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Amendments to a Contract With a Contracting Authority May Constitute State Aid

Amendments to a Contract With a Contracting Authority May Constitute State Aid

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The regulations allow, and even mandate, a consequential amending of a public contract in certain cases. However, they do not prejudge whether such an amendment is state aid.

Pursuant to the classical definition adopted in EU law, state aid is understood as any support provided selectively to a specific undertaking or group of undertakings (premise of selectivity) by a Member State or from public resources (premise of public origin of funds), which may distort competition (premise of effect on competition) in trade between EU member states (premise of effect on intra-EU trade).

Procurement as a form of state aid

In this context, it is generally accepted that the acquisition of goods or services by the state, its authorities or institutions from an undertaking may also be a form of state aid. This is because such an acquisition is generally financed from public funds (so the premise of public origin of funds is satisfied), and moreover, these funds go to a specific undertaking providing certain goods or services (so the premise of selectivity is also satisfied). In addition, depending on the volume of the delivery and the size of the market affected by the contract in question, the premises of effect on competition and effect on intra-EU trade may also be satisfied; in the European Commission’s practice, the latter two prerequisites are virtually always assumed to be fulfilled, except in the case of small value support (known as de minimis aid) or specific, strictly local markets or infrastructures.

Consequently, the acquisition of goods or services by the state from an undertaking may constitute state aid. In particular, the award of a contract to an undertaking for the delivery of certain goods, construction works, the design, construction or management of certain infrastructure, or the provision of public services may be considered state aid, which involves a number of important legal implications, including in particular the obligation of the relevant member state to notify the above state aid to the Commission in advance and the obligation to refrain from the awarding of the aid pending a positive decision issued by the Commission (standstill obligation).

A breach of the above obligation may have serious consequences for the supplier (contractor), such as the EU law-based obligation to repay state aid (if the Commission declares it incompatible with the internal market), the possible obligation arising directly from national law to repay state aid (regardless of its possible incompatibility with the internal market and the Commission’s decision in this regard), the risk of annulment of the relevant public contract, etc.

Annex to the public contract

The fact that the above legal regime is not just theoretical or marginal was experienced, for example, by the contractor in the well-known dispute over the Wielkopolska Highway. In the above case, on the basis of a tender and a corresponding concession agreement, the Polish authorities entrusted a private Polish company, Autostrada Wielkopolska S.A., with the construction and operation of the highway in 1997. However, after Poland’s accession to the European Union, Polish regulations were amended to implement certain EU regulations on toll highways. Since this amendment resulted in a loss of revenue for highway concessionaires, Polish law also provided for adequate compensation for them, paid from a dedicated national fund, the rules of which were to be detailed in an annex to the relevant concession agreement.

Therefore, Autostrada Wielkopolska and the Polish authorities negotiated and concluded an annex to the concession agreement providing for the method of calculating the said compensation, which, according to the Polish authorities, was intended to put Autostrada Wielkopolska S.A. back in the position it would have been in had the Polish regulations on toll freeways not been amended.

Breach of the notification obligation

Over time, however, the Polish authorities came to believe that the methodology for calculating compensation provided for in the annex to the concession agreement was flawed and led tothe company being overcompensated. As a result, the Polish authorities demanded that Autostrada Wielkopolska S.A. return the compensation, and furthermore notified the Commission of the compensation as a form of state aid.

The company refused to return the compensation, and also went against the Polish authorities before an ad hoc arbitral tribunal (UNCITRAL), which ruled in 2013 that the annex to the concession agreement was valid and should be respected by the Polish authorities. The latter, however, filed a case in a Polish civil court in 2013 to set aside the arbitral award.

Meanwhile, on the basis of the aforementioned notification of state aid made by the Polish authorities in 2012, the Commission opened a formal investigation of the aid in 2014 and in 2017 concluded in its decision that the amount of overcompensation constituted illegal aid incompatible with the internal market and should be recovered by the Polish authorities from Autostrada Wielkopolska S.A with interest.

Courts affirm Commission’s decision

The company appealed against the Commission’s decision to the EU General Court, which, however, dismissed the company’s complaint. The company’s appeal against the General Court’s judgment to the EU Court of Justice, which confirmed the Commission’s decision in its judgment of 11 November 2021 in Autostrada Wielkopolska v Commission and Poland (C-933/19 P), also proved unsuccessful.

In the meantime, proceedings pending before the Polish courts in relation to the arbitration award of 2013 led (after a trial court’s ruling dismissing the Polish authorities’ claim) to a ruling issued by the Court of Appeal in 2019 (case no. I ACa 457/18), in which the court upheld the Polish authorities’ position and overturned the arbitral award. In this respect the Court of Appeal first of all noted that pursuant to the rules of Polish civil procedure, an arbitral award may be set aside by a court if it is contrary to the fundamental principles of the Polish legal order.

However, as the Court of Appeal noted, EU law has also become part of this national legal order. In particular, EU competition law (including state aid law) is also part of national public policy, which national courts should take into account when reviewing arbitral awards.

The Court of Appeal further emphasized, referring to the CJEU judgments of 26 October 2006 in the Mostaza Claro case (C-168/05) and of 1 June 1999 in the Eco Swiss case (C-126/97) - that if a member state’s national rules of judicial procedure require setting aside an arbitral award that is inconsistent with national public policy principles, then, due to the principle of equivalence, if an arbitral award is inconsistent with the relevant EU law principles of the same kind, it should also be set aside.

In that regard, the Court of Appeal found that the arbitral award in question did not consider aspects of the case related to state aid regulations at all. In particular, the Court of Appeal noted that the said arbitral award could not be reconciled with the Commission’s final decision of 2017, which classified the overcompensation - approved in the arbitral award - as unlawful state aid granted in breach of the suspension obligation (as the annex to the concession agreement was concluded prior to its notification to the Commission).

In addition, in the opinion of the Court of Appeal, the arbitration court failed to note that under Polish law, contracts that are inconsistent with a statutory law [Polish: ustawa] are considered invalid, and pursuant to the established case law of Polish courts, the concept of a statutory law in this sense also includes the rules of EU competition law, including, in particular, the third sentence of Article 108(3) of the TFEU providing for the suspension obligation. Thus, the court explicitly stated that “the contradiction with Article 108(3) sentence 3 of the TFEU causes the invalidity of an act in law that does not comply with this provision as contrary to the law.” It is worth noting that the judgment of the Court of Appeal was appealed to the Supreme Court, before which the case is still pending.

Arm's length transactions

However, it is also assumed in EU law that the acquisition of goods or services by the state from an undertaking does not constitute state aid if it is done in accordance with market conditions. At the same time it is worth noting that the Commission views compatibility of a public contract with market conditions quite restrictively, allowing only that the competitive tendering procedure “leave(s) the successful bidder with a normal return, not more”.

In this context, it is believed that awarding a public contract to an undertaking in full compliance with the rules and regulations of the public procurement law is one way to ensure compatibility of the transaction with market conditions . Thus, an undertaking winning a contract under this procedure and in full compliance with its requirements need not, in principle, be concerned about the risks of obtaining illegal state aid. It is yet another issue, raised in the rich decision-making practice of the Commission and the case law of the EU courts, which of the range of procedures provided for in the public procurement law sufficiently ensure compatibility of the transaction with market conditions and whether the use of a full tendering procedure is always sufficient to avoid the granting of state aid to the supplier or contractor.

However, it is important that under the above rules, the source of state aid may not only be the contract originally awarded, but also an amendment to that contract, in particular an amendment in favour of the undertaking, for example, an increase in the remuneration due for the originally agreed scope of deliveries or works. Also in such a case allegations of state aid (related not to the original contract, but to a subsequent change in its terms) can be avoided if it is demonstrated that the amendment to the contract was in line with market conditions.

Since, as mentioned above, strict compliance of the contract with the public procurement law essentially warrants its arm’s length nature (for the purposes of the analysis of the presence of state aid discussed above), if the contract is amended strictly in compliance with the requirements of the public procurement law, it should not be regarded as a source of state aid due to its market nature.

A change that is not a form of state aid

Thus, based on the above principles, it may be assumed that where explicit, universal and mandatory provisions of the public procurement law authorize or even prescribe a specific consequential amendment to a contract, making such an amendment in an individual case in full compliance with these provisions serves as grounds for arguing that such a change is not a form of state aid provided to a contractor or supplier.

It can be considered that a provision of this kind - providing the basis for considering an amendment to a contract to be at arm’s length - is the currently binding revised Article 439(1) of the Public Procurement Law (PPL). This provision stipulates that a contract for construction works, supplies or services, concluded for a term exceeding 6 months, must include provisions governing amendments to the contract regarding changes in the remuneration due to the contractor in the event of a change in the price of materials or costs related to the performance of the contract.

Nonetheless, it is worth noting that the said provision only obligates certain contracts to specify rules of future contract modifications in the event of the circumstances specified in this provision. Thus, the above provision may be considered a delegating one - authorizing and at the same time obliging the parties to the contract to agree certain rules (indicating to what extent and how the terms of the contract may be amended), but it does not concern or shape the material content of these rules themselves, leaving this task to the parties.

Consequently, Article 439(1) of the PPL provides grounds for the claim that the establishment of rules for the modification of terms and conditions of a public contract, or the subsequent modification of terms and conditions in performance of the relevant contractual provisions, in cases covered by this provision, does not yet as such constitute a form of state aid. However, and this is particularly important, the fact that the parties are acting on the basis and within the limits of the above provision does not yet determine whether the rules they set in the contract for amending its terms, or a specific amendment of the terms of the contract is, indeed, on an arm’s length basis and thus does not constitute state aid.

Author's view

The provisions of Article 439(1) of the PPL are undoubtedly relevant to the subject at hand, and create a starting point for the contracting parties to amend the contract so as to avoid allegations of state aid. However, it is still crucial for the parties to make and document a sound and in-depth economic analysis that allows them to demonstrate, on the basis of Article 439(1) of the PPL, that the amendment of the terms of the contract is on an arm’s length basis and therefore does not constitute state aid. This principle will apply even more so in the case of contracts that, for various reasons (including subject matter or intertemporal issues) do not fall within the scope of the said Article 439(1) of the Public Procurement Law or similar earlier regulations of the Public Procurement Law. Such an in-depth analysis of the arm’s length character of amendment to a public contract would also be recommended to the extent that the contract in question is financed by EU funds – since the amendment of such a contract made in full compliance with the standards set by the Public Procurement Law should also be free from the risk of the competent institutions recognizing the costs incurred by the beneficiary (as the contracting authority) under the amended contract as ineligible expenses.

By Michal Bernat, Managing Counsel, Dentons

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