The crisis and procurement contracts in Estonia

Russia’s aggression in Ukraine and the sanctions imposed because of that have increased the prices of various materials and broken supply chains. Due to the said reasons, companies are unable to fulfil contracts by the agreed terms and for the agreed prices. This has again raised the issues of amending the contracts concluded as a result of procurement procedure.

The short conclusion is that there are no good solutions. On the one hand, it could be said that extraordinary times require extraordinary measures, but on the other hand, not all the desired contract amendments can be justified with the crisis. As a rule, the contracting authority has the right to amend a public contract without holding a new public procurement only upon the occurrence of certain exceptions listed in the Public Procurement Act. Now there is a lot of talk about whether the crisis could bring any exceptions to that.

Public sector contracting entities are generally relatively inflexible in resolving unforeseeable circumstances. The Estonian Ministry of Finance has published its preliminary positions by preparing guidelines for the terms and conditions for amending public contracts in a crisis. Unfortunately, no notable exceptions from the ordinary amendment of public contracts derive from the guidelines.

Usually, problems arise in connection with terms due to delivery difficulties, but the amendment of the contract cost may also be necessary due to increases in the prices of raw materials. Some of the positions of the Ministry of Finance are presented below.

The Ministry of Finance indicates that delivery difficulties and the inability to comply with terms due to the imposed sanctions, the lack or unavailability of raw material or other such reasons cannot be considered the tenderer’s business risks. In such cases, it can be assessed whether the extension of a term is necessary due to unforeseeable circumstances independent of the contracting authority and whether the amendment of the public contract would be allowed under § 123 section 1 clause 4 of the Public Procurement Act.

The amendment of a public contract is allowed, if the amendment is caused by circumstances unforeseeable to a diligent contracting authority, the overall nature of the public contract is not altered, and the value of any amendment does not exceed 50 percent of the original value of the public contract. Circumstances arising from the crisis are doubtlessly of a kind which even a diligent contracting authority could not have foreseen when preparing a public procurement or concluding a public contract.

Unforeseeability is not equivalent to force majeure, but it must be a circumstance that is not the tenderer’s business risk or something that the tenderer could have taken into account when submitting a tender. Due to the Ukrainian war, the fulfilment of public contracts may be obstructed due to either direct or indirect unforeseeability. It is direct, for instance, when goods set forth in the public contract are not allowed to be delivered to Estonia due to an international sanction. In such a case, the circumstances do not constitute delivery difficulties, but an impossibility of fulfilling the public contract, in which event the application of the force majeure provisions would be a better alternative to the amendment of the public contract.

Attention is also drawn to the fact that upon performing an analysis of the permissibility of the amendment of a public contract, the contracting authority should also consider its conduct in preparing the procurement documents and holding the public procurement (i.e., whether the contracting authority has been a diligent contracting authority) and assess whether the circumstances are truly unforeseeable.

It is a reality that the prices of building materials and raw materials can rise essentially within hours. The added aftereffects of the corona crisis and the massive increase in electricity prices have led to a situation where the agreed prices significantly differ from the actual prices.

The Ministry of Finance has taken the position that a mere change in prices should not be considered as the alteration of the overall nature of a public contract. The offered products, services and construction works remain the same and their nature is not altered in any way. Therefore, the contracting authority can amend a public contract based on § 123 section 1 clause 1 in a situation where the price of construction works rise in connection with an increase in the prices of building materials or other raw materials and the value of the amendment remains within the limits of the allowed percentage and cost.

The amount in which the cost of a public contract needs to be altered in a situation affected by the Ukrainian war depends on the specific public contract and the object in progress (inter alia, whether construction has just started or is about to be completed, which materials are used in construction, whether their country of origin is Ukraine or a country from which materials must not be imported due to an international sanction, etc.). The assessment of the amount of the alteration should be proportionate, i.e., determining the price change of every single cost item may be overly burdening in the case of large-scale public contracts and therefore changes in the consumer price index or the construction price index can be used. It would also be possible to add a provision to the contract, pursuant to which the adjustment of the price is allowed based on a relevant index, provided that the total value of the amendments to the contract remains within 15% in the case of construction works and within 10% in the case of things and services and does not exceed the international limit.

The law also allows insignificant amendments. Neither the law nor case-law provide a complete list of circumstances that could be considered insignificant in this context. The Ministry of Finance explains that the amendment of terms is a significant amendment, as it generally causes the balance of contractual obligations to change in the benefit of the tenderer in a manner not set forth in the public contract. In case-law, amendments which tilt the balance of contractual obligations in the benefit of the tenderer in a manner not foreseen in the original public contract have been construed as significant amendments. The same applies to amendments which significantly extend the scope of the object of procurement defined in the public contract. The replacement of the tenderer is considered a significant amendment, if such an option was not originally foreseen or if it does not arise from the restructuring or reorganisation of the company.

However, § 123 section 1 clause 2 of the Public Procurement Act allows the amendment of a public contract if the contracting authority has established the scope, substance, and terms of application of such an amendment in the procurement documents in a clear, precise, and unequivocal manner and the overall nature of the public contract is not altered regardless of the value of the amendment.

It is important to keep in mind that the situation is different when the contracting authority has not been proactively notified of delivery difficulties or the need to extend terms and the contract partner has already violated the public contract. If the public contract has been violated by one contract partner or both contract partners, the public contract cannot simply amended – instead, the legal remedies established in the public contract and the Law of Obligations Act must be applied, unless the violation is excusable.

In conclusion, it must always be analysed, depending on the situation, whether the public contract needs to be amended and whether the amendment is in compliance with the law. It is the task of the contracting authority to determine why the contractor is unable to fulfil the contract and to assess the permissibility of the amendment to the contract. It is also worth considering that an unlawful amendment of a contract may not necessarily be the sole liability of the contracting authority, but it may also pose a risk for the contractor with whom the contract has been concluded. It may happen that a contracting authority who realises that amendments not permissible pursuant to law have been made in a public contract terminates the contract in an extraordinary manner before the contract term.

The guidelines of the Ministry of Finance of 22 March 2022 referred to in the text are available here.