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«The Long and Winding Road Tunnel Case: Compensation for Procurement Damage in Icelandic Law Eiríkur Jónsson 1 Introduction.. 118 2 Background.. ...»

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The Long and Winding Road Tunnel

Case: Compensation for Procurement

Damage in Icelandic Law

Eiríkur Jónsson

1 Introduction ………….………….………….…………….……...… 118

2 Background ………..………..………..………..………..………....... 118

3 The Road Tunnel Case….………….………….…………………… 121

3.1 Generally ………….…………...……………….……………… 121

3.2 Round 1 – Claim for an Acknowledgement of Liability……...... 121

3.3 Round 2 – Claim for a Certain Amount of Compensation …….. 122 4 Remarks ………….….…….………….………….………………… 124 Scandinavian Studies In Law © 1999-2015 118 Eiríkur Jónsson:The Long and Winding Road Tunnel Case 1 Introduction For almost a decade an important case on compensation for public procurement damage has been on-going in Iceland. More precisely the case regards a claim for loss of profit due to termination of a tender procedure in 2003 that concerned the making of a road tunnel in northern Iceland (here after referred to as the Road Tunnel Case). The case has already led to three district court’s rulings and two Supreme Court judgments and is still pending for the third one.1 Although the final judgment is still to come, it is worthwhile to reflect shortly on the case. It is the leading Icelandic case on the subject and a description of it thus serves as a complement to Kai Krüger’s comprehensive article on compensation for procurement damage, also to be found in this volume.

Moreover the case regards interesting questions about tenderers’ options to sue for loss of profit and the burden of proof in such cases. Finally the case mirrors an increasing trend in how claims for compensation, in the field of pure economic damage (n. rene formuestap), are pursued in Iceland.

2 Background The rules on government procurement in Iceland are laid down in the Act on Public Procurement, No. 84/2007, which implemented Directive 2004/18/EU.

When the events of the Road Tunnel Case took place in 2003 the act in force was Act No. 94/2001 but the articles on compensation are substantially the same in both acts,2 i.e. article 84 in the old act and article 101 in the new act. It should also be mentioned that there is a more general act in force, Act No.

65/1993, which is not limited to public procurement procedures. This article however focuses on liability in the public procurement context.

Article 101 of Act No. 84/2007 consists of two sections. Section 1 concerns tenderers’ negative interests, i.e. their cost of participating in the procedure (reliance damage), whereas section 2 has bearing on their positive interests, i.e.

loss of profit (pecuniary damage).

Section 1 is as follows:3

A contracting authority is liable for damages that violations of this Act, including the provisions of the Directive referred to in the Act, and rules established herein, may cause to economic operators. An economic operator need only prove that it had a realistic possibility of winning a contract and that this possibility was prejudiced by the violation. The amount of compensation 1 It should be mentioned that from 2002 to 2007 the author worked at the law firm representing the claimants in the Road Tunnel Case.

2 Parliamentary Record 2006-2007, A-section, p. 1609.

3 Direct quotes from the act are from a translation available at the website of the Ministry of Finance, “www.ministryoffinance.is/media/adrarskyrslur/Act-nr-84-2007-on-PublicProcurement.pdf.“ Other direct quotes in this article are translated by the author.

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shall be based on the cost of preparing a tender and participating in the tender procedure.

As the text directly indicates the requirements for such compensation are more relaxed than in general and the legislative material directly states that the contracting authority has the burden to proof that a violation has not caused damage to the tenderer.4 This means, for example, that if it is established that the Act has been violated in the evaluation of tenders, the authority has to prove that it would have been impossible for the relevant tenderer to win the contract. This also means that more than one operator may be able to obtain compensation for the same unlawful action.5 According to article 97 of the Act, the Public Procurement Complaints Commission, which economic operators may appeal to, “may express its opinion on the liability of the defendant for damages towards the complainant, but shall not express itself concerning the amount of damages”. The Commission has often expressed its view that a contracting authority is liable under section 1 of article 101.6

Section 2 of article 101 is as follows:

In other respects, damages resulting from violations of this Act and rules established hereunder shall be governed by general rules of law.

The legislative material states that section 2 is intended to iterate that section 1 does not preclude that tenderers can claim higher compensation than for

preparing a tender and participating in the procedure. It goes on:

More precisely section 1 does not preclude that a tenderer can claim compensation that aims at putting him in the same situation as if the contract had been carried through. In other words it would embody compensation for pecuniary damage, even though contract was never made, and what primarily comes here to inspection is a tenderer’s damage due to loss of profit.7 The legislative material then refers to a longstanding debate among Nordic academics on the question of whether it is possible to reward damages for positive interests in the case of violation of public procurement rules. It states that the view of limiting a tenderer’s right to compensation to his negative interests has generally been rejected and that his right to obtain compensation 4 Parliamentary Record 2000-2001, A-section, p. 4539.

5 Handbók um opinber innkaup, Reykjavík 2008, p. 114. Available at the website of the State Trading Centre (Ríkiskaup), “www.rikiskaup.is/media/eplica-uppsetning/HandbokOI_ Final.pdf“.

6 See for example the following recent rulings: PPCC (Public Procurement Complaint Commission 17 October 2011 (Case No. 20/2011), and PPCC 8 April 2011 (Case No.


7 Parliamentary Record 2000-2001, A-section, p. 4539. The legislative material cited here concerns the enactment of article 84 in Act No. 94/2011, but it is also fully relevant to the article now in force (article 101 of Act No. 84/2007), since the articles are substantially the same.

Scandinavian Studies In Law © 1999-2015 120 Eiríkur Jónsson:The Long and Winding Road Tunnel Case for loss of profit has been recognized. In that respect, it refers to SC (Supreme Court of Iceland) 18 November 1999 (Case No. 169/1998), where the Court awarded a sum of compensation for loss of profit by discretion (it awarded 1.850.000 ISK whereas 4.289.440 ISK was claimed). The legislative material then states that contrary to claims under section 1, a tenderer has to prove such

damage in accordance with general rules. It goes on:

This means, firstly, that he has to prove that he would have been awarded the contract, if there had not been a culpable violation on behalf of the buyer. Not only does this require that a tenderer proves that his tender was the most economically advantageous, but also that the buyer would not have rejected all offers… Secondly, the tenderer has to prove the extent of his damage, for example that he would have made profit from a contract with the buyer. In light of this it is clear that it can involve many complications for a tenderer to litigate a claim like this.8 Contrary to section 1, the Public Procurement Complaints Commission has refrained from expressing its view on liability under section 2. 9 The only way to pursue claims for loss of profit is therefore generally before the courts.

In sum, the text of section 2, refers to damages “governed by general rules of law”. Although these general rules were not perfectly clear when the article was enacted in 2001, there was a judgment from 1999 that awarded compensation by discretion for loss of profit and the legislative material provided further guidance as to the substance of the general rules. This was the situation when the Road Tunnel Case came to play in 2003.10 Two more things shall be mentioned before moving to the case and its special features. Firstly, the existence of damage is a peremptory condition of liability for damages in Icelandic law, whether in or out of contract. 11 Secondly, the general way to pursue compensation claims before the Icelandic courts is to claim a certain amount of money. The Act on Civil Procedure, No.

91/1991, however provides an exception in article 25, section 2, which allows plaintiffs to seek judgments of acknowledgement, on the condition that they have legitimate interests in seeking such a ruling.

8 Parliamentary Record 2000-2001, A-section, p. 4339-4540.

9 The Road Tunnel Case is a clear example of this, as will be explained in chapter 3.1.

10 It should however be mentioned that the Supreme Court handed down one judgment regarding section 2 in the period between the events of the Road Tunnel Case and until the case reached the Supreme Court. This judgment is SC 26 February 2004 (Case No.

347/2003), where the tenderer was not considered to have proven that he would have been awarded the contract in a flawless procedure.

11 See for example Örlygsson, Þorgeir, Bogason Benedikt and G. Gunnarsson Eyvindur:

Kröfuréttur II – Vanefndaúrræði, Reykjavík 2011, p. 188, and Matthíasson, Viðar Már Skaðabótaréttur, Reykjavík 2005, p. 595.

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In March 2003 the Icelandic Road Administration invited operators that had been pre-selected to participate in a procedure regarding a road tunnel in northern Iceland (the Héðinsfjarðargöng). The contract specifications stated that the comparison of tenders would be financial only. Four tenders were submitted, the lowest one a joint tender from Íslenskir aðalverktakar hf. (an Icelandic corporation) and NCC International AS (a Norwegian corporation), which was 3,2% higher than the authority’s estimated cost. On a meeting of the Icelandic government on July 1, 2003 the government decided to postpone the road tunnel project and with a letter July 8, 2003 the Road Administration announced that it would reject all tenders. The reason given was an “expansionary situation” which was under way in Icelandic society.

The two corporations resorted to the Public Procurement Complaints Commission that declared the decision to reject all tenders unlawful and expressed its view on liability under article 84, section 1, of Act No. 94/2001.12 It however refrained from doing the same with regard to section 2 of the same article so the corporations resorted to the Icelandic courts.

Round 1 – Claim for an Acknowledgement of Liability3.2

The corporation filed suit in the District Court of Reykjavík and claimed an acknowledgement of the Road Administration’s liability for the corporations’ loss of profit due to the rejection of their offer. No particular amount of compensation was claimed at this time. The District Court came to the conclusion that Act No. 94/2001 had been violated. The Road Administration was however acquitted since the corporations had not proven that this caused them damage.13 The corporations appealed to the Supreme Court which, in SC 17 November 2005 (Case No. 182/2005), overturned the District Court judgment and found in favour of the corporations. The Supreme Court made it clear that although legal provisions assumed that it might be permissible for a buyer to reject all tenders, and although the contract specifications in this particular procedure expressly reserved such right, this right could not be used unless there were objective and well-founded reasons for doing so. Since this was not the case the decision was considered to have violated Act No. 94/2001. The Court went on to state that in light of the legislative material, article 84, section 2 of the Act had to be interpreted in that way that a buyer which violates the Act might be obliged to pay an operator compensation for loss of profit, on the condition that the operator proves sufficiently that he would have been awarded the 12 See PPCC 19 August 2003 (Case No. 18/2003).

13 See DCR (District Court of Reykjavík) 15 April 2005.

–  –  –

contract if the Act had not been violated and that the violation thereby has caused him damage.

The Court referred to the provision in the contract specifications stating that the comparison of tenders would be financial only. It went on by noting that the two corporations had submitted the lowest tender, which was significantly lower than the second one, and that there was nothing to indicate that the authority would have had reason to reject the tender on the grounds of price.

And by choosing this particular operators for participation in the procedure, the authority had taken the view that they were generally competent to take on the project. In light of this and the provision of the contract specifications, the burden of proof had to be shifted to the authority, which needed to prove that the corporations would not have been awarded the contract if the procedure had not been terminated. The authority had not proven this and for that part the

conditions of article 84, section 2 were met. The Court went on:

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