Tales from the National Appeal Chamber: Proper self-cleaning by contractors
The “self-cleaning” procedure set forth in Art. 24(8) of the Public Procurement Law allows a bidder to seek the award of a public contract despite the existence of grounds for exclusion. But what evidence of self-cleaning should a contractor present for the effort to be effective? In the recent ruling of 31 July 2020 (case no. KIO 1248/20), the National Appeal Chamber held that contractors are not only required to show the personnel, organisational and technical measures they have taken to remedy past irregularities, but must also show that these measures will prevent similar violations in the future.
State of facts
In the case under discussion here, after selecting the most advantageous offer the contracting authority summoned the successful bidder under Art. 26(1) of the Polish Public Procurement Law to submit documents and statements to confirm the absence of grounds for exclusion from the procurement. In response, the bidder provided information to the contracting authority on prior public contracts it had won that were terminated by the investors, and the proceedings conducted in those cases before the National Appeal Chamber (KIO) and the state court. The bidder also described the factual circumstances in which the earlier contracts were terminated and the personnel, organisational and technical measures it had undertaken to avoid similar situations in the future.
But after receipt of this information, the contracting authority found that the measures taken by the bidder, referred to in Art. 24(8) of the Public Procurement Law, known as the “self-cleaning” procedure, were insufficient to demonstrate the bidder’s reliability, and decided to exclude the bidder from the procedure under Art. 24(5) (2) and (4) of the act. The contractor disagreed with the contracting authority’s decision and appealed to KIO. In the contractor’s view, prior to exclusion the contracting authority should analyse in detail whether the sanction of exclusion is proportional to the circumstances of the specific case, in the context of the diligence and remedial measures undertaken by the contractor. But in the contracting authority’s view, the contractor had failed to present any arguments from which it could assess how the earlier organisational structure, the flow of documents, and the activity of the dismissed personnel had contributed to the contractor’s failure to perform the prior contracts.
Rules for contractors’ exercise of self-cleaning
When preparing the documentation for the tender, the contracting authority decided to include in the contract announcement the optional grounds for exclusion from the procedure set forth in Art. 24(5) (2) and (4) of the act, providing for the possibility of excluding:
- A contractor guilty of grave professional misconduct, which renders its integrity questionable, in particular if, intentionally or due to gross negligence, the contractor failed to perform, or improperly performed, an earlier public contract, which the contracting authority could demonstrate through relevant evidence
- A contractor which for reasons attributable to the contractor failed to perform, or improperly performed, an earlier public contract, resulting in termination of the contract or the award of damages.
However, inclusion of optional grounds for exclusion do not cause automatic rejection of a contractor’s offer, as under Art. 24(8) of the act, contractors can still exercise the right of “self-cleaning.”
The institution of self-cleaning is derived from Art. 57(6) of the Classic Procurement Directive (2014/24/EU), which as a result of implementation into the Polish legal system introduced the possibility for contractors subject to exclusion to submit explanations. Under Art. 24(8) of the Polish act, a contractor subject to exclusion under optional grounds may provide evidence to the effect that measures it has taken are sufficient to demonstrate its reliability, in particular by demonstrating that it has:
- Redressed the injury caused by a criminal or fiscal offence
- Provided monetary compensation for injury or redress of loss
- Cooperated with the investigating authorities to comprehensively clarify the facts and circumstances
- Taken concrete technical, organisational and personnel measures appropriate to prevent further criminal or fiscal offences or misconduct.
As the National Appeal Chamber stated in the justification for its ruling, “As a rule, the contractor should present information on self-cleaning in its own declaration filed together with the offer or application for admission to the procedure, e.g. in the European single procurement document (ESPD).” KIO also cited its own ruling of 3 February 2017 (case no. KIO 139/17), in which it held that to properly follow the self-cleaning procedure, the contractor must admit to the prior misconduct; denial of the prior misconduct renders its self-cleaning statement unreliable.
Remedial measures and proof of effectiveness
The most important step in the self-cleaning procedure is presenting evidence of the measures taken by the contractor to cleanse itself of the objections for which it could be excluded. A contractor seeking to properly conduct the self-cleaning procedure provided for in Art. 24(8) should provide the contracting authority a precise description of the remedial measures taken, supporting a finding that to a high degree of probability the prior wrongful act or omission will not occur again in the future. As the chamber explained, “The remedial measures taken by the contractor may involve construction or modification of certain organisational structures, introduction of a transparent decision-making process or contract management system, introduction of a system of supervision and control, and introduction and enforcement of internal responsibility for actions taken.” The chamber also explained that organisational and personnel measures that could adequately prevent future irregularities on the part of the contractor include, for example, imposing disciplinary consequences on the persons guilty of misconduct, in the form of terminating their employment, or hiring of additional specialists.
But how should contractors demonstrate the measures they have taken? In response to this question, the chamber gave examples of evidence that contractors could use to properly show the remedial measures taken, such as a written statement by the injured party on compensation for the loss, proof of payment of fines or monetary compensation, making of bank transfers with a debit note corresponding to contractual penalties, or submission of a statement by the investor confirming that the loss has been fully redressed.
But the contractor must not lose sight of the aim of self-cleaning. All the measures taken and the evidence confirming them are intended to assure the contracting authority that the contractor will properly execute the new contract. Thus to properly follow Art. 24(8), it is not enough for the contractor to take just any technical, organisational or personnel measures. The measures must be sufficient to prevent similar irregularities from occurring in the future.
The evidentiary burden in this respect rests solely on the contractor. As the chamber held, “The essence of the self-cleaning procedure is that the burden of proving its effectiveness rests on the contractor. As a rule, the contractor must submit explanations and evidence to this end, at its own initiative and in its own discretion. The role of the contracting authority boils down to assessing on this basis whether the contractor can be regarded as reliable.”
Did the contracting authority correctly assess the evidence presented?
In response to this question, the chamber first pointed out that in making its evaluation, the contracting authority must take into account the gravity and particular circumstances of the contractor’s misconduct (Art. 24(9) of the Public Procurement Law). With this in view, the chamber upheld the contracting authority’s position that while the contractor had indeed introduced remedial measures, it had not adequately demonstrated that the measures taken would actually eliminate the reasons for breach of the prior contracts.
The chamber upheld the contracting authority’s finding that “changes involving implementation of IT systems for electronic circulation of documents and data management, and changes in the organisational structure, combined with a change in the organisation and dismissal of two individuals, cannot be treated as arguments justifying a finding of the contractor’s future reliability.” The lack of information on measures reducing the likelihood of another early termination of contract prevented the contracting authority from making a proper evaluation of the evidence submitted.
Another argument by the contracting authority, which the chamber upheld, was that for the self-cleaning procedure to be effective, the contracting authority must regard the evidence submitted as sufficient, and consequently the contractor is not subject to exclusion. In essence this is a question of trust between the contracting authority and the contractor in the context of the contractor’s prior misconduct.
The ruling by the National Appeal Chamber discussed above throws light on how contractors should pursue the self-cleaning procedure described in Art. 24(8) of the Public Procurement Law. Contractors must not only show the organisational, personnel or technical measures taken in their enterprise, but also show that these measures will prevent similar shortcomings from occurring in the future. That can be hard, if not impossible. The entire burden of the self-cleaning procedure rests solely on the contractor. To be successful, the contractor must persuade the contracting authority that the remedial measures it has taken will be effective.
Cyprian Herl, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners