Amendments to legislation on public procurement under federal law no. 44-FZ triggered by the COVID-19 pandemic

Pepeliaev Group advises of the measures being taken to amend legislation on public procurement.

In the difficult epidemiological situation caused by the spread of the new coronavirus infection, state authorities are taking actions to amend Federal Law No. 44-FZ dated 5 April 2013 “On the contract system in the area of the purchases of goods, work and services to provide for the state and municipal needs” ("Law No. 44-FZ").

1. The procurement procedure will be simplified in the case of force majeure circumstances and states of emergency.

In its Letter No. IA/21684/20 dated 18 March 2020 the Federal Antimonopoly Service recognised the coronavirus pandemic as a force majeure circumstance, which has to be taken into account by persons examining complaints, administrative offence cases and applications for entities to be included in the register of bad faith suppliers, as well as by auditors.

In addition, the letter specifies that, based on article 93(1)(9) of Law No. 44-FZ, customers may purchase from a single supplier (contractor or service provider) if there is a cause and effect connection between activities aimed at preventing, averting and liquidating the consequences of the spread of coronavirus infection and the item being purchased.

On 19 March 2020, the Finance Ministry published its Letter No. 24-06-06/21324 “On purchasing from a single supplier (contractor or service provider) when a high-alert regime is activated” in which the Finance Ministry also:

• concludes that the spread of the new coronavirus infection is extraordinary and unavoidable in nature and, hence, is a force majeure circumstance;
• confirms the right to purchase from a single supplier;
• points out that the condition regarding the absence of the purchased goods, works and services from the list of the goods, works and services required for providing humanitarian aid or liquidating the consequences of an emergency is not applied^[1].

More detailed clarifications are contained in Federal Law No. 98-FZ dated 1 April 2020 “On amending certain items of legislation of the Russian Federation regarding the prevention and elimination of emergencies” ("Federal Law No. 98-FZ") that has already been signed by the Russian President and that governs the relationship arising in connection with the need to imminently address the challenges connected with the spread of the new coronavirus infection. The draft law provides for the following adjustments with respect to procurement procedures:

• a preliminary selection that used to be an exception from the procurement commission’s audit of the purchase participant’s conformity with individual provisions of the law no longer constitutes such an exception;
• the rules for filing applications to participate in a preliminary selection of participants in a purchase for providing humanitarian aid or eliminating the consequences of natural or man-caused emergencies^[2].

the preliminary selection procedure proved to be ineffective for purchases in an state of emergency, and, therefore, it was decided to renounce it under the given circumstances.

• the purchase from a sole supplier also became possible for the prevention (i.e. if a high-alert regime is activated) and/or liquidation of a state of emergency, or for the supply of humanitarian aid;
• at the same time, the customer may purchase goods, work or services in the required quantities and scope if it is time-consuming and ineffective to use competitive ways of selecting a supplier;
• allows federal executive bodies to enter into contracts with a sole supplier for the purposes of performing special tasks of ensuring state defence and security;
• Until 31 December 2020 the Government is allowed to use the grounds for purchasing from the sole supplier that are not stipulated by any clause of Law No. 44-FZ.

In addition, ‘special’ purchases in the area of construction are considerably simplified in the final provisions of Law No. 44-FZ:

• the condition has been excluded that the specified rule extends only to purchases of capital construction items within national projects;
• the right to approve the lists of capital construction items, which may be purchased on a “turnkey” basis, is granted not only to the Russian Government and higher state executive bodies of constituent entities of the Russian Federation, but also to local administrations;
• it has been established that such lists must be approved before 1 January 2024;
• it has been established that any equipment required for ensuring the operation of a facility may be purchased on a “turnkey” basis, rather than just medical equipment as it used to be.

In pursuance of the state policy aimed at changing the regulation of public purchases procedures in the situation of the pandemic, on 25 March 2020 the Finance Ministry moved ahead with preparing the draft Federal Law “On amendments to the Federal Law ‘On the contract system in the area of purchases of goods, work and services for public and municipal needs’” (the “Finance Ministry’s Draft”), which is also aimed at optimising the procedure of making purchases from a sole supplier for the purpose of eliminating the consequences of force majeure and a state of emergency^[3].

The Draft has been developed in accordance with clause 4.4. of the Plan of priority measures (actions) aimed at ensuring sustainable development of the economy in the deteriorating situation with the spread of the coronavirus infection. The regulatory act is scheduled to come into force in June.

The amendments adopted to Law No. 44-FZ are aimed at supporting business under the conditions of the spread of COVID-19 as a force majeure circumstance. The simplified purchase procedure will allow customers to obtain the required resources faster, including medications, means of individual protection, disinfection etc.

2. Softer requirements for the SMEs

When purchases are made from small entrepreneurs and socially-oriented non-profit organisations, Federal Law No. 98-FZ provides that until 31 December 2020 customers may not demand that these entities secure the performance of contracts and guarantee obligations (provided that no advance payment has been made).

The Finance Ministry is planning to include in the Draft, among other things, amendments enabling the customer not to establish a demand to provide security with respect to the contract when purchases are made from small enterprises.

In addition, the draft government directives prepared by the Finance Ministry (the “Draft Directives”) also contain the following provisions:

• state companies will include in their purchase regulations a rule that they may pay an advance of up to 50% of the price under contracts whereby 30% of purchases are from SMEs.
• state companies must decide to enhance control over compliance with payment obligations under contracts with SMEs;
• State companies must ensure that the relevant decisions (with respect to advance payments and more stringent control) extend to their affiliates and dependent companies^[4].

The specified measures are aimed at supporting businesses, including for the purpose of avoiding negative implications relating to the spread of the new coronavirus infection.

3. Wider opportunities for changing the contract price and period

In 2020, Federal Law No. 98-FZ allows for the contract period and price to be changed, if they are impossible to perform in the conditions of the spread of COVID-19, as well as in other situations provided for by the Government^[5].

In order to do so it is required to have a written justification for such a change and a resolution of a higher executive body, and the supplier must secure the performance of such a contract in terms of the new obligations that have not previously been secured. At the same time:

• provision is made for the possibility to reduce the security amount;
• under a previously submitted bank guarantee no return is performed and no collection is made;
• for the contractual obligations to be secured by an investment of funds, separate rules have been established for the contract price to be increased or reduced and for the period to be changed;
• a state or municipal customer may perform a change within the limits of the budgetary obligations for the time of performance of the contract.

The Russian Government’s Decree No. 672-r dated 19 March 2020 provides that pursuant to article 111(1) of Federal Law 44-FZ, in connection with the measures being introduced to prevent the spread of COVID-19, when specific contracts are performed by enterprises of the automobile industry the parties may agree to change the period of the relevant contracts without requiring the supplier to pay the late payment interest in connection with a delay in the performance of obligations, provided that such delay has been caused by the measures in question^[6]. The new rules will apply to 77 state and municipal contracts, including for the supply of KamAZ buses to Moscow City Public Transport Agency and the supply of Lada automobiles for the Ministry of Internal Affairs ^[7]

Also, in the Draft Directives, the Finance Ministry provided for a possibility to extend in 2020 the timeframes for performing agreements and adjusting prices, provided that this has become necessary owing to the spread of COVID-19. It is clarified that state companies will have to hold meetings of their boards of directors to discuss this issue within 10 days from receiving the directives.

A relaxation in the form of the parties to a contract being allowed to change the price and period appears to be justified, because in these extreme conditions we need to avoid mass non-compliance with the conditions of contracts, liability of suppliers and the lack of the goods, works and services required by customers.

4. A change in the procedure of applying penalty sanctions

Federal Law No. 98-FZ adds to the procedure of calculating late payment interest the option to calculate such interest not only based on the contract price, but also based on the price of a separate stage of the contract less the obligations performed under this stage. In addition, the law has extended the procedure of writing off penalties for 2015 and 2016 to penalties that were assessed in 2020.

In addition, with respect to the changes relating to liability for the non-performance of a contract, Letter No. 24-06-05/26578, 219-AG-70, МЕ/28039/20 of the Finance Ministry, Ministry of Emergencies and Federal Antimonopoly Service dated 3 April 2020 “On the position of the Finance Ministry, Ministry of Emergencies and Federal Antimonopoly Service on the purchases of goods, works and services for state and municipal needs in connection with the spread of the new coronavirus infection caused by 2019-nCoV” provides that, in the event of non-performance of a contract in connection with the spread of COVID-19, the supplier may refer to this circumstance as a ground for an exemption from a penalty (a fine or late payment interest) demanded by the customer.

The Draft Directives provide that penalty sanctions are not applied to suppliers when the latter are in breach of their obligations under contracts. By analogy with the above amendment relating to the possibility of changing the contract period and price, state companies will also have to conduct, within 10 days, meetings of boards of directors with respect to this issue (with representatives of the state having to vote in favour at these meetings).

5. Specifics of purchases being performed during the COVID-19 epidemic

Finally, on 6 April 2020 the Russian Government approved Resolution No. 443 dated 3 April 2020 “On the specifics of making purchases during the period when measures are being taken to ensure the sanitary and epidemiological welfare of the population in the Russian Federation in connection with the spread of the new coronavirus infection”, whereby, for the purposes of implementing the President’s Decree No. 239 dated 2 April 2020 in accordance with article 111 of Law No. 44-FZ, with respect to the period stated in clause 1 of the Decree from 4 to 30 April 2020 inclusive, the following specifics have been established with respect to purchases being made during the period when measures are being taken to ensure the sanitary and epidemiological welfare of the population of the Russian Federation in connection with the spread of COVID-19:

• the timeframes that are provided for by Law No. 44-FZ and regulations comprise only working days excluding Saturdays and Sundays;
• the last day of the period calculated under Law No. 44-FZ that falls on a non-working day as specified in clause 1 of the Decree must be moved only if it falls on a Saturday or Sunday. At the same time, the date for conducting electronic auctions under article 33(1)(8) of Law No. 44-FZ (with design documentation) is not to be moved;
• members of the commission may examine applications in a distant mode;
• customers are given the right not to draw up protocols of determining suppliers in hard copy. It would be sufficient to prepare a protocol in soft copy and sign it using the qualified digital signature of the customer’s representative;
• when sending a draft contract to the supplier for signing, the customer is permitted to extend the timeframe for performing obligations under the contract for a period not greater than the period specified in clause 1 of the Decree, i.e. not exceeding 27 calendar days.

WHAT TO THINK ABOUT AND WHAT TO DO

• Follow up on the measures being taken by the government and the changing regulations to remain good-faith market participants
• Avoid violations of antitrust legislation, take account of the most recent changes in the regulation when you participate in procurement procedures, including when you make purchases from a single supplier
• Assess the commercial decisions of the company involving the changes in contract prices and performance periods in terms of their being economically justified and compliant with legislation
• Pay special attention to how you build commercial relationships with SMEs when making purchases
• Consider taking other measures aimed at reducing risks of antitrust violations

HELP FROM YOUR ADVISER

Pepeliaev Group’s lawyers have significant experience of providing legal support to clients in the sphere of antitrust regulation including organising and making state and municipal purchases for Russian and foreign companies. Our lawyers will be happy to provide any legal support you need, including in terms of:

• analysing potential risks inherent in the company’s participation in the purchasing process
• developing strategies for companies’ efficient participation in purchases with an audit of the measures being taken for compliance with Law No. 44-FZ
• assessing the legitimacy of commercial decisions that are taken in connection with participation in purchases, as well as auditing the relevant documents with a view to preventing antitrust offences
• representing clients before the Federal Antimonopoly Service and courts in cases involving public procurement results being contested, persons being removed from the register of bad faith suppliers, and other offences.
• developing other measures aimed at mitigating the risks of antitrust offences.