Client's Scope of Action in Case of Contract Breach

Contract breach - the relation to the public procurement rules' amendment provisions

As is known, the procurement regulations only apply until a contract has been entered into. Thereafter, contract law regulates the parties’ rights and obligations. An important exception from this is the procurement regulations’ prohibition against significant changes. A significant change to an entered contract is considered a new procurement that should have been announced according to the regulations. If this does not happen, the client can be considered to have made an illegal direct procurement.

When implementing and following up contracts entered into under the procurement regulations, the client must therefore always keep in mind to what extent changes are taking place that could have procurement legal consequences. This also applies in cases of default. If the client fails to enforce the supplier’s default, the client can be considered to accept a change in the contractual relationship that could be equated with a significant change in the contract in procurement legal terms.

Neither the Norwegian procurement regulations nor the procurement directives regulate when the client’s inadequate enforcement of default is equated with a significant change. The question has also been considered to a limited extent in practice. However, at the end of 2023, KOFA issued two decisions, which can provide some further guidance.

KOFA's decision on default powers

KOFA case 2023/230 concerned a procurement of a framework agreement for the purchase of snow removal vehicles for airports. The complainant argued that there was a default due to delay and that the client had failed to enforce this. The complainant therefore argued that the contract had been significantly changed and that the client, by failing to enforce, had made an illegal direct procurement.

The Complaints Board begins the assessment with some general considerations about the client’s scope of action. The Board states that as “long as the principle of equal treatment is maintained, a client must have a certain leeway” related to the enforcement of default (paragraph 71). The Complaints Board further states that this particularly applies in cases of delay where there is no quantitative change in the delivery. The prerequisite, however, is that the enforcement takes place within the framework of the procurement rules’ amendment rules.

In this case, the parties agreed that there was a delay. The question was whether the delay had been sufficiently followed up. As a general starting point, the Complaints Board states that the client must have a “wide discretion” in the factual assessment of whether the contract’s default powers can be used. As always, however, the exercise of discretion must not be arbitrary, unreasonable or in violation of the principles of equal treatment and predictability. When the client in this case had assessed that there was no basis for using default sanctions and this assessment appeared defensible, there was no inadequate enforcement of the contract. Thus, there was no illegal direct procurement. Central to the Board’s decision seems to be that the client had not simply accepted the supplier’s delays, but assessed whether default powers were applicable and actively followed up the delivery.

In KOFA case 2023/236 on the procurement of asylum reception centers with transit places, it was also argued that the client had made an illegal direct procurement by failing to follow up the supplier’s default. The alleged default was whether a temporary use permit satisfied the contract’s requirement to have “all necessary public permits”. The Board interpreted the contract in such a way that this was sufficient and that there was therefore no contract breach. The client’s scope of action in following up default was therefore not put to the test.

Have we come closer with regard to the client's scope of action?

KOFA’s decisions do not clarify to what extent the client has a general obligation to use default powers if a default situation first arises, but support that the client has a leeway.

KOFA assumes that the assessment of whether the conditions for imposing default sanctions are met and how the default sanctions should be used in that case, falls under the client’s discretion. This means that the review is limited to whether the discretion is arbitrary, indefensible or in violation of the basic principles. If it is clear that there is a default, the client’s enforcement must also take place within the framework of the procurement regulations’ amendment provisions.

For the client’s scope of action, it is therefore not decisive whether the client assesses the default issue in the same way as a court. However, the client must be able to document that defensible assessments have been made based on what is an appropriate follow-up of the contractual relationship.

The article was first published on anbud365 (norwegian).