Compensation for unlawful termination of a public procurement/ government contracts procedure

The discontinuation of an award procedure is not only frustrating for bidders, but also expensive, as preparing a bid takes money and time. For bidders, it is then worthwhile to check any claims against the tendering authority.

This is because the bidder may demand reimbursement of those expenses under certain circumstances, the German Federal Court of Justice (Bundesgerichtshof – BGH) recently ruled (judgment of 8 December 2020, court file no.: XIII ZR 19/19). If the contracting authority cancels the award procedure unlawfully, i.e., without a legal justification, it is in breach of its pre-contractual duty of care. Thus, under Sections 280(1), 311(2), 241(2) of the German Civil Code (Bürgerliches Gesetzbuch – BGB), in such cases the bidder is entitled to compensation for the costs he incurred for preparing the bid, including a lump sum for personnel costs. However, according to the BGH, only the bidder with the best offer is eligible to make a claim at all.

Further, the BGH held that usually the bidder cannot claim any loss of profit. The court argued that public procurement law only guarantees the bidder a (fair) chance of being awarded the contract (or concession), but not a claim to the award itself. Only in cases where the contracting authority awards the contract to the “wrong” bidder, i.e., a bidder other than the one with the best offer, the actual “best” bidder may claim lost profit as well. In such cases, however, bidders will have to challenge the award decision first.

In the case decided by the BGH, the contract had not been awarded at all because the contracting authority had decided to terminate the award procedure early. Nevertheless, the BGH clarified that even under such circumstances bidders would be entitled to compensation for loss of profit if the contracting authority had awarded the contract to someone else despite the termination of the procurement procedure. However, those requirements were not met in the case at hand.

The position adopted by the BGH, i.e., allowing only the “best” bidder to claim damages, will likely result in practical difficulties when more complex award procedures are at stake. While it may be easy to determine which bidder should have been awarded the contract in open procedures (at least as soon as bids have been submitted), it will become more difficult in the case of negotiated procedures, e.g., when awarding major infrastructure projects. This applies, in particular, where the procedure is discontinued at an early stage, e.g., after completion of the call for competition or the initial bidding phase. At this point, bidders will have already incurred significant costs and may seek reimbursement – however, at this stage it is usually impossible to identify the “best” bidder. In such situations, the BGH is likely to deviate from its above-mentioned position (cf. BGH, judgment of 9 June 2011, court file no. X ZR 143/10, para. 16).

Further, if the award procedure is terminated due to deficiencies in the tender documents, a potentially larger group of bidders will likely be entitled to damages. This is because some bidders might not have participated in the award procedure in the first place, if the contracting authority had issued a correct tender from the outset. Those bidders must also be able to claim compensation for the costs they incurred – at least in case they submitted an eligible bid.

Co-Author: Franziska Jordan