“Lost profits” awarded to a losing bidder – Public Procurement

The Procurement Monitoring Bureau (the “IUB”) is the Latvian governmental authority which hears disputes about the outcomes of the procurement procedures most frequently and before ever proceeding to court. Losing tenderers are mostly interested in receiving the green light to sign the contract and then a profit-generating contract after that. However, if the IUB rejects the losing tenderer’s appeal and allows the contract to be signed, the contracting authority, having obtained the go-ahead, signs the contract with the winning tenderer even before the losing tenderer has time to file a court application. There are a variety of significantly complex aspects of applying for interim measures that, in general, discourage applicants from continuing to litigate disputes and force them to accept the unsuccessful outcomes of the procurement process.

The authors of this article highlight the specific conditions under which the losing tenderers may be eligible to recover lost profits even if the contracting authority has already signed the contract with another tenderer. This in turn is a crucial consideration when deciding whether to file a lawsuit after having to deal with an improper results evaluation and failing to persuade the IUB.

The essential requirements for receiving unearned profits and filing an appropriate claim are listed below.

Several criteria must be met in order to recover lost profits

Firstly, the losing tenderer can only claim lost profit if, in the absence of the relevant procurement procedure infringement, it should have received the right to enter into the procurement contract and would have been granted such right.[1] Therefore, it is not enough that the outcomes of the relevant procurement disputes are erroneous or illegal. It must be objectively concluded that if the “key error” in the evaluation result had been corrected, the losing tenderer would have won indisputably.

Secondly, only after determining whether the losing tenderer could have objectively won the procurement can the question of whether the losing tenderer would have gained a profit be addressed.[2]

A particular amount of lost profits must be actively and conclusively proven by the losing tenderer when presenting a claim for a recovery of such profits. Proving an exact amount of lost profit is challenging as it cannot be based solely upon assumptions. The reason for how much profit the claimant would have earned must be supported by clear evidence.[3]

The amount of lost profit must be the amount the losing tenderer would have received if the error or breach had not occurred. Justifying the amount of lost profit is a difficult process that necessitates a diligent and detailed assessment.

For example, the court shall not be persuaded by the claimant’s opinion alone, along with the procurement contract and accounting records.

When gathering the required evidence, it is important to bear in mind, the amount of lost profit is mostly determined by using specific calculations.[4]

However, such a calculation can be made taking into account various factors arising from the applicable case-law, for example:

• the general risks and circumstances of each particular case, which may increase or decrease profits;[5]
• expenses, such as production expenses, taxes, etc., must be deducted from the expected income;[6]
• it is important to consider market-related factors for the relevant industry, such as an increase in fuel or material prices during the procurement contract’s validity period. These situations can cause adjustments to the initially estimated price for which the losing tenderer was willing to carry out the works;[7]
• it has been acknowledged in the case-law a calculation that applies the claimant’s profit share (profit share in percentage) to the contract price the applicant proposed in the particular purchase would be wholly erroneous. This calculation would take into account the claimant’s profit share over the prior three years as a percentage of the economic activity’s average turnover. The court has stated that such a calculation is incorrect. The claimant’s profit in the individual procurement can be evaluated by analysing the evidence that must be presented and applied to the specific procurement.[8]

The aforementioned elements are not all-inclusive. A precise determination of the sufficient collection of evidence should be assessed on a case-by-case basis since the court’s practice on this issue continues to evolve.

Conclusions

To summarise, the conditions which must be satisfied when making a claim for lost profit as a losing bidder:

• The first condition, is the losing tenderer would have objectively been granted the right to enter into a procurement contract if the contracting authority had not made the breach or error during the evaluation of the tender.
• The second condition is gathering all the necessary evidence in accordance with the conclusions noted in the aforementioned case-law. An explanation of the causal connection between the evidence and the unearned profit must be given based upon the evidence that has been presented.

[1] The judgment of the Senate of March 30 2015 in case No SKA-585/2015, Clause 8.

[2] The judgment of the Senate of October 22 2014 in case No SKA-807/2014, Clause 12, 13.

[3] The judgment of the Senate of April 20 2017 in case No SKA-372/2017, Clause 12.

[4] Torgāns K. Saistību tiesības. Otrais papildinātais izdevums. Rīga: Tiesu namu aģentūra, 2018, 206.lpp.

[5] Law on Compensation for Damages Caused by State Administrative Institutions, Article 12, Section 3.

[6] The judgment of the Senate of May 27 2020, case No SKC 309/2020, Clause 11.

[7] The judgment of the Senate of May 10 2022, case No SKA 471/2022, Clause 48.

[8]  For more details, see the court's assessment of the mentioned issue in paragraph 15 of the judgment of the Senate of September 22 2017 in case No SKA-558/2017.