 pandemic. Terms such as scarcity, delays, and inflation are used to describe existing demanding economic situations. These demanding situations are in addition to the effects already felt through sanctions. Inevitably, public procurement is also affected by demanding economic situations. To mitigate the effects of existing supply chain disruptions on public procurement, a number of countries have taken initiatives, clarified the application of existing law or followed measures.
One such measure worth noting is the one taken through the UK, which suggests employing an “open book” technique for fabrics whose costs vary considerably. In this technique, the contracting authority and the tenderer do not agree on a constant price, however, it agrees that the tenderer will unload the fabrics at the most productive price imaginable, which he is obliged to prove.
Belgium and France refrained from adopting new legislation, but instead published instructions on how to use the existing legal framework to address existing economic challenges, as well as how to comply with EU sanctions. In France, a circular was issued to provide guidance to contractors. Government on how to modify ongoing contracts when fabrics are too expensive or unavailable. In addition, recommendations are given on how to deal with fortuitous cases, force majeure and value review clauses.
Similarly, France and Germany have issued circulars on how to comply with EU sanctions and the consequences of non-compliance. In Germany, the Federal Ministry of Economic Affairs and Technology has also made a self-declaration that bidders can to claim to comply with EU sanctions.
Poland has adopted another technique by adopting a new law that is implemented alongside existing public procurement laws. The new law covers topics such as new grounds for mandatory exclusion, such as Russian ownership or participation and fines for non-compliance.
Italy has taken the legislative lead through the adoption of legislation on mechanisms that grant flexibility in contracts in the event of value disruptions caused by disrupted supply chains. For example, the value review mechanism reintroduced in public procurement allows for an upward and downward reimbursement formula for value adjustments in vital building materials. To counteract imaginable value fluctuations, a contracting authority must make reservations, to which is added a value adjustment fund created by the Italian Ministry of Infrastructure to serve as a backup.
Finally, in the Netherlands, the government has provided recommendations to the contracting government and bidders on how to deal with the EU sanctions imposed on Russia, adding by publishing its own FAQs. [17] In its FAQ, the government explains in some detail how to find out if a bidder is subject to the ban. For example, the government clarifies the definition of ownership and references an EU Best Practices document published through the Foreign Relations Advisors Working Group[18]. The government offers further guidance by giving the contracting government and bidders the option to touch a designated branch of the Ministry of Economic Affairs and Climate Policy for the range of bidders. Furthermore, the Dutch government has published a document on how to apply for an authorization within the meaning of Article 5k(2) of Regulation 833/2014, i. e. an exception to the prohibition as provided comprehensively. [19] Importantly, the Dutch government responds to the query on what to do in the event of an alleged breach of EU sanctions. He suggests using the EU Sanctions Notification Tool or touching designated government branches. [20]
Conclusion
Strict sanctions in reaction to the Russian military’s attack on Ukraine have far-reaching consequences for public procurement. Essentially, all tenderers sufficiently connected to Russia are excluded from participation in tenders. However, figuring out whether a bidder is sufficiently connected to Russia can be tricky in practice. From a more practical point of view, we hope that the contracting government will be able to assess well whether tenderers deserve to be excluded. adhere to new developments related to the war in Ukraine and the law on public procurement.
For information, please contact:
Janneke Kohlen, partner, bird
janneke. kohlen@twobirds. com
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