The Remedy of Damages in Public Procurement in Israel and the EU: A Proposal for Reform

Abstract

Damages are formally part of the arsenal of remedies that an aggrieved bidder in a public procurement procedure may use in most jurisdictions, such as the EU, the US and Israel. It is also required by the WTO Agreement on Government Procurement. This remedy could have a critical role to play both in the encouragement of potential suppliers to invest in participation in the tender, as well as in curtailing and deterring improper or corrupt behavior by procuring agencies. However, in order for that to happen, the damages that are awarded must be effective and deterring. In spite of the great promise that such damages hold in encouraging greater competition in contracting and in reducing irregularity, the current rules that apply to the award of damages both in Israel and in the European Union have made this remedy ineffective and non-deterrent. After reviewing these rules and court rulings, this paper proposes changes aimed at improving the effectiveness of damages in public procurement so as to turn them into a deterrent factor in the fight against corruption and to contribute to the establishment of a more efficient and equitable procurement system. After discussing the rationales for awarding damages when procurement rules have been violated, we argue that when a material infringement of these rules have been proven, aggrieved bidders should be entitled to expectation damages, that is, pecuniary compensation assessed according to the lost profits. In order to overcome the difficulty of proving the causal link between the breach of the procurement rules and the plaintiff's loss of the contract, we propose to adopt an approach whereby damages are assessed based on the probability that the plaintiff's bid would have won the contract. In other words, the article advocates applying the approach of damage assessment based on probability, which until now has been considered and adopted by some jurisdiction mainly in contract and tort cases, also in public procurement cases. We also propose to reverse the burden of proof in this matter so as to create the proper incentive for the procuring agency to reveal all relevant information in court.

Keywords: public procurement, government contracting, remedies, damages, EU, Israel

JEL Classification: D73, H57, K23