Russian Public Procurement Law: Antimonopoly Requirements and Compliance

 

March 31, 2024

BRACE Law Firm ©

 

Ensuring competition during public procurement is a critical direction of state antimonopoly policy. Two primary laws regulate competition in the sphere of public procurement:

• First, the regulation of bidding rules to ensure their openness and transparency, creating equal conditions for market participants to access the market. Special laws regulate these rules, including Federal Law No. 44-FZ dated April 5, 2013, On the Contract System in the Sphere of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs (the "Contract System Law", "Federal Law No. 44-FZ") and Federal Law No. 18.07.2011 No. 223-FZ On Procurement of Goods, Works, and Services by Certain Types of Legal Entities (the "Law on Procurement", "Federal Law No. 223-FZ");
• Second, the establishment of general antimonopoly requirements for bidding in Federal Law No. 135-FZ dated July 26, 2006, On Protection of Competition (the "Law on Protection of Competition", "Federal Law No. 135-FZ").

This article examines antimonopoly requirements for public procurement through the prism of law enforcement practice and analyzes the liability for their violation.

General Antimonopoly Requirements

Article 17 of the Law on Protection of Competition establishes antimonopoly requirements for public procurement. By virtue of the direct wording of the law and the position of the Supreme Court of the Russian Federation set forth in Plenum Decree No. 2 dated March 4, 2021, On Certain Issues Arising in Connection with the Application of Antimonopoly Legislation by Courts (the "Plenum Decree No. 2"), these requirements do not extend to single-source procurement and apply only to competitive procurement. [1]

According to Part 1 of Article 17 of the Law on Protection of Competition, during the conduct of bidding, requests for quotations, and requests for proposals (the "bidding"), actions are prohibited that lead or may lead to the prevention, restriction, or elimination of competition, including:

1. Coordination by bidding organizers or customers of the activities of bidders, as well as the conclusion of agreements between bidding organizers and (or) customers with bidders, if such agreements aim to, result in, or may lead to the restriction of competition and (or) the creation of preferential conditions for any bidders;

The law does not clarify what is meant by "coordination of activities". In practice, supervisory authorities interpret this as a prohibition on preliminary negotiations and the exchange of information until a bidding winner is identified.

Article 46 of the Contract System Law also establishes a direct prohibition on negotiations by the customer or members of procurement commissions with a bidder. Unlike Federal Law No. 44-FZ, the Law on Procurement does not contain such a prohibition. However, FAS Russia, in its Standard for Procurement Activities of Certain Types of Legal Entities (approved by FAS Russia), considers negotiations between a customer and a bidder from the moment of the procurement announcement until the determination of the winner to be a violation of the law. To reduce corruption risks, FAS recommends that customers include a prohibition on such actions in their Procurement Regulations.

At the same time, we agree with the researchers of this issue that a complete lack of interaction with market participants is impossible for objective reasons. [2] For example, a customer cannot understand the market state and adequately determine the Initial Maximum Contract Price (IMCP) without communicating with suppliers. However, it is impermissible to provide potential bidders with information about the bidding that might create advantages for them over other economic entities, as such actions may be classified as a violation of antimonopoly prohibitions.

We can illustrate the prohibition on concluding agreements between customers and bidders with an example from judicial practice.

In Case No. A40-55695/2021, following an analysis of information received from a public organization, FAS Russia found a violation of Clause 1 of Part 1 of Article 17 of Federal Law No. 135-FZ in the actions of a state institution and a business entity. This violation involved the conclusion of an agreement between the customer and bidders for the supply of modular medical clinics, which led to price maintenance during the bidding. The business entity and the state institution applied to the court to invalidate the antimonopoly authority's decision. During the court hearing, the court established that the Institution used commercial proposals from the business entity and another market participant sent from the same email address, which resulted in the formation of an IMCP favorable to these economic entities. Additionally, the institution sent letters to the business entity to prepare technical specifications and contracts. The courts, including the Supreme Court of the Russian Federation, agreed with the antimonopoly authority's conclusions that the state institution and the business entity concluded an anticompetitive agreement facilitating the business entity's victory in the bidding. The court denied the application. [3]

2. Creation of preferential conditions for a bidder to participate in the bidding, including through access to information, unless otherwise established by federal law.

One of the most common ways to create preferential conditions for certain market participants over others is the establishment of excessive requirements for bidders. Examples include requirements regarding the absence of negative experience interacting with the customer, requirements for positive reviews, excessive work experience, or licenses that are not required for contract performance.

Other provisions of the procurement documentation can also restrict competition. For instance, as FAS Russia points out in its Reviews of Judicial Practice in the Sphere of Procurement under 223-FZ, [4] requirements to provide excessive documents as part of the bid, the establishment of a confusing bid submission procedure, requirements to provide a bank guarantee only from a specific bank, and the establishment of vague procurement conditions are restrictive.

Additionally, according to Paragraph 41 of Plenum Decree No. 2, the amendment of a contract concluded based on procurement results by the parties may indicate the creation of preferential conditions for the winner if the contract is changed so significantly that it affects conditions of material importance. For example, if the composition of bidders would have been different and (or) another person could have been recognized as the winner if the original contract had been concluded on the amended terms.

These violations are particularly characteristic of procurements carried out under Federal Law No. 223-FZ, which grants customers greater freedom in determining procurement conditions. To avoid these violations, we believe that the requirements established by the customer in the procurement documentation must be reasonable and consistent with industry legislation, while amendments to concluded contracts should only be made on grounds provided for by law and the Procurement Regulations.

3. Violation of the procedure for determining the bidding winner.

As practice shows, the following are recognized as violations of antimonopoly requirements:

• Deviations from the rules for conducting bidding established by law and (or) the Procurement Regulations and (or) the procurement documentation (for example, the use of different bidder evaluation criteria, failure to follow the procedure for calculating and scoring (formulas), improper execution of protocols and decisions, etc.);
• The absence of bid evaluation criteria, scoring procedures, and other material conditions in the procurement documentation that allow for the determination of the winner;
• Violations of the bidding procedure.

4. Participation of bidding organizers, customers, or their employees in the bidding.

As explained in Paragraph 40 of Plenum Decree No. 2, the organizer, the customer, employees of the organizer or customer, and other persons to whom the organizer or customer has the actual ability to give mandatory instructions or otherwise determine their actions are not allowed to participate in the bidding. The exercise of actual control is possible regardless of the presence or absence of signs of affiliation (for example, through kinship or property with persons who are part of the bidder's management bodies, direct or indirect participation in capital or management). When establishing such control, it is necessary to check how significant the influence of the person associated with it was on decisions regarding participation in the procurement.

To prevent such violations, we recommend developing an anticorruption compliance program and regularly auditing compliance with these requirements.

Note that the list of actions in Part 1 of Article 17 of Federal Law No. 135-FZ that may result in the prevention, restriction, or elimination of competition during public bidding is not exhaustive.

Alongside the above prohibitions, Part 3 of Article 17 of the Law on Protection of Competition establishes a prohibition on the restriction of competition by including technically and functionally unrelated goods, works, and services in a single lot when procuring for state and municipal needs. This prohibition is due to the fact that the artificial enlargement of a lot can establish additional barriers for highly specialized companies and restrict the number of procurement participants.

Current legislation lacks criteria for technological and functional interconnectedness. Law enforcement practice has also failed to develop uniform approaches; often, the decision depends on the specific circumstances of the case and the customer's active position.

Below are the most established positions from judicial practice. For instance, courts recognize the consolidation of licensed and non-licensed activities in a single lot as non-compliant with Part 3 of Article 17 of Federal Law No. 135-FZ, [5] conversely, including a requirement for two different licenses in the documentation is not, in itself, proof of unlawful consolidation and is considered based on the actual procurement conditions. Consolidating test systems for open-type and closed-type analyzers into one lot is often recognized as a restriction of competition, [6] at the same time, consolidating various medical devices with different functional purposes into one lot is not always recognized as such.

We agree with the researchers of this problem that the following criteria may be used to prove the existence of a technological and functional connection:

• A single target purpose for the procured goods, works, or services (for example, reagents and control materials for a laboratory analyzer are intended for laboratory diagnostics and form a single functioning market);
• A single need of the customer (for example, the procurement of MFPs, printers, and personal computers in one lot pursued a single goal – equipping workstations with office equipment);
• The impracticality of separating part of the goods, works, or services into a separate lot. [7]

Note that the Contract System Law and the Law on Procurement establish special rules for conducting competitive procurement and grant the antimonopoly authority special powers to oversee them. Therefore, the provisions of Article 17 of the Law on Protection of Competition apply to such competitive procurements only in parts not regulated by the norms of these special laws or in parts that specify their provisions (Paragraph 39 of Plenum Decree No. 2).

Below, we examine the norms of Federal Law No. 44-FZ and 223-FZ aimed at ensuring competition.

Antimonopoly Requirements in Special Laws

Article 8 of the Contract System Law establishes the principle of ensuring competition. In accordance with this norm, competition during procurement must be based on the principle of fair price and non-price competition between bidders to identify the best conditions for the supply of goods, works, and services. Customers, specialized organizations, their officials, procurement commissions, members of such commissions, bidders, and electronic platform operators are prohibited from performing any actions that contradict the requirements of the law, including those that lead to the restriction of competition, particularly the unreasonable restriction of the number of bidders.

Article 3 of the Law on Procurement declares a similar principle, stating that when procuring goods, works, and services, customers are guided by the principles of equality, fairness, the absence of discrimination, and the absence of unreasonable restrictions on competition toward bidders.

Various mechanisms implement this principle: rules for describing the procurement object, requirements for bidders, requirements for the content of bids, and procedural issues of bidding. All of them are, to some extent, aimed at ensuring equal access to bidding. Unfortunately, the format of this article does not allow for their full consideration.

Anti-dumping Measures in Procurement

In addition to the detailed regulation of the bidding procedure, the establishment of anti-dumping measures in special legislation is a measure to combat unfair competition.

Dumping (from the English "dumping" – "discarding") is the sale of goods, works, and services at artificially low prices. In the Contract System Law, dumping is defined as a price reduction of 25% or more from the Initial Maximum Contract Price. To protect against the unfair behavior of market participants, Article 37 of Federal Law No. 44-FZ provides for the following anti-dumping measures during auctions and competitions:

• If the IMCP exceeds 15 million rubles, a winner who reduced the contract price by 25% or more must provide contract performance security 1.5 times higher than the amount specified in the procurement documentation, but not less than 10% of the IMCP (or the contract price for procurements from small business entities and socially oriented non-profit organizations). If the contract provides for an advance payment, the security amount cannot be less than the advance payment;
• If the IMCP is less than 15 million rubles, the winner may provide either an increased security amount or information regarding its good faith along with the security amount established by the procurement documentation.

Information from the register of contracts confirms good faith, evidencing that the bidder performed three or more contracts within three years before the bid submission date. All contracts must have been performed without the application of penalties. The price of one of the contracts must be at least 20% of the IMCP. The form of security (independent guarantee or funds) has no legal significance when providing anti-dumping measures.

If goods necessary for the normal life support of citizens are procured (food, products for emergency or urgent medical care, medicinal products, medical devices, technical means of rehabilitation, fuel), the bidder must additionally provide a justification for the proposed price (a letter of guarantee from the manufacturer, documents confirming the winner's possession of the goods, or other documents and calculations confirming the possibility of supply).

Additionally, in cases of dumping, advance payments are prohibited, even if they were provided for by the contract terms.

Article 96 of Federal Law No. 44-FZ provides special rules for providing security for certain procurements: they are exempt from providing contract performance security, including during dumping, upon submission of evidence of good faith.

Anti-dumping measures do not apply in the following cases:

• Procurement of medicinal products included in the VED List if the proposed dumping price is actually reduced by no more than 25% relative to the registered maximum selling price;
• If the bidder is a state-funded institution;
• Procurement of credit services;
• Conclusion by a budget institution or a state or municipal unitary enterprise of a contract the subject of which is the issuance of an independent guarantee.

A bidder who fails to provide security in accordance with the procedure established by law is deemed to have evaded concluding the contract, and information regarding their inclusion in the Register of Unfair Suppliers is submitted.

Unlike the legislation on the contract system, Law No. 223-FZ does not provide for any special measures aimed at protection against dumping. However, the customer has the right to include them in the Procurement Regulations. As practice shows, procurement regulations often provide for such measures; customers frequently use the norms of Law No. 44-FZ when developing them, while the largest customers also detail and complicate these requirements.

Note that in practice, many disputes arise regarding compliance with anti-dumping measures, ranging from untimeliness or errors in submission to their substantive content. Therefore, to avoid the risk of "losing the contract", we recommend that bidders study the requirements for submission extremely carefully.

Liability for Violation of Antimonopoly Requirements in Procurement

The violation of antimonopoly requirements in public procurement may result in the corresponding bidding and the contracts concluded based on its results being recognized as invalid.

Article 449 of the Civil Code regulates the grounds for recognizing bidding as invalid, according to which bidding conducted in violation of the rules established by law may be recognized as invalid if:

• Someone was unreasonably excluded from participating in the bidding;
• The highest proposed price was unreasonably rejected at the bidding;
• The sale was made earlier than the period specified in the notice;
• Other significant violations of the bidding procedure occurred, resulting in the incorrect determination of the sale price;
• Other violations of the rules established by law occurred.

Additionally, violations of the requirements of Article 17 of the Law on Protection of Competition and the norms of the Contract System Law and the Law on Procurement may serve as grounds for recognizing bidding and contracts as invalid.

Antimonopoly authorities, prosecutorial authorities, and interested parties (bidders, parties to the contract concluded based on its results) have the right to challenge the bidding. Challenging is carried out through litigation in accordance with the norms of Article 449 of the Civil Code and Paragraph 2 of Chapter 9 of the Civil Code, Invalidity of Transactions.

To recognize bidding and a contract as invalid due to a violation of antimonopoly requirements, it will be necessary to prove:

• The existence of a violation of Article 17 of the Law on Protection of Competition, including that the performed action (omission) led or may lead to the prevention, restriction, or elimination of competition;
• The infringement of the applicant's rights as a market participant, including whether there is an actual possibility of restoring the plaintiff's rights — for example, whether this person could have become the winner in the absence of violations in the procedure of the competitive procurement, based on the entire set of bidding conditions.

If the antimonopoly authority files the claim, it will additionally need to prove that recognizing the procurement and the contract as invalid will lead to the restoration of competition in the market and (or) will allow for the elimination of a continuing violation of competition, and that the application of the consequences of invalidity takes into account the socio-economic interests of the state (municipal formation) and does not violate them (Paragraph 43 of Plenum Decree No. 2).

The statute of limitations is one year from the date of the contract conclusion, or, if such a contract was not concluded, from the date the competitive procurement was completed (Clause 1 of Article 449 of the Civil Code). General statutes of limitation apply to requirements to challenge agreements that amend or terminate a contract. More details on the procedure for recognizing invalidity can be found in our other article on similar issues.[8]

According to Article 167 of the Civil Code, the general consequence of invalidity is bilateral restitution: the obligation of each party to return to the other everything received under the transaction, or, if it is impossible to return what was received in kind (including when what was received is expressed in the use of property, work performed, or services provided), to compensate for its value.

For example, an antimonopoly authority applied to an arbitration court with a claim to recognize an auction for the provision of solid municipal waste transportation services as invalid and to apply the consequences of the transaction's invalidity. As the court established, only one bid was submitted for the auction by a Company, which was recognized as the winner. However, during the court hearing, facts of competition restriction were confirmed, involving the use of incorrect and unlawful wording in the procurement documentation, which made it impossible for potential bidders to participate in the bidding. The auction and the contract concluded based on its results were recognized as invalid. [9]

In Case No. A76-42901/2018 regarding the recognition of an auction and a state contract for the supply of a car as invalid, the customer was ordered to return the car to the bidding winner as a consequence of invalidity, and the winner was ordered to return the funds for the car to the customer in the amount of more than 3.5 million rubles. [10]

In addition to civil liability, administrative liability may be imposed for violating antimonopoly requirements. At the same time, according to FAS Russia's explanations, if actions performed during procurement activities simultaneously violate prohibitions established by Law No. 44-FZ or Law No. 223-FZ and Article 17 of the Law on Protection of Competition, the norms of special legislation and the corresponding norms of the Code of Administrative Offenses of the Russian Federation (CAO RF) establishing administrative liability for violating the requirements of these laws shall apply. [11]

Liability for violations of the Contract System Law is provided for by several articles of the CAO RF. The most frequently applicable in the context of the topic we are considering are:

• Part 1.4 of Article 7.30 of the CAO RF, Placement by an official or the submission to an electronic platform operator of information and documents subject to placement or submission in violation of the requirements provided for by the legislation of the Russian Federation on the contract system in the sphere of procurement. A fine on officials in the amount of 15,000 rubles; on legal entities – 50,000 rubles;
• Part 4 of Article 7.30 of the CAO RF, Establishment of a procedure for the consideration and evaluation of bids, requirements for bidders, and for the amount and methods of security not provided for by the legislation of the Russian Federation on the contract system in the sphere of procurement, as well as requirements for the submission by bidders, as part of a bid for participation in the determination of a supplier (contractor, performer), of information and documents not provided for by the legislation of the Russian Federation on the contract system in the sphere of procurement. A fine on officials in the amount of 1% of the IMCP, but not less than 5,000 rubles and not more than 30,000 rubles;
• Part 4.1 of Article 7.30 of the CAO RF, Inclusion in the description of the procurement object of requirements and indications regarding trademarks, service marks, trade names, patents, utility models, industrial designs, the name of the place of origin of the goods or the name of the manufacturer, requirements for goods, information, works, or services, provided that such requirements result in the restriction of the number of bidders, or the inclusion in a single lot or procurement object of goods, works, or services technically and functionally unrelated to each other. A fine on officials in the amount of 1% of the IMCP, but not less than 10,000 rubles and not more than 50,000 rubles.

Regarding violations of antimonopoly requirements in procurements under Federal Law No. 223-FZ, administrative liability may arise under Part 8 of Article 7.32.3 of the CAO RF, Presentation of requirements for bidders of goods, works, or services, for the procured goods, works, or services and (or) for the contract terms, or the evaluation and (or) comparison of bids for participation in the procurement according to criteria and in a manner not specified in the documentation for the procurement of goods, works, or services. A fine on officials from 2,000 to 3,000 rubles; on legal entities – from 5,000 to 10,000 rubles.

In conclusion, we note that establishing antimonopoly requirements for public procurement certainly contributes to the development and maintenance of competition. However, the lack of clear criteria for evaluating actions for competition restriction leads to inconsistent law enforcement practice and does not contribute to the stability of turnover.

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References

[1] Federal Law No. 46-FZ dated March 8, 2022, On Amendments to Certain Legislative Acts of the Russian Federation.

[2] Belyaeva O. Dialogue with Market Participants: Negotiations or Collusion in Corporate Procurement? // Progoszakaz, 2021, No. 8, pp. 33 – 42.

[3] Ruling of the Supreme Court of the Russian Federation No. 305-ES22-5807 dated May 13, 2022, in Case No. A40-55695/2021.

[4] Review of Judicial Practice in the Sphere of Procurement under 223-FZ for January 2020, December 2023, and April 2023 (Department for Control over State Order Placement of FAS Russia).

[5] Ruling of the Supreme Court of the Russian Federation No. 305-ES21-11761 dated July 19, 2021, in Case No. A40-69381/2020.

[6] Decree of the Supreme Court of the Russian Federation No. 2-AD20-3 dated November 24, 2020.

[7] Alexandrov G. Criteria for Technological and Functional Connection in Procurement // Progoszakaz, 2021, No. 7.

[8] Recognizing a State Contract as Invalid, February 5, 2022. BRACE Law Firm ©. Source: https://brace-lf.com/informaciya/kontraktnoe-pravo/priznanie-nedejstvitel-nym-goskontrakta  

[9] Ruling of the Supreme Court of the Russian Federation No. 309-ES20-16185 dated October 30, 2020, in Case No. A76-42901/2018.

[10] Ruling of the Supreme Court of the Russian Federation No. 309-ES22-11438 dated August 22, 2022.

[11] Letter of FAS Russia No. IA/60890/17 dated September 4, 2017, On the Actions of Antimonopoly Authorities in Cases of Receiving Information Regarding the Simultaneous Violation of Prohibitions Established by the Law on Protection of Competition and One of the Laws Regulating Procurement Activity.