What should the contracting authority do with a zero-priced tender?
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Have you ever thought what the contracting authority should do with a zero-priced tender? In a world of mercantilism, you could not even comprehend that this is possible. Nonetheless, such a case was referred to the CJEU. In the Case C‑367/19 of Tax-Fin-Lex (ECLI:EU:C:2020:685) the Court was posed with a closed question if the definition of public contract could justify the rejection of such a bid.
Facts of the case
Ministry of the Interior of Slovenia announced a tender concerning access to a legal information system for 24 months with the estimated value of around EUR 40’000. One of the tenders (Tax-Fin-Lex) proposed a price of EUR 0.00. His tender was rejected, and he challenged the decision to court. The court stayed the proceedings and referred the case to the CJEU asking whether the definition of public contract provided in Article 2(1)(5) of Directive 2014/24 is in itself a ground to reject a zero priced tender since public contract implies financial consideration.
Since the definition of the public contract should be applied in the same way, the CJEU retained the case, despite the procurement in the main proceedings being below EU threshold (paras 20, 21).
The Court underlined that the wording ‘for pecuniary interest’ from the definition referred in Article 2(1)(5) of Directive 2014/24 means a contract under which each of the parties undertakes to provide one form of consideration in exchange for another. The synallagmatic nature of the contract is thus an essential element of a public contract (para 25).
The Court agreed with AG’s opinion that the consideration need not necessarily consist of money payment. Other types of compensations, such as expenditure reimbursement, cannot be ruled out. However, it was stressed that the reciprocal nature, i.e. obligations on both sides, cannot be taken from the equation (para 26). Consequently, the Court ruled that when there is no consideration in return, there is no public contract within the meaning of Article 2(1)(5) of Directive 2014/24 (para 27).
The Court refuted the zero priced tenderer’s argument that the contract would open up access to a new market or enable to receive references as being highly speculative to characterise it as ‘pecuniary interest’ (para 28). Nonetheless, the Court made a U-turn and decided that despite the above considerations a zero priced tender cannot be rejected based on the definition of ‘public contract’ in this case because the procurement in the referred case was below Directive 2014/24 threshold (paras 29). However, in the next paragraph 30, the Court hinted to the fact that even for caught by the Directive procurements the definition of ‘public contract’ cannot serve as an automatic ground for rejecting the bid.
The Court advised checking whether the zero priced tender was abnormally low within the meaning of article 69 of the Directive (para 31), and see following the inter partes procedure that the zero price will not jeopardise the proper performance of the contract (para 32).
It is a puzzling situation. On the one hand, offering a zero-price tender means that the contractual construction is outside the public contract definition. On the other hand, this does not free the hands of the public buyer to reject the zero-priced tender. Further, the contracting authority is advised to check whether this bid is abnormally low.
The substantive justifications behind the abnormally low tender provisions are centred around three main goals: (i) aversion of contractual non-performance risks, (ii) ensure fair competition and (iii) law compliance. The methods of achieving these are shrouded in vagueness.
Let’s assume that in the present case the tenderer is compliant with the mandatory rules on staff remuneration, contribution to the social security system, observance of the health and safety work standards, etc., and that there is no state aid involvement whatsoever.
The contracting authority has to engage in a risk assessment exercise and avoid any possible contractual non-performance scenarios. Accepting below cost tenders is riskier, but not illegal per se. Nonetheless, at the evaluation stage, risk mitigation possibilities are slim. Let’s suppose that when drafting the procurement documents, the buyer would have in mind the possibility that a zero-priced tender or below cost tender will be submitted. In turn, the contracting authority would introduce a higher ratio between assets and liabilities, larger cash-flow or turnover requirements, higher policy insurance or performance guarantee or any other requirement serving the same purpose. Not having these risk mitigating tools, the contracting authorities remain wary and prone to reject such tenders.
However, a zero-priced tender as a strategy to penetrate the public procurement market may have its economic justifications. This is in particularly valid in the service sector where, up to a certain volume, the variable costs are close to the ground in comparison with the fixed costs. So, it is worth dipping a toe.
Against this background, it is ultimately to the public buyer’s considerable discretion to decide whether to consider a zero-priced tender as abnormally low following the inter partes due process.
Let’s assume that the contracting authority accepts the zero-priced tender as the winner. In such case, the daunting issues which the contracting authority has to digest and reconcile is a “public contract” with a zero-priced tender which does not have any “pecuniary interest” on the one hand, and the definition of public contract on the other hand, which in CJEU view cannot seat at the same table. In such a scenario, this decision of the CJEU may be the source of strong disagreement rather than the clarifications of the contours.
Of course, in the EU realm we may never see a zero-priced tender scenario. Nonetheless, as a matter of principle in below EU threshold procurement such tenders will undoubtedly pop up, and the contracting authority will again have the conundrum to accommodate the legal and economic side of this equation. And who knows, the penetration of the procurement market argument, may not be considered so speculative after all.