The public procurement monitoring procedure carried out by the State Audit Service of Ukraine (SASU) and its territorial bodies is increasingly becoming the basis for court disputes, and its results can lead to serious legal and financial consequences for customers and participants of public procurement.
In recent years, the vector of judicial practice of the Supreme Court in reviewing disputes over challenging the results of monitoring has also changed, significantly strengthening the position of the regulatory authority and raising the stakes for business. While previously the courts often recognized auditors' demands to terminate already concluded contracts as excessive and disproportionate, today the judiciary increasingly sides with the State Audit Service of Ukraine (SASU), proceeding from the priority of strict compliance with the legality of the procurement procedure.
The purpose of this article is a comprehensive analysis of the risks associated with SSAU monitoring. The article will examine in detail the monitoring mechanism, analyze changes regarding the appeal of SSAU conclusions, and highlight the negative consequences of a lost dispute—the invalidation of the contract and the application of mutual restitution, which may mean for the supplier the obligation to return all funds received under the contract, even if it was fully and properly executed.
What is monitoring and who conducts it
Monitoring of a procurement procedure is the analysis of the procurement entity's compliance with the legislation in the field of public procurement, which is carried out by the State Audit Service of Ukraine and its interregional territorial bodies. This control covers the entire procurement cycle: from its conduct and the conclusion of the contract and during the validity of such a contract.
The legal basis for conducting monitoring is Article 8 of the Law of Ukraine “On Public Procurement” dated December 25, 2015, No. 922-VIII (hereinafter referred to as Law No. 922-VIII). The decision to initiate monitoring is made by the management of the State Audit Service of Ukraine (SASU) body in the presence of one or more grounds, which include: data from automatic risk indicators in the electronic procurement system;
information from state authorities, People's Deputies of Ukraine, local government
self-government on the presence of signs of violations; reports in the mass media
information; signs of violations detected by the SASU itself in the information published in electronic procurement system, as well as information from public associations by results of public monitoring.
Throughout the monitoring, the auditors have the right to send requests to the customer for explanations and documents, to which the customer is obliged to respond within three working days.
State Audit Service conclusion based on the monitoring results
Based on the monitoring results, a conclusion is drawn, which is a key document recording the results of the inspection. This document is an act of individual action that can be challenged only in an administrative court. The conclusion can state either the absence of violations or their presence. In the second case, pursuant to Article 8 of Law No. 922-VIII, it necessarily contains a description of the detected violations and an obligation to remedy them. It is precisely the wording of this obligation that is critically important, as it determines the future fate of the procurement and the concluded contract. Most often, the State Audit Service of Ukraine puts forward one of the following requirements:
- Cancellation of the tender. This requirement applies if the procurement procedure has not yet been completed and the contract has not been concluded. The State Audit Service of Ukraine (SASU) may oblige the customer to cancel the tender. The grounds for such cancellation are defined in Article 32 of Law No. 922-VIII if the identified violations cannot be eliminated.
- Termination of the contract. This is the most common requirement in cases where the contract following the procedure has already been concluded. Usually, the wording sounds like: “carry out measures to eliminate the identified violations... by terminating the contract... compliance with the provisions of the Civil Code of Ukraine”.
- Termination of obligations with the application of the consequences of invalidity/nullity. With such wording, the State Audit Service does not simply propose terminating contractual relations, but in fact directly points to their legal defectiveness from the moment of conclusion.
Precisely the last two formulations of violation remedies given in the conclusion become the subjects of dispute and may subsequently have negative consequences for both the customer and the tender winner.
Challenging the conclusion in court and changing the vector of the Supreme Court's practice
Procedural aspects of appealing
The customer, disagreeing with the conclusion of the State Audit Service of Ukraine (SASU), has the right to appeal it to an administrative court within 10 working days from the date of its publication in the electronic procurement system; such a right is provided for by Part 10 of Article 8 of Law No. 922-VIII. As we can see, the deadline for appeal is quite limited, but when preparing a claim, the customer must take into account quite a few points. Since the SASU conclusion and the court decision based on the results of its appeal directly affect the rights and obligations of the bidding winner (in particular, the future fate of the contract concluded with them), involving them in the consideration of the dispute is extremely important, and failure to involve them is a gross violation of procedural rights and an unconditional ground for overturning court decisions and sending the case for a new trial.
Previous practice: priority of the principle of proportionality
Until recently, judicial practice, including at the level of the Supreme Court (hereinafter – the SC), tended to protect the stability of economic turnover and the rights of the bona fide winner. Courts frequently overturned the conclusions of the State Audit Service of Ukraine (SASU), especially regarding the requirement to terminate the contract, guided by the principle of proportionality enshrined in Article 2 of the Code of Administrative Procedure of Ukraine (hereinafter – the CAP of Ukraine). The main arguments of the courts in relevant decisions were as follows:
- Disproportionality of the measure: The requirement to terminate a contract that has already been partially or fully performed is an excessive response measure, disproportionate to the procedural violation committed, especially if it was of a formal nature.
- Lack of grounds in civil legislation: The conclusion of the State Audit Service of Ukraine in itself is not a ground for terminating the contract provided for by the Civil Code of Ukraine.
- Vagueness of the requirement: The obligation to “terminate the obligation with the application of the consequences of invalidity” is vague and unspecific, which violates the requirements for an individual act.
An example of such an approach is case no. 380/10533/22. In this case, in its ruling, the Supreme Court supported the position of the lower instances that it is necessary to take into account the principle of proportionality of the consequences of such a measure to the violations detected and the risks they create, as well as the observance of a fair balance between the interests of business entities, the direct recipients of the procured services (which in this case are patients undergoing inpatient treatment) and public interests. At the same time, the defendant's demand to oblige the customer to take measures to terminate the contract concluded based on the results of the tender, according to the courts of both instances, is not aimed at achieving a legitimate aim and is not proportionate to it.
In case No. 480/1380/21, the Supreme Court supported the customer, pointing out that the State Audit Service of Ukraine (SASU) assessed the participant's documents with excessive formality and the requirement to terminate the contract is disproportionate. A clear example of the importance of compliance with the principle of proportionality is the resolution dated January 21, 2021, in case No. 120/1297/20-a, where the Supreme Court pointed out the need to take into account the principle of proportionality and commensurability, and noted that the elimination of deficiencies in the drafting of tender documentation identified during the procurement monitoring in the manner proposed in the contested conclusion, namely by terminating the supply contract, will lead to a violation of the rights and interests of a third party and will have negative consequences for the plaintiff's reputation, which is disproportionate in relation to the identified deficiencies.
Regarding the importance of specifying the method for remedying violations, the Supreme Court emphasized in its ruling of May 4, 2023, in case No. 160/5890/22. Based on the results of this case, the Supreme Court focused on the fact that indicating in the operative part of the disputed conclusion the requirement to take measures to eliminate the identified violations by terminating obligations under the contract, including through the application of the relevant consequences of the invalidity/nullity of the contract, indicates its lack of clarity and certainty. The Court emphasized the prior established legal position that the possibility of eliminating the identified violations directly depends on the clear definition by the authority of a specific measure (option of conduct) that should be taken by the authorized person of the customer to eliminate the violations. Forcing the plaintiff to independently determine, based on vague norms, what specific measures need to be taken to eliminate the identified violations, in turn, may lead to a new potential violation of current legislation by the plaintiff.
New practice: the primacy of the rule of law
However, gradually over recent years, there has been a shift in the vector of judicial practice.
The Supreme Court changed its approach, prioritizing the principle of legality of the procurement procedure.
The logic of the courts is now stricter and more formalized: if a violation was committed during the procurement procedure that required the rejection of the future winner's tender offer, then such a participant could not become the winner, and the contract with them should not have been concluded.
The key thesis of this approach is: “In case of compliance with the requirements Law No. 922-VIII the relationship between the procurement winner and the customer would not have arisen at all and the contract about the procurement would not have been concluded. Accordingly, the State Audit Service's requirement to terminate or cancel such a contract is viewed as a lawful way to “restore the parties to their original state” and rectify the unlawful situation.
This approach is illustrated by a number of recent Supreme Court decisions:
Case No. 160/5101/22: The Supreme Court supported the State Audit Service of Ukraine, noting that the non-compliance of the winner's tender offer with qualification criteria is an imperative ground for its rejection. Since the customer failed to do this, the conclusion of the contract was unlawful, and the demand for its termination was legal.
Case No. 420/4661/23: The court recognized that the absence of a qualified electronic signature (QES) in a tender bid where it was required is not a formal, but a material non-compliance. This obligated the customer to reject the bid, and therefore the demand of the State Audit Service of Ukraine to terminate obligations under such a contract is lawful.
Case No. 160/9478/21: The Supreme Court agreed with the auditors that the participant, who failed to provide a license for fire protection works and did not confirm experience in executing two separate analogous contracts, should have been rejected. Accordingly, the demand to terminate the contract concluded with them is justified.
Case No. 160/19784/22: The Supreme Court concluded that the state financial control body, taking into account the nature of the established violations—the existence of which made it impossible to conduct the public procurement procedure and conclude the contract with the specified participant—by choosing as a method to eliminate the violations detected through monitoring the obligation, in accordance with the provisions of the Civil and Commercial Codes of Ukraine, to terminate the contract or take actions to terminate its validity, sufficiently specified the exact measures the plaintiff must take, which indicates its clarity and definiteness, and the method itself is proportional to the committed violation. As recent practice shows, the courts have effectively stopped weighing the “gravity” of the violation.
Instead, a simpler approach is applied: if there was a violation which, pursuant to Article 31 of Law No. 922-VIII, required the rejection of the bid, then all subsequent actions (recognition as the winner, conclusion of the contract) are considered illegal, and the demand of the State Audit Service of Ukraine to terminate the contract is a legitimate way to rectify the situation.
This shift in judicial practice significantly changes the risk allocation in public procurement.
Now the risk of the customer's errors during proposal evaluation has effectively been shifted to the winner of the procedure. Even if the participant acted in good faith, submitted an impeccable proposal, and was unaware of the customer's errors, or if the participant made some formal or certain technical errors, an already concluded and possibly executed contract may be terminated. This creates significant legal uncertainty for business and requires participants not only to prepare their own documents perfectly, but also to closely monitor all actions of the customer throughout the procedure.
Consequences of a lost dispute: commercial court, contract invalidity, and restitution
If the customer did not appeal the SNAC conclusion or lost the case in the administrative court, but still failed to fulfill the requirement to terminate the contract, a chain reaction is triggered. The SNAC or the prosecutor's office, acting in the interests of the state, files a claim with the commercial court. As judicial practice shows, such claims are most often filed by prosecutor's office bodies. In most cases, the subject of such a dispute is a demand to invalidate the contract and recover funds.
At the same time, the conclusion of the State Audit Service, which has entered into legal force, becomes weighty evidence in a commercial case, but not decisive. An analysis of judicial practice shows that in this category of cases, the Supreme Court adheres to the legal position that, when deciding on the possibility of satisfying such a claim, the court, taking into account the specific circumstances of the case, must determine the effectiveness of the method of protection chosen by the plaintiff—to determine the consequences of declaring the contract invalid for the state in whose interests the prosecutor filed the claim, to ascertain how the rights of the state as a plaintiff will be restored, in particular, the possibility of conducting bilateral restitution, the possibility of re-procuring goods (works, services) if the defendant returns the funds, the necessity of compensating the other party to the transaction for the value of the goods (works, services) or losses (for example, the Supreme Court resolution of May 26, 2023, No. 905/77/21). The Grand Chamber of the Supreme Court in the resolution of September 18, 2024, in case No. 918/1043/21, indicated that in the event of the invalidity of a transaction, the mutual return by the parties of what was received under it (bilateral restitution) is a legal obligation arising from the law and the legal fact of the invalidity of the transaction.
Therefore, given the mandatory application of bilateral restitution, the courts must assess the specific circumstances of the case and decide whether invalidating the contract will help protect the rights of the state.
The most negative consequence of recognizing a contract as invalid (null and void) is the application of bilateral restitution provided for in Article 216 of the Civil Code of Ukraine. Bilateral restitution consists in the fact that each of the parties must return to the other in kind everything that she received under an invalid transaction. If such a return is impossible (for example, the works have already been performed, services rendered, or goods consumed), the party is obliged to reimburse the value of what was received at the prices existing at the time of reimbursement.
For business, this means a financial risk. A supplier who has conscientiously delivered goods or performed work and received payment for it may be required to return the entire amount received to the budget. Although theoretically the customer must return the goods, in practice this is often impossible, which leads to lengthy and complex disputes regarding valuation and offsets. However, in such a case, financial risks also arise for the state.
The paradox of restitution: protecting the rule of law at the cost of budget losses?
At first glance, the goal of the state, represented by the prosecutor's office or the State Audit Service, when it demands that a contract be declared invalid, is justified and understandable—the protection of the public interest and the prevention of the improper expenditure of budget funds. However, in practice, the main consequence of such a declaration—two-way restitution—can lead to the exact opposite result, creating a paradoxical situation where the fight for economy turns into even greater losses for the budget.
As an example, let us consider a typical scenario for an already executed contract. The supplier returns all received funds to the budget. In turn, the customer (a state authority or local self-government body) is obliged to return the received goods, works, or services.
Since it is impossible to return consumed goods, completed works (for example, road repairs), or provided services in kind, the customer must reimburse their value at current market prices. As a result, a number of negative consequences arise for the budget: from double expenditures to a new procurement.
Thus, the formal restoration of procedural legality through the invalidation of a contract may in practice cause significantly greater financial damage to the budget than the one that was sought to be prevented. This aspect creates an obvious contradiction between the principles of legality and the maximum economy and efficiency of public funds. Judicial practice, which increasingly leans toward the priority of formal legality, leaves this issue open, shifting the negative economic consequences onto the parties to the procurement.
Conclusions and recommendations
An analysis of current practice in disputes with the State Audit Service of Ukraine (SASU) shows that the priority of judicial practice has shifted from a flexible assessment of the “proportionality” of a violation to a formalistic approach regarding the “legality” of the procedure. SASU monitoring is effectively aimed at auditing procedural purity rather than economic efficiency or performance quality.
Therefore, our recommendations to minimize the negative consequences of the results monitoring:
For procurement entities:
- Maximum attention to detail: carefully check every stage of procurement – from drafting tender documentation to evaluating proposals – for compliance with the mandatory requirements of Law No. 922-VIII.
- Do not ignore the conclusions of the State Audit Service of Ukraine (SASU): upon receiving a conclusion with identified violations, it is necessary to immediately conduct an in-depth legal analysis of it and make a strategic decision regarding the advisability and prospects of its judicial appeal.
For procurement participants:
- Careful preparation of the proposal: every requirement of the tender documentation must be fulfilled literally. As practice shows, there are no minor mistakes, and any non-compliance that serves as a ground for rejection under Law No. 922-VIII may result in the termination or invalidation of the contract.
- Active participation in defense: in the event that the customer appeals the conclusion of the State Audit Service of Ukraine (SASU), entering the case as a third party is not just a right, but a necessity to protect one's interests and the concluded contract.
- Procedural and legal audit before contract conclusion: before signing a contract, especially in large and complex procurements, it is advisable to conduct your own assessment of risks associated with the customer's actions during the procedure, since it is ultimately the winner who bears the greater risk of financial losses.
Ultimately, we want to emphasize that successful participation in public procurement requires businesses not only to have a competitive price and a quality product, but also a deep understanding of the procedural and legal nuances of government procurement.
Source: LIGA ZAKON
