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Newsletter - Fosen-Linjen II, case E-7/18

In last week’s decision by the EFTA Court in the Fosen-Linjen II case the Court departs from its former advisory opinion in the Fosen-Linjen I case and concludes that the EU enforcement directive does not stipulate that any breach of procurement rules gives a right to compensation for lost profits in procurement disputes. There must be a sufficiently qualified breach. This is the first time the EFTA Court has been presented with practically the same question in two rounds; first when an advisory opinion was requested by Frostating Court of Appeal (that chose not to comply with the EFTA Court’s advisory opinion) and now through a request from the Supreme Court.

Case background

This autumn, the Supreme Court shall consider a compensation claim made by a bidder (Fosen-Linjen AS) against a client (AtB AS, owned by Trøndelag County Council) following alleged errors in the public competitive tender for the operation of a ferry service.

The dispute in the case relates to the scope of the State’s responsibility if an error is made in a tender process and what conditions should apply to be awarded compensation for positive contractual interest upon breach of procurement rules. The key question is whether the enforcement directive art. 2 no. 1 c, incorporated into the EEA Agreement, stipulates that any breach of the regulations on public procurement in itself constitutes a basis for the client’s liability for positive contractual interest, or if the error must be sufficiently qualified. 

When the case was being considered by Frostating Court of Appeal, the Court of Appeal approached the EFTA Court for guidance in the interpretation of the enforcement directive. In case E-16/16 (Fosen-Linjen I) the EFTA Court concluded that the enforcement directive requires strict liability for compensation following a breach of the procurement rules, in other words that any breach of the tender rules could result in a compensation claim for lost profits for parties that lose a competitive tender. The EFTA Court therefore stated that even a simple error provides a basis for such compensation, which would probably increase the financial risk for clients subject to the procurement regulations.

In the Norwegian legal system, the understanding of the EEA law has been that compensation is contingent on a “significant error”, cf. Rt-2001-1062 (Nucleus). In determining whether a significant error has occurred, reprehensibility has been one of several significant aspects. This understanding was followed up by the Supreme Court in the decision included in Rt-2008-1705 and considered by the legislator in connection with the last amendments of the procurement regulations. The EFTA Court’s opinion in Fosen-Linjen I on the requirement for basis of liability is thus in conflict with what has been deemed applicable law in Norway for many years.  

Frostating Court of Appeal considered the EFTA Court’s opinion to be less than fully correct and chose to maintain the understanding of the law that the Supreme Court has assumed in the Nucleus decision, so that compensation still required that a “significant error” had been made. 

Frostating’s decision was appealed to the Supreme Court by both parties. 

Fosen-Linjen II

In last week’s decision, the EFTA Court arrived at the opposite result of what the same EFTA Court arrived at in the Fosen-Linjen I case. In Fosen-Linjen II (case E-7/18), the EFTA Court concludes that: 

“[...] enforcement directive article 2 no. 1 c does not stipulate that any breach of the public procurement regulations in itself is sufficient to grant compensation for loss of profit for persons who have been adversely affected by a violation of EEA rules on public procurement.” (section 121).

The EFTA Court justifies its response by stating that the directive is a tool for minimum harmonisation, i.e. that the directive only stipulates minimum requirements and does not fully harmonise the national rules in the EU/EEA. The Court notes that in the absence of EEA legal provisions in this area, it is, in accordance with the principle of procedural autonomy for the EEA states, up to the individual member state’s legal order to lay down the criteria to award compensation for damage resulting from a violation of the EEA regulations on public procurement. Member states have discretion in determining the conditions for granting and meting out compensation for lost profits that have arisen from a breach of EEA law on public contracts, provided that the principles of equivalence and effectiveness are complied with.

The consequences of the EFTA Court’s decision are that the enforcement directive does not impose a strict liability for positive contractual interest on EU and EFTA states, and that all errors therefore do not result in liability, regardless of size and severity.

The legal treatment of the conflict has attracted much attention because Norwegian courts have requested an advisory opinion from the EFTA Court twice in the same case. This is unusual. The EFTA Court, however, clarifies this initially, and states that a new submission in the same case may be applicable where this is justified in cases where the national court has difficulty understanding or applying the judgment, when it submits a new legal question or presents new considerations which can lead to a different answer to a previously submitted question (paragraph 49). As the Supreme Court sought clarification and does not dispute the validity of Fosen-Linjen I, or asks an identical question (paragraph 56), the EFTA Court complied with the request for a new consideration of the case. 

The opinion is advisory and the Supreme Court may in principle choose to disregard the opinion or to place emphasis on the previous opinion in the Fosen-Linjen I case, as encouraged by the EFTA Court’s former President, Carl Baudenbacher, among others. 

Concluding remarks

The EFTA Court’s opinion provides much needed clarification regarding the relevance of the severity of the breach of the procurement rules, and how it takes a qualified breach to enable a scorned bidder to claim compensation for lost profits. The opinion represents a relief for clients who after the Fosen-Linjen I decision risked having to compensate bidders with lost profits, even for less qualified breaches of the procurement regulations. 

The opinion also gives rise to several fundamental questions related to the emphasis of the EFTA Court’s advisory opinions, and the extent to which the court may depart from earlier opinions. 

It is now up to the Supreme Court of Norway to take a final position on the question of what errors can result in liability for positive contractual interest, and clarify the weight that Fosen-Linjen I and Fosen-Linjen II shall be given in the proceedings. 

Arntzen de Besche has one of Norway’s leading procurement groups. Our procurement group comprising 14 lawyers in Oslo, Trondheim and Stavanger assists both clients and suppliers in all phases of the procurement and contractual implementation, in terms of project development, strategy, ongoing counselling and dispute assistance.