Dozens of public procurement procedures take place every day in various forms, and in these often relatively complex processes, the interests of bidders and contracting authorities typically clash. Act No. 343/2015 Coll. on Public Procurement regulates the procedures for awarding contracts, as well as so-called review procedures—that is, procedures that allow bidders to respond to specific conditions and requirements of contracting authorities if they consider them unlawful, or to defend themselves against exclusion, incorrect evaluation of bids, or other actions by the contracting authority (e.g., cancellation of the public procurement). Naturally, this results in costs for bidders during the bid preparation process, which the law does not account for.
These costs also include those incurred in the exercise of one’s rights within the framework of review procedures. However, the law contains no provisions regarding compensation for damages, and with regard to the reimbursement of costs, it de facto stipulates that the costs are borne by the individual parties, regardless of the outcome of the proceedings.
The question for interested parties and bidders is thus generally how the contracting authority is liable for errors and violations of the Public Procurement Act. Of course, the fact that contracting authorities bear administrative liability is important; however, the fact that a contracting authority may be sanctioned in the form of a fine does not compensate the bidder for the costs incurred or damages in any other form. In this regard, there should therefore be a mechanism through which such aggrieved bidders can seek reimbursement of costs or compensation for damages. The existence of such a mechanism is primarily confirmed by European legislation, namely:
- Council Directive 89/665/EEC of 21 December 1989 on the coordination of the laws, regulations, and administrative provisions relating to the application of review procedures in the field of public supply and public works contracts, which provides in Article 2(1)(c) that “Member States shall ensure that the measures adopted concerning the review procedures referred to in Article 1 include the power to award damages to persons harmed by an infringement.”
- Council Directive 92/13/EEC of 25 February 1992 coordinating the laws, regulations, and administrative provisions relating to the application of Community law on public procurement procedures for entities operating in the water, energy, transport, and telecommunications sectors, pursuant to which Member States are to ensure that the measures adopted concerning review procedures include the power to award damages to persons harmed by a breach of law.
The fact that bidders should be entitled to compensation for damages caused by an unlawful procedure of the contracting authority is also confirmed by extensive case law of the General Court and the Court of Justice of the European Union, with the Court of Justice of the European Union stating in one of its decisions that “claims for damages based on a breach of public procurement law by a contracting authority do not depend on the condition of fault for such a breach.”
At first glance, it may seem logical to assume that the above-mentioned mechanism is regulated by Act No. 514/2003 on Liability for Damage Caused in the Exercise of Public Authority and on Amendments to Certain Acts. However, case law has clearly established that “public procurement is not the exercise of public authority, but rather the private-law activity of public authorities in the market; therefore, the application of Act No. 514/2003 Coll. on Liability for Damage Caused in the Exercise of Public Authority (hereinafter “Act No. 514/2003 Coll.”) to the municipality’s acts related to the procurement of municipal property.”
The preceding paragraph therefore leads to the conclusion that liability for damage in the event of unlawful conduct by a contracting authority is governed by the liability regime under the Civil Code, however, for a long time in judicial practice, there was no clear conclusion as to whether liability for damages in the event of unlawful conduct by a contracting authority is governed by the regime under the Civil Code or the Commercial Code, and the conclusion regarding the application of the Civil Code was adopted by the Supreme Court of the Slovak Republic, which, in its decision, Ref. No. 3MCdo/40/2012, in the matter of the liability relationship between the contracting authority and the entity that submitted the bid, established that “... in the given case, there was no breach of the obligations imposed by the Commercial Code; the fulfillment of the prerequisites for this liability must be assessed in accordance with the general legal provisions on liability for damages, namely the provisions of the Civil Code, including the right to seek performance as a result of raising a statute of limitations defense.”
However, to assert claims for damages caused by the unlawful conduct of a contracting authority, it is necessary to demonstrate that the general prerequisites for liability for damages have been met; in this regard, we would like to cite the decision of the Constitutional Court of the Slovak Republic, Case No. II. ÚS 507/2017, according to which “The prerequisites for a civil claim for compensation for damages caused by the contracting authority to a bidder/participant are unlawful conduct, i.e., a violation of the Public Procurement Act, the occurrence of damage, and causality between the damage and the unlawful conduct. The contracting authority is relieved of liability if it proves that it did not cause the violation.
The amount of damages will depend on the position of the injured party and will generally be aimed at compensating the injured party for what they expended in connection with their participation in the procurement (negative interest) and only exceptionally at compensating them for what they would have gained by concluding the contract (positive interest).” The Constitutional Court also noted that the most common cases in which compensation for damages comes into consideration are the cancellation of the procurement procedure and the unlawful exclusion of a bidder.
The unlawfulness of the contracting authority’s conduct, as one of the conditions for liability for damages, may be proven, for example, by a decision of a public administration body—the Public Procurement Office. In this regard, the Supreme Court of the Slovak Republic, in one of its decisions, Case No. 3MCdo/40/2012, found it proven that the contracting authority’s procedure was unlawful, as the unlawfulness was confirmed by a decision of a public administration body, specifically the Public Procurement Office.
Based on the foregoing, it follows that bidders harmed by the contracting authority’s unlawful procedure are entitled to seek compensation for damages in the form of reasonably incurred costs, such as those incurred in preparing a bid or drafting objections, for the purpose of remedying the contracting authority’s unlawful conduct.
In conclusion, we also draw attention to the recent decision of the Court of Justice of the European Union in Case C-547/22, which is a landmark decision within the case law of the courts of the Slovak Republic, as it established that bidders excluded from a public procurement procedure due to an unlawful decision by the contracting authority are entitled to compensation for damages caused by the loss of the opportunity to participate in the public procurement procedure with the aim of securing the contract in question. In this regard, it concerns compensation for damages in the form of “loss of opportunity,” which we will address in our upcoming articles.
At the law firm Hronček & Partners, s. r. o., we continue to focus intensively on public procurement issues, and we would be happy to assist you with any matters related to public procurement services.
