Publication

Geopolitical events in recent years have significantly impacted the public procurement marketplace, especially within the field of defence and security. In Lavia, national security considerations are increasingly becoming a decisive factor influencing the final decision concerning the award and the performance of the procurement contract.

This article analyses the recent administrative court judgement concerning the final decision of the contracting authority to exclude the supplier from a defence procurement procedure. The case highlights several practical and legal issues that are discussed by the authors below.

Factual background of the dispute

On 13 June 2024 , the administrative court heard a dispute between the general partnership MMG (comprising of SIA MONUM and SIA MON1) (the “Supplier”) and the State Defence Military Facilities and Procurement Centre (the “Contracting Authority”) regarding the exclusion of a tenderer from participating in a public procurement procedure on the conclusions rendered by way of an opinion issued by the Military Intelligence and Security Service (the “MIDD”).

During 2021, the Contracting Authority and the Supplier concluded a procurement contract for the development of a construction project, author supervision and construction works at the dormitory reconstruction site at Ezermalas iela 6, Riga (the “Contract”). As the construction works to be performed under the Contract were related to a military facility,[1] the Contract was awarded in accordance with the applicable provisions of the Defence and Security Procurement Law (the “ADJIL”).

During the performance of the Contract, the Supplier approached the Contracting Authority with a request to amend the price of the Contract due to an increase in construction costs. The Supplier claimed the construction costs had risen sharply due to significantly cheaper construction materials imported/originating from Russia and Belarus no longer being available due to imposed sanctions.

The Contracting Authority did not agree to amend the Contract, but instead announced a negotiation procedure without publishing a contract notice (the “Negotiation Procedure”) with the aim of concluding an additional agreement with the Supplier on the increase in the costs of construction works specified in the Contract.

During the Negotiation Procedure, the Contracting Authority, based upon the provisions of Article 44, Paragraph 2, Clause 2 of the ADJIL, which came into force on 1 January 2023, decided to request that the MIDD provides an opinion on the Supplier.

According to the provided MIDD opinion, the Supplier was assessed negatively. Thus, the Contracting Authority excluded the Supplier from further participation in the Negotiation Procedure. The MIDD opined that concluding a contract with the Supplier could pose a threat to Latvian national security. The contracting authority decided to terminate the Negotiation Procedure because the only participant in the Negotiation Procedure (the Supplier) had been subsequently excluded.

After receiving the opinion from the MIDD, the Contracting Authority also notified the Supplier of its unilateral withdrawal from the Contract, as it considered that, given Russia’s full-scale invasion of Ukraine and the security and geopolitical changes in the region, the performance of the procurement contract could not be continued after receiving the opinion from MIDD.

The Supplier challenged the Contracting Authority’s decision to exclude it and terminate the Negotiation Procedure before the Procurement Monitoring Bureau (the “IUB”). The IUB concluded the application to be unfounded and upheld the Contracting Authority’s decision to terminate the Negotiation Procedure. [2]

Findings of the Administrative Court

The Supplier appealed against the IUB’s decision in the Administrative District Court upon the basis of the following main arguments:

1) The Contracting Authority had unjustifiably conducted a negotiation procedure instead of amending the Contract;

2) The fact that the Contract does not provide for price increases due to cost increases is irrelevant, as this is provided for in the applicable regulatory enactments;

3) The Contracting Authority incorrectly applied Article 44(2) of the ADJIL (amended version);

4) The Contracting Authority did not verify whether the opinion provided by the MIDD complies with the requirements of the applicable law. The opinion does not apply to the Supplier, but to the members of the general partnership. Furthermore, the facts stated in the opinion violate the presumption of innocence;

5) The Contracting Authority has violated the principle of good governance.[3]

In its judgment of 13 June 2024, the Administrative District Court stated the introduction of the imposed sanctions on the import of construction materials originating from Russia and Belarus cannot be regarded as changes that directly affect the performance of the contract.

The import of construction materials was not prohibited altogether and the applicant had to find other suppliers of construction materials or purchase stocks of construction materials at higher prices. Furthermore, even if the Contract or regulatory enactments allowed for substantial amendments to the Contract by increasing the contractual price, neither the applicable regulatory enactments nor did the Contract impose an obligation upon the Contracting Authority to agree upon any amendments concerning the Contract.[4]

With regard to the application of the Negotiated Procedure to resolve the issue of the increase in the contract price, the Administrative District Court pointed out that the contracting authority had initiated the negotiated procedure without justification, because, according to Article 6(6)(4) of the ADJIL, the negotiated procedure may only be applied in exceptional circumstances without publishing a contract notice. However, it does not follow from the circumstances of the case that the subject matter of the dispute had to be constructed urgently as a matter of priority.[5]

As for the Contracting Authority’s obligation to request an opinion from the security authorities, the court of first instance actually agreed with the IUB’s argument, underlining clause 11.2. of the Negotiation Procedure Regulations already provided for such an obligation on the part of the Contracting Authority, which the Supplier had not contested in accordance with the procedure laid down by the applicable law.

Furthermore, the court pointed out that even if this provision had not been included in the regulations, the Contracting Authority would have had to request the opinion of the security authority and exclude the Supplier in the event of a negative opinion from the security authority, as such an obligation was provided for in the regulatory enactments in force at the time of the commencement of the negotiation procedure.[6]

With regard to the Supplier’s argument (the Supplier was found to meet the selection requirements during the initial procurement procedure), the court pointed out the applicable law does not define what constitutes a threat to national security and the methodology/criteria for assessing it are within the competence of the relevant security authorities. Subsequent amendments to the ADJIL cannot be regarded as an extension of the scope of assessment by the security authorities, as it cannot be denied that, as the geopolitical and domestic political situation in the country changes over time, the perception of the situation and the interpretation of security risks and events also change.[7]

Regarding the assessment of the opinion provided by the MIDD, the court of first instance noted the security authority had not committed any obvious errors in exercising its discretion, as the assessment of the personality and activities of the beneficial owner of a partnership is not contrary to the principles set out in the applicable law (transparency of procurement, free competition among suppliers, as well as equal and fair treatment of them, effective use of the Contracting Authority’s resources and maximum reduction of the Contracting Authority’s risks). Furthermore, if security risks are associated with a member of the board of a general partnership and the beneficial owner, then the security authorities must take such risks into account.[8]

With regard to the Contracting Authority’s possible breach of the principle of good administration, the court of first instance noted the Contracting Authority had taken all of necessary steps to assess the possibility of agreeing with the Supplier on a revision of the contractual price before unilaterally terminating the Contract. Given the uncertainty of the situation, including in relation to the admissibility of amendments to the Contract, the court did not find the Contracting Authority’s delay in making a decision constituted a violation of the principle of good governance. Thus, the court of first instance dismissed the Supplier’s application in its entirety.[9]

The Supplier appealed the first instance judgment to the Administrative Case Department of the Senate of the Republic of Latvia (the “Senate”). However, in its decision of 14 August 2025, the Senate refused to initiate cassation proceedings, recognising there was no doubt as to the legality of the contested judgment.

The Senate’s decision emphasised that amendments to a procurement contract are not solely dependent on the will of the parties, but are subject to regulatory requirements. Specifically, if regulatory acts do not allow such amendments, then they cannot be made.[10] Although the Senate recognised the increase in the costs of construction due to Russia’s military action in Ukraine is a well-known fact and the Supplier could not have foreseen it, amending the procurement contract for this reason is permissible, not mandatory, and the contracting authority has the right to choose the solution it considers most appropriate, as long as it does not conflict with regulatory enactments.[11]

With regard to the unjustified application of the Negotiated Procedure, the Senate pointed out it was not the fact of applying the Negotiated Procedure that had negative consequences for the Supplier, but rather the grounds for exclusion specified in the legal norms – the opinion provided by the MIDD.[12]

With regard to the application of the incorrect version of the law, the Senate pointed out the amendments, which entered into force on 1 January 2023, only specified the cases of application, but did not change the essence of the grounds for exclusion. Consequently, even if the regulation in the version valid until 31 December 2022 were applicable, the Contracting Authority would in any case be obliged to exclude the Supplier upon receiving such an opinion.[13] In addition, the Senate pointed out, in the understanding of ADJIL, the Negotiation Procedure announced by the Contracting Authority cannot be considered a continuation of the previous procurement procedure, but rather a separate and independent procurement procedure in which the Contracting Authority is obliged to verify there are no grounds for exclusion.[14]

Conclusions

Precisely because security risks are not static, the legislator should consider the possibility of providing for the right of the contracting authority to unilaterally terminate the procurement contract if new risks to national security are discovered during its performance. Currently, the ADJIL does not provide for the possibility for contracting authorities to request a repeat opinion from the security authorities on the contractor during the performance of defence and security procurement contracts, nor does the law provide for the consequences if, in the case of an already concluded procurement contract, the repeated opinion is negative for the supplier. It cannot be ruled out certain security risks become known after the procurement contract has already been concluded.

In this specific case, the Contracting Authority’s decision to unilaterally terminate the procurement contract with the Supplier is not a completely secure solution from a legal point of view, as the Supplier could have challenged it by filing a claim in a court of general jurisdiction for the performance of the contract and for damages.[15]

However, the administrative court practice analysed in this article confirms national security considerations have a significant impact on ADJIL procurements. On the other hand, judicial review of the opinions of security authorities in ADJIL procurements is limited, as only security authorities are competent to determine what could threaten national security, while the court examines, within the framework of administrative proceedings, whether there has been an obvious error in assessment or significant procedural violations.[16]

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[1]     Within the meaning of the first part of Article 4.¹ of the National Armed Forces Act.

[2]     IUB Decision No. 4-1.2/23-199/2 of the Application Review Commission of 27 October 2023.

[3]     Judgment of the Administrative District Court of 13 June 2024 in case No. A420253923, A42-00845-24/20, paragraph 3.

[4]     Ibid., paragraphs 9.3 and 9.4.

[5]     Ibid., paragraph 10.3.

[6]     Ibid., points 11.2 and 11.3.

[7]     Ibid., point 12.1.

[8]     Ibid., point 13.3.

[9]     Ibid., point 14.

[10]   Decision of the Administrative Case Department of the Senate of the Republic of Latvia of 14 August 205 in case No. A420253923, SKA-256/2025, point 4.

[11]   Ibid., paragraph 4.

[12]   Ibid., point 5.

[13]   Ibid., point 6.

[14]   Ibid.

[15]   The authors of the article are not aware that the Supplier has brought such or similar civil claims against the Contracting Authority.

[16]  Supreme Court of the Republic of Latvia, Bulletin No. 27/2023, November, p. 38, available at: https://www.at.gov.lv/lv/par-augstako-tiesu/augstakas-tiesas-biletens/augstakas-tiesas-biletens-nr-27/parskats-par-konferenci.