Assignment of contracts signed with French administrative authorities:

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1 Assignment of contracts signed with French administrative authorities: what does the ECJ 19 June 2008 judgement change? The European Court of Justice (the ECJ ) rendered a judgement on 19 June 2008 which at first sight restricts the assignment of contracts, the original entry into of which was subject to public tender rules. This judgement could be interpreted as adding another condition to those already set by the French Supreme Court (the Conseil d État ) in order for assignments to be valid: that an assignment clause must be provided for in the initial contract. The ECJ judgement could also have implications for internal reorganisations of company groups, change to the contractual partner s shareholding and step-in clauses. The consequences of this judgement are still difficult to assess but it seems to us that a case-by-case analysis is now necessary rather than applying general principles. The context According to the Conseil d Etat s advice dated 8 June (the Conseil d'etat s Advice ), assignment of contracts that were originally entered into pursuant to public tender rules is possible on the condition that the assignor obtains prior authorisation from the administrative authority. The latter may refuse the authorisation (i) when the assignee does not present sufficient professional and financial guarantees in order to ensure the performance of the contract, (ii) when the assignment is likely to affect the elements which have led to the award of the contract to the initial contractual partner, or (iii) when the assignment is accompanied by a material modification of the economic balance of the contract; the Conseil d Etat adds that assignment will not be possible if the administrative authority takes part in an action intended to circumvent rules governing the tender of public contracts. Contents The context 1 The ECJ Judgement 2 Consequences for contract assignments 3 Consequences for internal reorganisations of groups of companies 4 Consequences for a change to the shareholding 5 Consequences for step-in clauses 6 Points to look out for in contracts subject to public tender rules 7 Our Procurement Practice 8 1 CE, avis, 8 June 2000, n November

2 Projet The Internal Market and Services Directorate General of the European Commission had made a similar analysis to that followed by the Conseil d Etat in a letter which was disclosed (the Commission s Letter ) 2. In its judgement dated 19 June (the Judgement ), the ECJ ruled, to our knowledge for the first time, on the question of compatibility of contract assignment with public tender rules. The ECJ ruled on the question as to whether a publicly procured contract could be freely assigned, or whether the assignment should be considered as a modification which needed the conclusion of a new contract and thus a new public tender process 4. The ECJ Judgement The facts are the following: the press agency Austria Presse Agentur ( APA ) was registered in Austria as a liability registered cooperative. APA signed a service contract with the Austrian Republic, notably allowing the Austrian Republic to use a text service named OTS. APA subsequently constituted a 100% owned subsidiary in the form of a limited liability company (APA-OTS) and transferred to APA-OTS the operation of the OTS service. The Austrian authorities granted their consent to the provision of the services by APA-OTS. A competitor of APA filed a challenge before an Austrian court on the ground that the OTS service contract should have been subject to public tender following the transfer of the OTS service by APA to APA-OTS. Following a reference for a preliminary ruling from the Austrian court, the ECJ ruled that As a rule, the substitution of a new contractual partner for the one to which the contracting authority had initially awarded the contract must be regarded as constituting a change to one of the essential terms of the public contract in question, unless that substitution was provided for in the terms of the initial contract, such as, by way of example, provision for subcontracting (point 40). However, in the specific case of an internal reorganisation between APA and APA-OTS, the Court ruled that this situation did not materially modify the terms of the initial procurement (point 45); indeed, it ruled that a new public tender process of the contract was not justified in a situation in which the contract is assigned to a subsidiary 100% owned by the assignor, which is controlled by the assignor and to whom the assignor gives its instructions; Letter dated 1st April 2004 by the Internal Market and Services Directorate General to our attention; see P.Lignières, Le droit communautaire des marchés publics autorise la cession des contrats, Droit Administratif, April 2005, 4. Case C-454/06, Pressetext Nachrichtenagentur GmbH. The ECJ judgement was rendered in the field of a public procurement under Directive 2004/18/EC of 31 March 2004; it cannot be ruled out that it will be applied to other contracts which are subject to public tender rules and subject to the treaties transparency and equal treatment principles. This judgement could also apply to contracts signed by contracting entities in the excluded sectors. However, the term contract with administrative authorities is used in this memorandum for simplification purposes. 2

3 provided that the assignor continues to assume the responsibility for compliance with the contractual obligations (point 54). The ECJ also indicated that a change of control of APA-OTS would, as a rule, be an amendment to an essential term of the contract which would justify a new tender process (point 47). In addition, the ECJ indicated that, as a rule, a change to the shareholding of a public company listed on stock exchange does not justify a new tender process; nevertheless, the situation may be different if such change was a practice intended to circumvent Community rules governing public contracts (point 51). The Judgement is likely to have consequences for contract assignments in general, for internal reorganisations, for change in shareholding and for step-in clauses. Consequences for contract assignments The ECJ considered, in light of the facts of the case, that the assignment of the contract was possible so long as the contract draft given to the tenderers in the original tender process provided for the possibility of assigning the contract. Indeed, the ECJ indicated that the assignment must have been provided for in the terms of the initial contract (point 40). In practice, assignment clauses are often provided for in draft contracts provided to the tenderers. In our view, this requirement may be understood as signifying that all the tenderers are, in that case, informed of the possibility of assigning the contract; if not, some of them could consider that assignment is forbidden, which might lead them either to refuse to submit an offer or to submit a less advantageous offer; a subsequent assignment of the contract could then affect the elements which have led to the award of the contract to the initial contractual partner 5. Conversely, this would mean that a contract which does not include an assignment clause may not be assigned. The Judgement could therefore be understood as contrary to the Conseil d Etat s Advice and to the Letter of the Commission on this point, since these institutions allow, under certain conditions, the assignment of the contract in this case Regarding the contracts governed by French law, the possibility to assign the contracts subject to public tender rules was recalled by the Conseil d Etat s Advice and confirmed by the Letter of the Commission. It was considered that in the silence of the contracts on the possibility to assign, one should refer to general principles of law; it was therefore difficult to claim that the tenderers were not informed of the possibility to transfer a contract which did not provide for an assignment clause. As regards public procurements, the consequences of the apparently diverging position could be mitigated by the insertion of assignment clauses in the field of the undergoing reform of the general administrative clauses (cahiers des clauses administratives générales). 3

4 Projet However, this is, to our knowledge, the first ECJ judgement on administrative contract assignment. It is therefore likely that the ECJ will clarify its reasoning in subsequent decisions. It is also possible that its case-law will eventually align with that of the Conseil d Etat and that the ECJ will consider that there are cases in which contract assignment remains possible, even in the absence of an assignment clause or following the modification of a clause prohibiting transfer. Indeed, one could imagine that an assignment would be possible in such cases, provided that the assignor could demonstrate that the assignment does not constitute a change to one of the essential terms of the public contract, i.e. that the tenderers in a public tender would not have submitted a different offer had an assignment clause been provided in the draft contract that they analysed 7. The use by the ECJ of the term as a rule in the Judgement paragraph relating to assignment allows one to think that the presence of an assignment clause in the draft contract provided to the tenderers is not the only scenario in which assignment would be authorised. If one follows the interpretation of the Judgement, there is a presumption that the contracts may not be assigned but it is a simple presumption which can be rebutted. In that sense, it seems to us that, in the end, the solutions to which the Judgement leads could be identical to the solutions which stemmed from the Conseil d Etat s Advice or the Letter of the Commission. Consequences for internal reorganisations of groups of companies The ECJ gave the go-ahead to the internal reorganisation of APA. Indeed, the ECJ considered that the assignment of the OTS service contract by APA to APA-OTS a 100% owned subsidiary of APA, controlled by APA and to which APA gives instructions is authorised, provided APA remained liable for the performance of the contract (point 54). The ECJ considers in that scenario that there is no change to one of the essential terms of the initial contract (point 45). However, it is not possible to state as a general principle that contracts may be assigned freely in the context of internal reorganisations of groups of companies, particularly for cases of internal reorganisation which would not be identical to that of APA. For instance, one could imagine that the contract 7 If a different solution were to be held, this would mean that the contract could not be assigned even in cases in which assignment does not lead to distorting competition and in which the assignor presents sufficient guarantees in order to perform the contract and therefore ensure continuity of public service, which seems hardly conceivable except if one should consider that all contracts executed with administrative authorities are intuitu personae contracts, which would not be justified (all the more since public tender processes aim to select in a first step tenderers which are likely to perform the contract phase of candidacy selection and in a second step, following the phase of selection of offers, to select an offer and not a person). 4

5 counterparty could assign its contract to a company within its group without assuming responsibility for compliance with the contractual obligations (for instance if it is absorbed by the assignee as part of a universal succession), as long as it can be demonstrated that the performance of the contract will remain unchanged and that the assignee presents technical and financial guarantees identical to that of the assignor and that the other conditions of the Conseil d Etat s Advice are met. In addition, the ECJ considered that a change of control of the assignee APA-OTS would, in principle, lead to a new tender process for the award of the contract; indeed, according to the ECJ, this change of control would be analysed as an effective change of the contractual partner since it would not be an internal reorganisation of the initial contractual partner (point 47) 8. Such a change of contractual partner should therefore be analysed in light of the principles mentioned above: the contract draft given to the tenderers in the tender process must provide for the possibility of assigning the contract. Consequences for a change to the shareholding Following a question raised by the Austrian court on the consequences of a change to the composition of the assignor s shareholding (APA), the ECJ considered that the change to the composition of the shareholders of a cooperative does not as a rule lead to a modification of an essential term of the contract (point 52); therefore, such a contract does not have to be the object of a retendering process. The ECJ considers that it stems from the nature of the public companies listed on stock exchange that their shareholding is likely to change at any time and that as a rule such a situation does not affect the validity of the award of the contract to such a company except in exceptional cases, such as actions intended to circumvent Community rules governing public contracts. It seems to us that the same reasoning could be followed as regards companies not listed on stock exchange The ECJ indicated that the absence of guarantee that the shares of the subsidiary will not be transferred to a third party during the currency of the contract does not affect this conclusion (point 49). Indeed we understand the reference of the ECJ as being an example for a demonstration which concerns all types of companies. In addition, the ECJ begins and ends its reasoning on change to shareholding by using very broad terms which thus aim all types of companies (points 50 and 53). 5

6 Projet Consequences for step-in clauses In the context of PPP and other project financing, it is not unusual for the senior financiers to have a direct agreement or other mechanism allowing them to step-in, rescue the project and thereafter potentially dispose of the project (or certain of the contracts constituting the project). The step-in mechanism typically consists of two phases. The first phase involves the lenders (usually via a special purpose vehicle) assuming with the defaulting concessionaire its obligations under the relevant contracts for a step-in period in order to prevent termination. The second phase occurs before the end of the step-in period where the lenders either substitute (by way of a transfer of the relevant contracts to) a third party so replacing the defaulting concessionaire or step out and leave the defaulting concessionaire in place (i.e. allowing the contract to terminate). The Judgement is of interest in both scenarios since they involve a form of transfer of a contract the subject of the public procurement regime. The position adopted until the Judgement was, in light of the Conseil d Etat s Advice and of the Letter of the Commission, that the implementation of the step-in mechanism was possible provided the administrative authority granted its consent on the substitution of the contractual partner 10 and that this consent could be refused only for one of the four reasons mentioned above (page 1). This reflects the terms of a typical direct agreement. The Judgement does not expressly consider step-in clauses but one can envisage its application given that nearly all PPP contracts / concession agreements are let pursuant to public procurement rules. If so, it is arguable therefore that the implementation of such clauses is possible only when they are contemplated in the draft contracts given to the tenderers during the tender process. However, it is our experience that step-in mechanisms are usually contemplated in the draft contracts (and direct agreements) provided to tenderers in the original procurement and so one would expect that the Judgement will have only limited consequences in practice. 10 The European Commission had already launched a debate on the fact that the implementation of a step-in clause could possibly affect the award of the contract to the initial contractual partner due to the implementation of a step-in clause; indeed, it stated in the Green Paper on PPPs that certain step-in type arrangements may present a problem in terms of transparency and equality of treatment and asked to the stakeholders of the consultation of the Green Paper if they were sharing the Commission s view (Green Paper on Public-Private Partnerships and Community Law on Public Contracts and Concessions, 30 April 2004, COM(2004) 327 final). Certain stakeholders indicated that one of the reasons for step-in clauses not presenting a problem in terms of transparency and equality of treatment is the fact that they are concluded under full competition (Report on the public consultation on the Green paper on Public-Private Partnerships and Community Law on Public Contracts and Concessions, 30 May 2005, SEC(2005) 629). 6

7 Points to look out for in contracts subject to public tender rules In order to secure the possibilities of assigning throughout the term of the contract and, as part of any step-in mechanism required for financing, the tenderers for contracts subject to public tender rules will need to ensure that: - the draft contracts contain an assignment clause; and - step-in rights and transfer after step-in are expressly contemplated in the draft contracts. In the absence of an assignment clause, assignment to a wholly-owned subsidiary may be possible without needing to retender; provided (i) the assignee is controlled by the assignor, (ii) receives instructions from the assignor, and (iii) the assignor remains liable for the performance of the contract; however, there is a risk that subsequent change to the shareholding of the assignee triggers an obligation to retender the contract. It may be that other forms of assignment will be possible in the absence of assignment clauses, but they will have to be assessed on a case-by-case basis and will in any case involve a risk of retendering. 7

8 Our Public Procurement Practice Across Europe, we have extensive experience in advising on the application of the local and EU public procurement laws and the general principles of EU law that they embody. We advise clients on both sides of the fence including: - public authorities and utilities needing to ensure that their contracting arrangements are compliant - private sector companies looking to contract with bodies bound by the procurement rules - banks lending to both the private and public sectors who need to understand risks related to the procurement process. Clients benefit from our expertise in developing and managing competitive tendering processes - from pre-qualification, selection and negotiation through to award. We provide pro-active, strategic advice at all stages of the process in order to manage and minimise risk so that the eventual award is robust, and the risk of challenge for procedural impropriety minimised. For disappointed tenderers we ensure that they have all the legal tools at their disposal starting with expert advice, through administrative proceedings and ultimately court challenge. Editor: Paul Lignières This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2007 Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at Paris Linklaters LLP 25 rue de Marignan Paris Tel: (+33) Fax: (+33) A Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ and such persons are either solicitors, registered foreign lawyers or European lawyers. 8

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