In response to Russia’s aggression in Ukraine, the EU has decided to impose sanctions and end business ties with the aggressor. Estonia, Latvia and Lithuania have also spoken up clearly and consistently in this regard: restrictions will be applied. One of these involves amendments to the public procurement laws, which have already entered into force in Estonia and Lithuania. There have not been amendments to the laws of Latvia that would directly impact the conduct of public procurements, but there are now many more practical challenges.
Please find below our highlights of important legal changes and challenges in the public procurement in the Baltics.
Modifications to the Estonian public procurement rules: a more coherent approach to the control of the applied sanctions
In Estonia, two acts regulate the conclusion contracts with a person who is sanctioned or buying sanctioned goods or services. Both of these acts also regulate Estonian public procurements.
The Estonian Public Procurement Act contains a ground for exclusion whereby the contracting authority is obliged to exclude any tenderer who has been sanctioned or whose representative has been sanctioned. If there are any other sanctions in place regarding the origin of goods or services, the contracting authority is to enforce such sanctions. The Estonian Public Procurement Act does not regulate the verification of the origin of the services and goods, but the Estonian International Sanctions Act does.
According to the Estonian International Sanctions Act, all agreements that breach sanctions are null and void. So, if a contracting authority has failed to check origin of the goods or services, the consequence might be that the contract is invalidated and the procurement process will have start again – not to mention that breaching a sanction is a criminal effence under Estonian criminal law, punishable by up to five years in prison.
There are two levels of sanctions in Estonia:
- international sanctions adopted under international public law
- and sanctions by the Estonian Government.
The international sanctions can be checked on the EU-wide web page “EU Sanctions Map”, but the sanctions by the Estonian Government need to be checked separately on the Estonian web page “Riigi Teataja”. If, for example, the Lithuanian Government adopts sanctions, these sanctions are not necessarily enforced and followed in Estonia. Therefore, if a person is sanctioned in another country based on the decision of that state’s government and not due to an international sanction, this does not necessarily lead to exclusion from an Estonian tender.
After 1 June 2022, Estonian contracting authorities will be allowed to conclude a contract with a person who is sanctioned provided that the contract does not breach the international or Estonian Government sanctions. This means that if the sanction forbids access to Estonia to a natural person who is a member of a board, then concluding an agreement with the tenderer itself is not forbidden.
A draft act with the intention of changing the Estonian Public Procurement Act is again under discussion in the parliament; the aim is to adopt a few changes to the Public Procurement Act by 1 June this year. When the draft act is adopted, contracting authorities will not be allowed to sign contracts with a person on the sanctions list under any circumstances. At present the exclusion allows to sign a contract with a sanctioned company if it is in the general interest. Another change relates to the current possibility of using self-cleaning measures while under sanctions: as the Estonian International Sanctions Act does not allow for such measures, this will also not be allowed in public procurements.
Practical challenges in public procurement in Latvia
There have not been any amendments to the laws of Latvia that would directly impact the conduct of public procurements in Latvia, including in the utility, and defence or security sectors. However, due to the considerable increase in the number and scope of the sanctions (these are called “restrictive measures” in the EU) that the EU and many States have imposed in response to the situation in Ukraine, there are many more practical challenges that are now more acute than before.
Exclusion of sanctioned persons
The Law on International and National Sanctions of Latvia requires the contracting authorities and entities to exclude from procurements any candidate or tenderer whose officials, ultimate beneficial owners or representatives have been sanctioned either under national sanctions, or sanctions implemented by the Security Council of the United Nations Organisation, or Regulations of the EU, or such sanctions applied by individual member states of the EU or NATO that significantly affect the interests of the financial and capital market of Latvia, if such sanctions prevent the fulfilment of the contract. In practice, every such candidate or tenderer will be excluded. The Law on International and National Sanctions of Latvia does not provide for a self-cleaning mechanism.
Challenges during the performance of the contracts
There are several challenges for the performance of contracts, which need to be managed in a timely fashion. In many cases, the sanctions will lead to termination of the contract because it is highly likely that the sanctions applied to legal or natural persons will at least forbid the contracting authorities and entities to make payments to the sanctioned party or freeze the performance of the contract. In many cases it may also be necessary to amend the contract price or deadlines, or to make other material amendments to the contract. The Procurement Monitoring Bureau of Latvia currently recognises that the sanctions and other geopolitical changes may increase the cost of materials, extend deadlines, or require other material amendments to the contracts.
Three lists from the Government of Lithuania dedicated to fighting hostile states
These three lists outline the states and territories hostile to Lithuania and specific categories of goods and services to which new regulations apply. This allows – and in some cases obliges – the contracting authorities to exclude suppliers from ongoing procurement procedures or delivery of goods or services if the suppliers are unable to refute ties with the hostile states and territories indicated on the lists. These amendments shall lead to significant changes in the energy, transport and information technology sectors, as suppliers will have to find new suppliers, producers and resources that do not have any links with the states and territories listed as hostile to Lithuania.
If a particular supplier, or its sub-suppliers, manufacturers or controlling entities are registered in or reside in one of the states identified as hostile to Lithuania, the purchasing organisations must not only reject any bids made during an ongoing procurement but are also obliged to review or even terminate public procurement contracts already in force.
Suppliers will also need to negotiate and prepare for active communication with the contracting authorities, providing documentation and evidence for their business partners. The additional grounds for rejecting bids and terminating contracts may also increase the number of pre-litigation and in-court disputes in the field of public procurements. As a general rule, national security considerations are taken very seriously by the courts. This means that suppliers when disputing the contracting authority’s decision to reject a proposal or terminate a contract, will not only have to substantiate their claims regarding the illegality of such a decision but will also have to prove in court that there is no real threat to national security.