Regulaton & Policy
Legal Certainty in French Procurement & Concession Contracts Post-Reform: Taking Into Account The Lenders’ Perspective

We are very pleased to feature a guest article from Julien Moiroux, a procurement law specialist based in the Paris office of Simmons & Simmons. He works at the “cutting edge” of developments in France, acting for both awarding authorities and government contractors. He is also the co-author with Prof. Lucien Rapp of “Contrats publics et finance d’entreprise: indemnités contractuelles, financement externe, risque contentieux”.

French procurement law has recently been reformed, following the implementation of three new EU Directives dated 26 February 2014:

  • – Directive 2014/23 on the award of concession contracts;
  • – Directive 2014/24 on procurement in the public sector (repealing Directive 2004/18/EC); and,
  • – Directive 2014/25 on procurement by entities operating in the so-called “utilities sector” – water, energy, transport and postal services (repealing Directive 2004/17/EC).

These directives were implemented into French law in 2015-2016, by two ordinances, concerning procurement contracts[1] and concession contracts[2], and their respective implementing decrees[3].

The purpose of this paper is to identify the aims of the reform in order to assess whether and how this reform has taken lenders’ expectations into account in complex procurements and concession contracts in France.

1 – The reform had three official goals: simplicity, modernization and support for small businesses. In this respect, one could easily argue that the French government did a good job. For instance, the access of SMEs to procurement contracts is fostered by specific measures, such as the division of contracts into lots and the possibility to indicate in the contract notice whether tenders may be submitted for one, several or all of the lots with a limit to the number of lots that may be awarded to only one candidate.

But one could also easily say that these goals were artificial and even contradictory: although the European reform of procurement law imposed the division of contracts into lots as a general principle, France introduced restrictive conditions under which it is possible to waive this rule. In a manner, this seemingly SME-friendly rule may imply a technical assessment when the contracting authority wants (or needs) to waive it, which in fact does not really simplify the approach to procurement law.

The only real issue is whether the reform is effective and achieves the goals which underlie procurement law in Europe and France: good use of public money given the growing scarcity of public financing, equal access to procurement and above all, a high level of legal certainty for all economic operators involved in a public contract, including the banks and investors. In view of the global economic crisis, investors have higher expectations in terms of legal certainty in publically owned projects.

The reform in France therefore sought to achieve another goal: to bring comfort to the lenders in complex procurements (public private partnerships, called “partnership agreements” after the reform) and concessions, where in addition to the design, construction and operation of an infrastructure, operators may also have to set up the financing of the project in a context of increased litigation risk.

2 – It is not very surprising to note that in France (as well as in other EU Member States), the number of legal challenges has increased in the current context, principally as a result of two factors:

  • – On the one hand, the credit-crunch has put pressure on businesses, contracting authorities and contracting entities. An unsuccessful bid, especially for a complex procurement, may have important commercial implications for the bidder, because of the loss of business opportunities.
  • – On the other hand, more legal remedies now exist thanks to, inter alia, recent case-law[4] of the French administrative courts which, alongside the usual pre-contractual and contractual remedies resulting from the EU Remedies Directive[5] (référé précontractuel and référé contractuel), provides a general remedy allowing all interested parties to challenge the validity of an administrative contract[6].

This litigation risk will increase the more political or controversial the project (in recent years in France, see for instance the Balard PPP project for the new headquarters of the French Ministry of Defence).

In this context, in order to guide their choice of granting credit, lenders study the project’s profitability, the financial strength of the contracting public entities[7], and assess the level of legal certainty of the transaction. In other words, the ability to raise debt is limited by investors and lenders’ risk aversion – particularly, the litigation risk.

In the event of early termination of the contract – as a result of termination, resolution or invalidity of the contract decided by the administrative judge – the lenders must ensure that compensatory commitments made by the contracting authority remain effective and binding. For instance, lenders usually require that the financial costs incurred between the effective date of the contract and the date of early termination, are properly compensated.

Thus, lenders, who are not directly a party to the procurement/concession contract but are nevertheless involved in the project wholly or partially funded by them, require that any actionable measure – including the decision regarding the choice of contractor or the act authorizing the public authority to sign the contract – and the contract itself be free of all possible claim or risk of withdrawal by the public body, prior to first draw down on the bank financing. It means that in event of a legal challenge against the contract, the contractor could be prevented from drawing on the financing and at the same time, would nevertheless have to perform the contract under a risk of default[8].

3 – This is why, in the process of implementing the EU directives on procurement and on concession contracts, the French government adopted two mechanisms[9] aimed at ensuring legal certainty for the parties to a procurement / concession contract and, ultimately for their lenders.

  • – Severability of contractual indemnification provisions: both ordinances provide that in the event of early termination of a concession contract or a partnership agreement by the judge, the indemnification clause (if one is provided for in the contract) is deemed severable from the rest of the contract. This brings more legal certainty as before that, the severability of contractual provisions in administrative contracts was subject to the judge’s discretion.
  • – Qualification of the financial costs as “necessary expenditure”: this notion is a case-law construction[10] in order to allow the compensation on a quasi-contractual basis and has been granted a true legislative force through the recent ordinances on procurement and concessions contracts, which constitutes genuine progress in terms of legal certainty. Moreover, the notion is not defined narrowly by both ordinances, leaving leeway for the parties (under the control of the administrative courts) to define its content.

The French approach to the implementation of the EU procurement directives reveals the increasing importance of corporate financing in the context of public procurement, especially regarding complex procurements such as public-private partnerships and concessions and achieves the necessary legal certainty for all parties involved, directly or indirectly, in such contracts.

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[1] Ordinance No. 2015-899, 23 July 2015 on public procurement contracts.

[2] Ordinance No. 2016-65, 29 January 2016 on concession contracts.

[3] Decree No. 2016-360, 25 March 2016, concerning public procurement and decree No. 2016-361 , 25 March 2016, concerning public procurement involving defence or security aspects ; Decree No. 2016-86, 1 February 2016 on concession contracts.

[4] See Decision of the Council of State (French highest administrative Court), 4 April 2014, req. No. 358994, Département du Tarn-et-Garonne.

[5] Directive 2007/66/EC of 11 December 2007 amending Council Directives 89/665/EEC and 92/13/EEC with regard to improving the effectiveness of review procedures concerning the award of public contracts.

[6] Procurement contracts and concession contracts being administrative contracts by virtue of the law.

[7] This can be easily assessed through a credit rating, as an increasing number of French local authorities are rated.

[8] Under French administrative law, the holder of an administrative contract must ensure performance of the contract in all circumstances, except in case of force majeure.

[9] See, Ord. No. 2015-899, art. 89 and Ord. n°2016-65, art. 56.

[10] See Decisions of the Council of State, 7 December 2012, req. No. 351752, Commune de Castres ; Administrative Court of Appeal of Bordeaux, 17 June 2014, req. No. 13BX00564, concerning the PPP for the construction of the new football stadium of Bordeaux (in the context of the EURO 2016).