Public Procurement & Government Contracts 2020 includes 27 jurisdictions. This edition covers key legislation, the contract award process, transparency obligations, review procedures and court decisions.
Last Updated: April 06, 2020
The Parable of Fosen-Linjen: Establishing Damages Liability for Breaches of EU Procurement Law
In October 2017, following a referral from a Norwegian Court of Appeal, the EFTA Court gave an advisory opinion on the correct interpretation of Directive 89/665/EEC (the Remedies Directive). A key question which the EFTA Court had to consider in its decision (Fosen-Linjen I or the “2017 decision”) was whether the award of damages for a breach of procurement legislation could be made conditional on certain criteria. Relevant in this context was the fact that under Norwegian law, damages for loss of profit are only available where, among other things, the breach of procurement legislation is deemed to be “sufficiently serious”.
In its 2017 decision, the EFTA Court concluded that a simple breach of public procurement law was sufficient to trigger liability to compensate the person harmed for the damage incurred, subject to the other conditions for the award of damages (including, in particular, the establishment of causation) being met.
However, the referring court disagreed with the EFTA Court’s conclusion and did not follow it in its decision. Both parties to the domestic proceedings appealed that decision to the Supreme Court. The Supreme Court then made a new reference to the EFTA Court asking it to consider whether the Remedies Directive requires that any public procurement law breach should be deemed sufficient in itself for the purposes of establishing liability for loss of profit. In its Fosen-Linjen II decision the EFTA Court concludes that there is no such requirement under the Remedies Directive.
This note sets out relevant facts and considers the basis on which the EFTA Court reached its conclusion. It also comments on the EFTA Court’s approach, the effect of Fosen-Linjen II on Fosen-Linjen I, and the possible relevance of the wider context in helping us understand how, in effect, the same issue was referred to the EFTA Court again for re-consideration.
Fosen-Linjen, a small Norwegian ferry operator, and the claimant in the domestic proceedings, came second in a tender process for the procurement of ferry services. The process, which had been launched in June 2013, was subject to the Norwegian law implementing Directive 2004/18/EC (the 2004 Directive), the predecessor directive to Directive 2014/24/EU, regulating public procurement in EEA countries.
Tenders were evaluated on the basis of price (50%), quality (25%) and environment (25%). The environmental considerations criterion was assessed by reference to the amount of fuel which each bidder specified in its tender as necessary for the running of the ferry service. Crucially, bidders did not have to explain how they calculated the amount of fuel which they had specified in their tenders or state the assumptions underlying their calculations. Norled was declared the winner, despite the fact that Fosen-Linjen had achieved the highest score for price, and a score equal to Norled’s for quality. The difference in the rankings seems to have been due to Norled achieving a higher score in relation to the environmental considerations criterion.
in January 2014, Fosen-Linjen sought and obtained interim measures stopping the conclusion of the contract between AtB, the contracting authority, and Norled. AtB subsequently decided to cancel the contract award process after the Frostating Court of Appeal (the Court of Appeal) confirmed the decision of a lower court to grant interim measures prohibiting the contract’s signature. In doing so, AtB referred to the Court of Appeal’s finding that AtB had failed to establish a reasonable basis for evaluation and committed an error by not verifying the reasonableness of the fuel consumption estimate which Norled had specified in its tender.
Fosen-Linjen did not contest the decision to cancel the original tender process, nor did it participate in two subsequent competitions which AtB initiated for the provision of ferry services for reasons which, it appears, related to the way in which the new contracts were structured.
In subsequent proceedings that dealt with Fosen-Linjen’s claim for damages for loss of profit or, the alternative, bidding costs, while criticising AtB’s approach to evaluating environmental considerations, the court did not award damages to Fosen-Linjen. The latter appealed this decision to the Court of Appeal. It was in the context of those proceedings that the Court of Appeal made reference to the EFTA Court.
As part of this referral, the EFTA Court was asked to consider a number of issues, including the question of whether the award of damages for a public procurement law breach could be made conditional on certain criteria. In that regard, the referring court noted that it found it difficult to reconcile the decisions of the Court of Justice of the European Union (CJEU) in Commission v Portugal and Strabag with the CJEU decision in Combinatie Spijker.
It should be recalled that in Commission v Portugal and Strabag, the CJEU essentially concluded that the Remedies Directive should be interpreted as precluding national legislation which made the right to damages for a breach of procurement legislation conditional on a finding and proof of fault or fraud. This was on the basis that to do so created the risk that the bidder who had been harmed by a contracting authority’s unlawful decision would be, nevertheless, deprived of the right to damages in respect of the damage caused by that decision. Accordingly, the national rule in question was not consistent with the principle of effectiveness, as assessed by, among other things, the general context and aim of the remedy of damages under the Remedies Directive.
However, only a few months after Strabag, the CJEU indicated in Combinatie Spijker that the obligation under Article (2)(1)(c) of the Remedies Directive, for member states to ensure that their domestic review procedures included the power to award damages to persons harmed by a procurement law breach, was subject to the requirements of the state liability doctrine.
This doctrine, established by the CJEU in Francovich and developed further in Brasserie du Pêcheur and Factortame, provides for the right of reparation for breaches of EU law for which the State can be held responsible, when three conditions are met: the rule of EU law infringed must be intended to confer rights on individuals; the breach of that rule must be sufficiently serious; and there must be a direct causal link between the breach and the loss or damage suffered by the claimant.
In its 2017 decision, the EFTA Court had effectively rejected the Combinatie Spjiker approach. Instead, it adopted a purposive interpretation of legal obligations, and sought to determine, among other things, whether national rules were such as to undermine substantially the goal of effective and rapid judicial protection which the Remedies Directive pursued. For reasons, which it sets out clearly in its decision, the EFTA Court concluded that a simple breach of public procurement law was in itself sufficient to trigger the contracting authority’s liability to compensate the person harmed for the damage incurred, provided that the other conditions for the award of damages were met including, in particular, the existence of a causal link.
However, as noted earlier, the Court of Appeal did not consider this conclusion to be correct. Instead, it believed that the question of an EEA state’s right to regulate the contracting authority’s liability has not been decided unambiguously by the CJEU. It also considered relevant that there were diverging views on this issue across the EEA and believed that Fosen-Linjen I did not appear to be “clearly correct” on this point. On that basis, it decided that damages for loss of profit were contingent on there being a sufficiently serious breach, as previously established by the Supreme Court. The Court of Appeal considered that this conclusion was consistent with the CJEU’s decisions in Francovich and Brasserie du Pêcheur and Factortame, to which the CJEU had referred in Combinatie Spijker.
As to the substance of the case, the Court of Appeal concluded that there had been errors in the invitation to tender and that, as a result, AtB had cancelled the tender process lawfully. In view of this, there was no causal link for the claim for damages for loss of profit.
Both Fosen-Linjen and AtB challenged the Court of Appeal’s decision in the Supreme Court. The Supreme Court then made a reference to the EFTA Court asking it to consider whether Article 2(1)(c) of the Remedies Directive required that any breach of procurement legislation should be deemed sufficient for the purposes of establishing liability for loss of profit.
In its referral to the EFTA Court, the Supreme Court indicated that it considered that Fosen-Linjen I did not address specifically important issues and expressed reservations as to whether the 2017 decision should be read as setting out the criteria for liability for loss of profit. Instead, it considered that there was “ambiguity” in the EFTA Court’s understanding of the level of harmonisation under Article 2(1) of the Remedies Directive, the principle of effectiveness and the relevance to this issue of the standard of liability for damages of the EU institutions in their public procurement activities. The Supreme Court also noted that the Supreme Courts of the United Kingdom and Sweden had adopted a standard of liability which corresponded to the CJEU’s finding in Combinatie Spijker, with neither of those courts finding it necessary to refer the issue to the CJEU.
As a preliminary issue, the EFTA Court considered the question of admissibility. It concluded that the request for a further advisory opinion was admissible on the basis that the Supreme Court was not contesting the validity of Fosen-Linjen I. Instead, it was merely seeking clarification as to whether Article 2(1)(c) of the Remedies Directive required that any procurement law breach should be deemed sufficient for the purposes of establishing liability for loss of profit.
The EFTA Court also considered that this question could not be answered simply by issuing an order referring to the 2017 decision. The reason for this was that the questions that had been considered in that decision and the question now in front of the EFTA Court were “not manifestly identical”. According to the EFTA Court, the questions referred in Fosen-Linjen I did not deal with the conditions applicable to a specific head of damage but concerned the conditions for damages claims more broadly.
As to the substance of the reference, the EFTA Court considered that the referring court’s question concerned the level of harmonisation which the Remedies Directive required, and the rules governing the award of damages for loss of profit.
In that respect, it considered relevant that one of the aims of the Remedies Directive was to ensure that adequate procedures existed in all member states that permitted the setting aside of unlawful decisions and the compensation of persons harmed by an infringement.
According to the EFTA Court, CJEU jurisprudence had established that the Remedies Directive was an instrument of minimum harmonisation. It followed that the adequate review procedures envisaged in the Remedies Directive, merely had to meet the minimum conditions set out in that directive.
Separately, the Remedies Directive required EEA states to ensure that review procedures against contracting authority decisions were effective and as rapid as possible, and were made available to any person having, or having had, an interest in obtaining a particular contract and who has been, or risked being, harmed by an alleged infringement. To that end, Article 2(1)(c) of that directive required EEA states to ensure that their review procedures provided for the power to award damages to persons harmed by an infringement.
However, neither Article 2(1)(c) nor any other provision of the Remedies Directive set out specific conditions for the award of damages, such as in relation to specific heads of damage or standard of liability. In that regard, the EFTA Court considered it relevant that loss of profit, as a head of damage, was not addressed explicitly in the Remedies Directive or indeed, Directive 92/13/EEC (collectively, the Remedies Directives).
In the absence of EEA rules governing the matter, it was for the legal order of each EEA state to determine, in accordance with the principle of procedural autonomy, the criteria on the basis of which which to assess harm caused by an infringement of EEA law in the award of public contracts.
Accordingly, EEA states enjoyed discretion in determining the criteria on which damage for loss of profit, as a result of a breach of EEA procurement law, should be determined and estimated, provided that the principles of equivalence and effectiveness were respected. That meant that those rules had to be no less favourable than those governing similar domestic actions and should not render practically impossible, or excessively difficult, the exercise of EEA law rights.
In order to ensure the effectiveness of the requirement under Article 2(1)(c) of the Remedies Directive to provide for the power to award damages to persons harmed by an infringement, it was necessary that such persons were, in principle, able to seek compensation for loss of profit.
At the same time, the Remedies Directive did not harmonise the standard of liability. In that regard, the EFTA Court considered that making the award of damages for loss of profit conditional on the injury having been caused by a sufficiently serious breach was sufficient for the purposes of safeguarding the rights of individuals. This was on the basis that case law had already established that as the threshold for the award of damages for injuries caused by an EEA state’s failure to act or where the injury was caused by the adoption of a legislative or administrative act in breach of EEA law.
In more detail, under the state liability doctrine, an EEA state could be held responsible for breaches of its obligations under EEA law when the law infringed conferred rights on individuals, the breach was sufficiently serious, and there was a direct causal link between the breach and the damage suffered.
At the same time, compliance with the principle of effectiveness required, in particular, that national rules did not subject the award of damages to a finding and proof of fault or fraud. This did not mean that certain objective and subjective factors connected with the concept of fault under a national legal system could not be relevant in the assessment of whether a particular breach was sufficiently serious. However, the obligation to make reparation for loss or damage caused to individuals could not depend on a condition based on any concept of fault going beyond that of a sufficiently serious breach of EEA law.
In the light of the above considerations, the EFTA Court concluded that Article 2(1)(c) of the Remedies Directive did not require that any breach of the EEA public procurement rules should be deemed sufficient in itself for the purposes of awarding damages for loss of profit to persons harmed by an infringement.
Despite the relative length of the judgment, setting out in some detail the views of the parties to the main proceedings as well as the observations of the European Commission and others, the actual part of the decision dealing with the Court’s findings is relatively succinct: the Remedies Directive is an instrument of minimum harmonisation which, among other things, requires EEA states to incorporate into domestic review procedures the power to award damages to persons harmed by a procurement law infringement.
At the same time, the Remedies Directive does not set out specific conditions for the award of damages. It is, therefore, for individual EEA states to determine the criteria on the basis of which damages should be made available, subject to such criteria respecting the principles of equivalence and effectiveness. Under the well-established principle of effectiveness, in particular, national procedural rules must not render practically impossible or excessively difficult the exercise of EEA law rights.
In line with CJEU jurisprudence, the EFTA Court then concludes that the total exclusion of loss of profit as a head of damage does not accord with the principle of effectiveness. Instead, in order to ensure the effectiveness of Article 2(1)(c) of the Remedies Directive, a person harmed by a public procurement law breach should, in principle, be able to seek compensation for loss of profit.
Up to this point, the EFTA Court’s position is broadly consistent with Fosen-Linjen I. The fundamental difference lies in the EFTA Court’s subsequent conclusion that it is consistent with applicable effectiveness requirements for the award of damages for loss of profit to be made conditional on a finding that the breach in question is sufficiently serious.
Although the judgment’s wording on this point could be clearer, it seems that the Court reaches this conclusion on the basis that in the absence of harmonisation of the standard of liability under the Remedies Directive, the conditions attached to the state liability doctrine applied (as a minimum). Jurisprudence on state liability had already established that these conditions satisfied the requirement of providing effective protection for the rights of individuals. It followed, therefore, that the requirement for a sufficiently serious breach was consistent with legal obligations under the EEA Agreement:
“The requirement of a sufficiently serious breach as a minimum standard is considered sufficient for the purposes of safeguarding the rights of individuals, since it is the threshold applied for the award of damages for injuries caused by failure to act on the part of the EEA States, and where it is the result of the adoption of a legislative or administrative act in breach of EEA law.”
In contrast, in Fosen-Linjen I, the EFTA Court did not assume that the “sufficiently serious breach” condition should be deemed to comply automatically with effectiveness requirements, by virtue of that condition being a constituent part of state liability doctrine.
Instead, it sought to consider the question of whether the award of damages under Article (2)(1)(c) of the Remedies Directive could be made conditional on certain criteria, including the requirement that the breach should be of a certain type or gravity, by reference to the question of whether such conditionality “substantially undermine(d)” the goals of the Remedies Directive as well as the objectives of EU public procurement legislation more widely.
In doing so, it followed a well-trodden path which the CJEU itself has charted and followed in the context of seeking to interpret the extent of obligations under the Remedies Directive. As the CJEU noted recently in Star Storage:
“According to settled case-law, the detailed procedural rules governing the remedies intended to protect rights conferred by EU law on candidates and tenderers harmed by decisions of contracting authorities, must not compromise the effectiveness of [the Remedies Directives], the objective of which is to ensure that decisions taken unlawfully by contracting authorities may be reviewed effectively and as rapidly as possible… In particular, care must be taken to ensure that the effectiveness of [the Remedies Directives] is not undermined… or the rights conferred by EU law… Furthermore, it must be recalled, as is clear from recital 36 of Directive 2007/66, and therefore [the Remedies Directives] that it amended and supplemented, that they seek to ensure full respect for the right to an effective remedy…”
Indeed, a key concern with Fosen-Linjen II lies in its conclusion that it was appropriate, or even necessary, in view of state liability case law, to assume that the requirement for a sufficiently serious breach accords automatically with the principle of effectiveness at all times, irrespective of context and, ultimately, actual effect. This approach treats the state liability doctrine conditions as immutable so that any investigation regarding the question of effectiveness need only be carried out in relation to conditions other than those which apply under the state liability doctrine. In adopting this approach, the EFTA Court reaches a conclusion which, for the reasons given in Fosen-Linjen I, would appear to undermine the effectiveness of the Remedies Directive.
This point is illustrated even more starkly by reference to the question of the availability of damages for bidding costs. Given that the Remedies Directive does not seek to harmonise issues such as heads of damage, the likely implication of the Court’s conclusion that the requirement for a sufficiently serious breach is consistent with the principle of effectiveness, is that the award of damages for bidding costs may also be made conditional on a finding of a sufficiently serious breach.
That would mean that in cases where a domestic court concludes that the breach is not sufficiently serious, a claimant seeking a remedy following contract conclusion, might not have access to any remedy at all, let alone an effective remedy.
Indeed, it is noteworthy that following the Fosen-Linjen II decision, the Supreme Court has now concluded in its decision in the main proceedings that the award of bidding costs is not available under Norwegian law other than in cases where there is a finding of a sufficiently serious breach.
It might be argued that the above concerns are misplaced given that the EFTA Court’s approach would seem to be consistent with the CJEU’s own approach in Combinatie Spijker.To the extent that it is appropriate to interpret Combinatie Spijker as articulating the CJEU’s clear and established position on the applicability of the state liability doctrine to the interpretation of the Remedies Directive, the same concerns must be raised also in relation to that decision.
Clarification or re-consideration?
In determining the admissibility of the Supreme Court’s request for an advisory opinion, the EFTA Court considered that the referring court did not seek to contest the validity of Fosen-Linjen I but merely sought clarification as to whether Article 2(1)(c) of the Remedies Directive should be deemed to require that any public procurement law breach may provide the basis for liability for loss of profit.
The view that the decision in Fosen-Linjen II merely amounts to a clarification requires a very particular reading of the EFTA Court’s conclusion. First, the conclusion that Article 2(1)(c) does not require that any public procurement law breach is sufficient in itself to award damages for the loss of profit to persons harmed by an infringement, should be uncontroversial. It is clear that the Remedies Directive does not require member states to award damages for loss of profit, or indeed, for any other loss that a claimant might allege that they have suffered, simply on the basis that a breach of public procurement law has been established. The issue of causation, as regulated under domestic legislation, subject to the principles of equivalence and effectiveness, would also be of primary relevance in determining the appropriateness of a damages award.
Taking this conclusion out of its context, Fosen-Linjen II could, therefore, be deemed to be consistent with the conclusion in Fosen-Linjen I that a simple breach of public procurement law is in itself sufficient to trigger the liability of the contracting authority to compensate the person harmed for the damage incurred, pursuant to Article 2(1)(c) of the Remedies Directive, provided that the other conditions for the award of damages are met including, in particular, the existence of a causal link. From that perspective alone, Fosen-Linjen II may be said to constitute merely a clarification of the earlier judgment.
However, the conclusion in Fosen-Linjen II must be interpreted by reference to what proceeds it, and in particular the EFTA Court’s clear position that the “sufficiently serious breach” requirement is consistent with the effectiveness principle, so that EEA states may limit the availability of a damages award for loss of profit to sufficiently serious breaches.
That position is incompatible with the Fosen-Linjen I conclusion that, under the Remedies Directive, a simple public procurement law breach is sufficient for the purposes of triggering a damages liability.
In this regard, it seems puzzling that the EFTA Court considered it necessary to move away so drastically from the Fosen-Linjen I position. Indeed, it would have been possible for it to adopt a more nuanced approach by concluding that, although it considered the “sufficiently serious breach” requirement to be consistent with the effectiveness principle, in the absence of any discretion in complying with a requirement of EU procurement legislation, but also so as to ensure the effectiveness of the Remedies Directive, any breach of a procurement law obligation by a contracting authority should be deemed to be sufficiently serious.
If such an approach were to have been adopted, it would have been less difficult to assert that this clarified Fosen-Linjen I. In the event, Fosen-Linjen II does not clarify Fosen-Linjen I; it affects the validity of its conclusion that any public procurement law breach may trigger a damages liability.
A question of sovereignty?
Over and above the issue of disagreement with the EFTA Court’s legal analysis in Fosen-Linjen I, it is possible that the perceived implications of that decision in effectively extending the scope of state liability, also played a part in the Supreme Court’s decision to ask the EFTA Court to re-consider its original judgment.
Although a detailed consideration of this issue is outside the scope of this article, it might be relevant to note that, following the entry into force of the EEA Agreement, Norway, among others, had resisted the application of the state liability doctrine in an EEA context, essentially on the basis that this was based on special characteristics of the EU legal order which were absent from the EEA Agreement. Subsequently, following acceptance of this doctrine as also relevant for EEA purposes, Norway argued in favour of interpreting it more narrowly in an EEA context.
Accordingly, the conclusion in Fosen-Linjen I that each contracting authority procurement law breach was capable of triggering damages liability, might not have been particularly welcome, especially at a time when the CJEU itself had yet to clarify fully its own position on the matter.
Further support for this view might be found in the fact that, in reality, the practical implications of Fosen-Linjen I should have been limited. More specifically, it would seem unlikely that the Fosen-Linjen I conclusions would have led to an appreciable increase in successful loss-of-profit damages claims, given the need for claimants to demonstrate also causation.
The real difficulty in demonstrating causation in such claims was, in fact, one of the factors which in 2006 prompted the European Commission to propose the revision of the Remedies Directives, so as to facilitate, among other things, the use of more effective pre-contractual remedies.
Ultimately, despite the EFTA Court’s conclusion in Fosen-Linjen II, it is noteworthy that in its consideration of the damages claim for loss of profit, the Supreme Court appears to have focused its analysis on the question of causation rather than the question of whether the breach was sufficiently serious.
This adds an element of irony to the whole affair in that the outcome of the domestic proceedings would not have been substantively different in this regard, had the Supreme Court simply followed Fosen-Linjen I.