In response to Russia’s war in Ukraine, the EU has quite unanimously decided to impose sanctions and end business ties with the aggressor. Lithuania has also spoken clearly and consistently in this regard: restrictions will be applied. One of them involves amendments to the public procurement laws, which were adopted as a matter of urgency and have already entered into force. Of these, three measures drawn up by the government should be emphasized.

Possibility of contracts being terminated

The first list outlines the states and territories hostile to Lithuania: Russia, Belarus, Russia’s annexed territory of Crimea, Transnistria and the territories of Abkhazia and South Ossetia. The list itself is applicable in the event of a mobilisation, war or state of emergency, or by a separate government decision related to such situations. In other words, the list of states hostile to Lithuania will be applied for a limited period of time. On the other hand, once the government has decided to apply the list, virtually all contracting authorities involved in higher-value procurements will be able to employ it. It will then be possible not only to reject a tender in an ongoing procurement but also to review or even terminate contracts already in force. This is relevant today, as a state of emergency in Lithuania has been declared at least until 20 April 2022.

There are several ways to assess whether a particular supplier or its product is related to one of the states considered hostile to Lithuania. In particular, the location of the supplier and the manufacturers’ of the goods offered by its partners and the legal entities controlling them must be taken into account. The permanent place of residence and citizenship of the natural persons concerned, as well as the countries of origin of the goods, including their components, should be assessed in a similar manner. It is noteworthy that a threat to national security posed by a particular supplier or contract may also be recognised by a separate decision of the Government or after the contracting authority has consulted with the competent public authorities.

Restrictions will be applied to Chinese suppliers and goods

The second list, which the government approves taking into account the long-term threats identified in the National Security Strategy, also outlines the states hostile to Lithuania. Alongside the states and territories mentioned above, China (except Taiwan) is also included. The list itself is intended for the contracting authorities that have ties with Lithuania’s security interests, such as those operating in the field of defence, responsible for ensuring national security in strategically important economic sectors (energy; transport; information technology and telecommunications as well as other advanced technologies; finance and credit; and military equipment), for managing the critical information infrastructure and those contracting authorities included in the List of Secure Network Users.

These contracting authorities are obliged by law to require the exclusion of a subject from procurement procedures if it has links to the hostile states indicated on the list. The exclusion is possible only with a separate Government’s decision on a particular procurement participant. Such a decision shall be taken in accordance with the conclusion of the Commission for Coordination of Protection of Objects of Importance to Ensuring National Security. However, in the case of actual proven links, except in exceptional cases, the government’s decision should be predictable – the law states that links with the specified states and territories mean that the subjects being assessed (participants in the listed states or nationals of the listed states; or their partners, manufacturers, or persons carrying out or inspecting the maintenance or upkeep of hardware or software) are “not considered to be trustworthy”.

The third list includes specific goods and services purchased by these contracting authorities that have ties with national security interests. It currently lists 77 separate procurement objects, including computer, radio and telecommunications equipment; mobile telephones; video surveillance products; remote control equipment, dispatching systems; navigation and train monitoring equipment; software development; internet supply products and other services. Restrictions on the procurements of all these goods and services are applied due to potential technological risks. In other words, if the specified goods or services are offered by entities that are registered or residing in hostile states, or who hold the citizenship of such states, or if maintenance or support services are provided from the designated territories, those bids shall be rejected. Here as above –  the contracting authorities will be able to reject tenders of certain tenderers, subject to the relevant decision by the Government.

Number of disputes may increase

Assessing these amendments it can be claimed that Lithuania is realising its declared interest in abandoning public sector acquisitions from Russia and Belarus. It is crucial that these changes are not only aimed at the future but also allow for reviews of existing and ongoing procurement contracts. This should lead to very significant changes in the energy, transport and information technology sectors, as companies will have to look for new suppliers, producers and resources that do not have links with the states and territories listed as hostile to Lithuania.

The first few months after these legislative changes take effect will likely be quite difficult. Participants in public procurements will have to assess the possible negative influence of partners and producers who have connections with the states named as hostile to Lithuania when participating in public procurement procedures. Suppliers will also need to negotiate and prepare for active communication with the contracting authorities, providing documentation and evidence of their business partners. In addition, due to the war in Ukraine and the application of sanctions on Russia and Belarus, the cost of materials and resources required for supply chains from Eastern Europe has changed significantly. For this reason, companies that have no links with the states hostile to Lithuania also approach the contracting authorities with requests to review the tariffs provided in their contracts. As a result, the contracting authorities will need to carefully review and apply the terms of their planned procurements, assess the legality of existing contracts and proactively require the suppliers to provide the necessary information on their performance.

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, so the suppliers will not only have to justify the illegality of the contracting authority’s decision to reject a proposal or terminate a contract but will also have to prove to the court that there is no real threat to national security. As the practice of applying the provisions of the law becomes established, there will be less and less legal uncertainty. A uniform implementation standard among the contracting authorities as coordinated by the central state institutions will become crucial for the implementation of the objectives being pursued.