Alternative Penalties

Alternative penalties are the "second-best" sanction in the European public procurement remedies framework. They sit below the full sanction of declaration of ineffectiveness and are applied when a review body determines that voiding the contract would cause disproportionate harm to the public interest but the contracting authority's breach is nonetheless serious enough to warrant a formal penalty.

What are Alternative Penalties?

Article 2e of the Remedies Directive (2007/66/EC) permits (and in some circumstances requires) review bodies to impose alternative penalties when the conditions for ineffectiveness are met but overriding public interest reasons justify maintaining the contract. The directive specifies two forms of alternative penalty:

1. A financial penalty imposed on the contracting authority. The directive does not set the amount, leaving member states to determine the applicable fine levels. In practice, fine amounts vary widely across Europe: some jurisdictions set maxima as a percentage of the contract value; others use fixed tariffs or give courts broad discretion.

1. A shortening of the contract duration. The review body may order that the contract terminate earlier than its original end date, depriving the authority and its supplier of some of the benefit of the unlawfully awarded contract.

Both penalties may be imposed simultaneously, or separately, depending on the national implementing rules. The choice between ineffectiveness and alternative penalties involves a balancing exercise: the review body must weigh the severity of the breach and its impact on competition against the consequences of voiding a contract that may be partially performed, that provides essential public services, or that affects third parties who relied on it in good faith.

National implementing rules vary in how they define the "overriding public interest" threshold. Courts in some jurisdictions have set this bar very high, making ineffectiveness the norm and alternative penalties the exception. Others have taken a more pragmatic approach, particularly where contracts involve essential infrastructure or social services.

Why Alternative Penalties Matter for Bidders

For a bidder challenging a serious procurement breach, alternative penalties represent a compromise outcome. The contract is not voided, but the contracting authority is penalised and the challenger may receive some acknowledgment that the process was unlawful. This may or may not be commercially meaningful depending on the bidder's objectives.

Where the primary goal is to participate in a fresh procurement (because the original was never advertised), a financial fine on the authority and a shortened contract term are less useful than ineffectiveness. However, they at least create a record of the breach and may deter future unlawful direct awards.

Bidders bringing proceedings should always claim both ineffectiveness and, in the alternative, alternative penalties. This preserves all options if the court finds ineffectiveness disproportionate.

Example

A Romanian regional authority awards a social housing construction contract directly to a preferred company without publication. A construction company challenges, seeking declaration of ineffectiveness. The court finds the direct award was unlawful but also finds that 40% of the housing units are already built and occupied. Voiding the contract would require unwinding completed works, causing significant hardship to residents. The court applies alternative penalties: a fine of 5% of the contract value and a shortening of the contract by one year for the remaining maintenance phase.

Frequently Asked Questions

Who receives the financial penalty from alternative penalties?

The fine is typically paid to the state (the national treasury or a public fund) rather than to the challenging tenderer. This is different from a damages claim, which compensates the claimant for their specific loss. Alternative penalties are a public law sanction, not compensation.

Can a challenger receive both alternative penalties on the authority and their own damages claim?

Yes, in principle. Alternative penalties are a sanction on the contracting authority. A separate damages claim (procurement) brought by the challenger compensates the challenger for their loss. The two proceedings may run in parallel or sequentially depending on national procedural rules. The existence of a penalty does not reduce the damages the challenger may be entitled to claim.

Does the winning supplier lose the contract when alternative penalties are imposed?

Not necessarily. The contract continues (that is the whole point of applying alternative penalties rather than ineffectiveness). The winning supplier retains the benefit of the contract, though they may face a shorter term if that penalty is imposed. The supplier may, however, face a counterclaim from the contracting authority if the authority subsequently seeks to recover the penalty amount indirectly.