Are the new EU sanctions on the contracting government a ‘Don’t buy Russian’ rule?

The European Union continues to impose new sanctions and export control restrictions linked to Russia, in response to the war in Ukraine (see our coverage here). The latest “fifth round” of restrictive measures imposed by Council Regulation (EU) 2022/576 (the Sanctions Regulations) entered into force on April 9, 2022 and, for the first time, also has a direct impact on public procurement.

Bans on Russian entrepreneurs

Article 5(k) of the sanctions regulation aims to prevent European tax money from going to Russian entrepreneurs. While other restrictive measures against Russia target specific persons, companies or industry sectors, Article 5(k) has a broader scope: it covers not only Russian companies and individuals in general, but also any company majority-owned by, or acting on behalf of or under the direction of a Russian company or individual.

As of April 9, 2022, contracting authorities will therefore no longer be able to:

  • award a public contract to persons, entities or bodies having a link with Russia within the meaning of Article 5 k) of the Sanctions Regulation; or
  • execute a previously awarded government contract. However, there is a grace period until October 10, 2022.

National authorities may grant individual derogations from this prohibition for a limited number of tenders described in Article 5k(2), for example for the supply of strictly necessary goods or services or the purchase, importing or transporting natural gas and oil.

Bans on Russian subcontractors, suppliers and other parts of the supply chain

Section 5k) goes even further. It not only prohibits the direct bidder or contract partner from having a connection with Russia, but also covers subcontractors, suppliers or entities whose capabilities are relied upon – in each case, provided they represent more than 10 % of contract value.

Public contractors should therefore carefully examine their supply chain to determine whether any of their subcontractors, suppliers or entities whose capabilities they rely on in public tenders may be Russian or controlled entities. Russian. And if the answer is yes, government contractors must determine if any of these companies are contributing more than 10% of the value of the relevant contract.

A few questions remain:

  • Should a public contractor only examine its direct suppliers and subcontractors or does the exclusion provided for in Article 5k also extend to suppliers and subcontractors further down the supply chain?
  • And is the 10% threshold calculated individually by supplier and subcontractor or cumulatively between all the parties concerned?

The European Commission having adopted a proposal for Corporate Sustainability Due Diligence Directive of February 23, 2022 and the German Business Due Diligence Act in Supply Chains taking effect on January 1, 2023, discussions on supply chain due diligence are gaining momentum. A diligent entrepreneur may therefore already have begun to assess and monitor their supply chain and can now benefit from careful preparation.

Impact on ongoing tenders

In ongoing tenders, tenderers can expect contracting authorities to require confirmation that the tenderer and its supply chain comply with Article 5k) of the Sanctions Regulation. Failure to do so will likely be grounds for disqualification and, if there has been a misrepresentation, may also jeopardize a bidder’s ability to participate in future tenders.

It will depend on the actual phase of the tender, the general situation of the tenderer and the applicable procurement rules if a tenderer is able to replace any of its subcontractors, suppliers or entity of which it uses short-term capacity.

Impact on existing government contracts

Government contracts already awarded on or before April 9, 2022 can continue to be performed until October 10, 2022. And we would say that in general either party can continue to require performance until this date.

Contractors can expect their government clients to send them a request for confirmation of compliance with Section 5(k) of the Sanctions Regulations. In the absence of a request for specific information, the question arises whether a contractor is required to proactively disclose any links with Russian companies and entities falling within the scope of Article 5k) of the Regulation on penalties. This obligation is not expressly set out in the Sanctions Regulation and it could be argued that it only applies to contracting authorities, not to individual bidders.

If a public contract is to be terminated by October 10, 2022, a number of civil law issues regarding liability, damages and termination rights will arise and will need to be assessed on a case by case. In this context, Article 11 of the Sanctions Regulations largely excludes claims for damages from Russian persons, entities or agencies.

What to do next

  • Businesses relying on government contracts should carefully consider their supply chain and business partners to determine whether there is a risk of falling within the scope of Article 5k) of the Regulation on penalties.
  • In ongoing calls for tenders, bidders will have to assess whether it is possible to replace the supplier or subcontractor concerned within the often ambitious deadlines of a public call for tenders and in accordance with the applicable procurement rules. . Otherwise, tenderers will have no choice but to withdraw from the invitation to tender, unless they benefit from an exemption under Article 5k(2) of the penalty regulations.
  • For contracts already awarded, contractors will need to consider what the grace period until October 10, 2022 means for their performance. Will they be able to complete the contract before this deadline? If not, what are their contractual responsibilities vis-à-vis suppliers and subcontractors? Do they share the risk that the government contract will not be performed and can the agreements be terminated in time?
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