A case from Supreme Administrative Court in Finland KHO 2016:182
The tension between centralization, large framework agreements and the competition principle has as of lately been increasingly discussed by academics, but also by national legislators. The new Procurement Directive 2014/24 aims, among other objectives, to enhance SME participation in public tenders by setting out rules on the division into lots. These issues have not yet been directly addressed in the Court of Justice case law. Nevertheless, in the recent ruling KHO 2016:182, the Finnish Supreme Administrative Court (korkein hallinto-oikeus) enforced the principle that “[f]ramework agreements should not be used improperly or in such a way as to prevent, restrict or distort competition”, which is codified in s.31(2) of the current Finnish Act on Public Contracts (laki julkisista hankinnoista 2007/348) and included in the recital (61) of Directive 2014/24. In this regard, the Supreme Administrative Court found that the decision to award “too-large” a framework agreement for health care and hospital supplies created barriers to bidding for most undertakings and was unduly restricting competition. It thus cancelled the decision (for those readers who can read either Finnish or Swedish, you can reach the case in Finnish and in Swedish).
This case, regardless of being handled in one of the smallest EU member states by population and with a language regime not easily accessible for others, has created a lot of discussion among practitioners and academics alike. Therefore, Albert kindly asked me to shed some light on this case, where the competition principle has finally broken into the Finnish public procurement law regime and decreased contracting authority’s level of discretion regarding the terms of a competition-restrictive public tender [for which he has been constantly arguing, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 355 and ff, specifically on framework agreements].
TENDER PROCEDURE
In the case at hand, KL-Kuntahankinnat Oy, a central purchasing body for Finnish municipalities, run, on behalf of a hospital district and three municipalities, a framework agreement award procedure on health care and hospital supplies of 12 different product categories including stock-management and home delivery services. According to the terms of the call for tenders, other clients of KL-Kuntahankinnat Oy could also participate in the framework agreement at a later stage. The list of potential “other clients” of KL-Kuntahankinnat Oy was rather vast, and it included, among others, all Finnish municipalities. The framework agreement envisaged term was of four years.
The bidders could not tender for separate lots, but were rather required to submit a full-scale bid covering stock-management and home delivery services and all 12 product categories with a minimum of 5,000 items. As a cherry on top, this framework agreement on all possible health care and hospital supplies (and with the potential to have all Finnish municipalities or hospital districts as clients) was going to be awarded only to a single economic operator. In short, then, the framework agreement was bound to create a funnel for all hospital and health care supplies to be concentrated on a single supplier for a period of 4 years.
When submitting their bids, bidders were to provide two references on contracts of similar nature for the past three years. Both of these references were required to include products of at least eight of the 12 product categories included in the current contract award. Additionally, one of these references was required to include stock-management services. It soon emerged that the requirement of references that would cover eight categories could not be met by most of the potentially interested bidders. A majority of potential bidders only operated within one, two or maximum three product categories. As a result, these reference requirements led to the exclusion of all bidders except for two wholesale distributors of health care supplies.
MARKET COURT (FIRST INSTANCE)
Four bidders excluded from the contract award procedure initiated judicial proceedings in the Finnish Market Court arguing that the central purchasing body KL-Kuntahankinnat Oy had not only breached the principle of non-discrimination but also unduly restricted competition. The Market Court rejected the claims and considered that the central purchasing body had discretion over the product categories to be included in the framework agreement, as well as on whether or not to divide the contract into lots. In accordance with the arguments presented by the central purchasing body, the Market Court accepted that any economic operator had a chance to build consortiums or arrange for the coverage of missing product categories through sub-contracting. In addition, the Market Court did not find the reference requirements disproportionate, given the account the value and extent of the framework agreement.
SUPREME ADMINISTRATIVE COURT
The four companies appealed against the Market Court’s decision to the Finnish Supreme Administrative Court. They argued that KL-Kuntahankinnat Oy’s tender procedure and the ensuing framework agreement discriminated (ie de fact excluded) all economic operators other than wholesale distributors, and that this led to an undue restriction of competition.
In the joint appeal of Bayer Oy, Coloplast Oy, Oy SCA Hygiene Products Ab and Steripolar Oy, these companies submitted that the 5,000 products included in the framework did not form a coherent subject matter of a contract. The new agreement was significantly broader than any earlier framework agreement, combining products that previously were purchased through 10 different contracts or framework arrangements. Consequently, only two wholesale distributors had a true chance even to submit a bid in compliance with the rules set out in the call for tenders. The other bidders had no chance to succeed as there was no possibility to tender for separate lots.
The companies emphasized that the arguments presented by the contracting authority on the possibility to build consortiums or resort to sub-contracting in order to fulfill requirements were not reasonable or feasible, as it would have required a co-operation of 10-12 different companies or with the wholesale distributors themselves. Establishing a large consortium with both multinational companies and SMEs would have required a lot of time, money and effort, but also a common IT-system, customer service function and logistics.
1. The need to identify the users of the framework agreement
The Supreme Administrative Court stated that a contracting authority has an obligation to provide adequate information on the contract to be awarded already in the contract notice. By reserving a possibility for any other Finnish municipality and other contracting authorities to enter into the framework agreement at a later stage, the central purchasing body had breached the principle of openness and transparency by failing to provide adequate information on the scope of the framework agreement in question.
2. Restriction of Competition
The central purchasing body, KL-Kuntahankinnat Oy, argued in the Supreme Administrative Court that it had defined the scope of the framework agreement based on the needs of its clients. The award of the whole framework agreement to a single provider was considered to be the most economically advantageous alternative. The central purchasing body objected the claims on undue restriction of competition emphasizing that it had informed the potential bidders of the terms of the contract award in advance and encouraged them to establish consortia or sub-contracting arrangements in order to meet the requirements included in the call for tenders.
The Court did not support such views and stated that the scope of contract and the requirement of a common IT-system, logistics and customer service, was too extensive to ensure equal opportunities of economic operators to offer supplies and services. Consequently the requirements set out in the call for tenders had led to an undue restriction of competition. According to the Court, the possibility to rely on the capacities of others did not remove the discriminatory, disproportionate and competition restrictive features of the tender procedure. These negative effects of the framework agreement with a single provider were considered especially severe due to the length of the contract term of four years.
CONCLUDING REMARKS
The Supreme Administrative Court’s ruling on the relation of the competition principle and large framework agreements will surely give a lot of food for thought, especially within central purchasing bodies and large volume contracting authorities. It is still a reality that foreign undertakings rarely submit bids called by Finnish contracting authorities. Regardless of the rules applied to the single market, in a rather small market at the North-East border of Europe, the relevant market is often in practice equivalent to the domestic market. Hence, the consequences of closing the Finnish market for four years could likely lead to closing down businesses and market exit by a number of economic operators. This can hardly be seen as the most economically advantageous solution for any society.
The Supreme Administrative Court’s ruling must therefore be praised, not only from a competition perspective, but also for enhancing transparency by setting rules on the identification of the actual users of the framework agreements. This is necessary in order to avoid framework agreements that could potentially be used by any public authority within any member state, bearing in mind that the amount of large framework agreements are likely to increase in the future as Directive 2014/24 sets out a possibility to purchase through any central purchasing body situated in any member state.
The author of this post, Dr. Kirsi-Maria Halonen holds a Ph.D. in Public Procurement Law and is currently working as a University Lecturer in Commercial Law at the University of Lapland, Finland. Her Ph.D. dissertation concerned the consequences of contractual ineffectiveness of a public contract between contracting parties. She is a member of the European Procurement Law Group (EPLG), the President of Finnish Public Procurement Association and an editorial board member of the Swedish Public Procurement Law Journal (Upphandlingsrättslig tidskrift, UrT) and a Finnish law journal on commercial law, Liikejuridiikka.
In addition to public procurement law, Kirsi-Maria is interested in contract law, tort law, corruption and transparency matters as well as state aid rules. She is the author of several articles (both in English and in Finnish) and a few books (in Finnish). Currently she is working in a research project for the Swedish Competition Authority (Konkurrensverket) on separate operational units within contracting authorities. Below some selected publications in English by the author:
K-M.Halonen, Disclosure Rules In EU Public Procurement – Balancing Between Competition and Transparency, the Journal of Public Procurement, Vol. 16, Number 4, Winter 2016, pp. 528–553.
K-M.Halonen, Is the remedy of contractual ineffectiveness truly effective in Finland? EPPPL - European Procurement & Public Private Partnership Law Review 4/2015, pp. 310–315.
K-M.Halonen, The liability of a contracting authority for an infringement of public procurement rules leading to a contract’s ineffectiveness- A Finnish approach, Upphandlingsrättslig tidskrift (UrT) 3/2015, 227–245.
K-M.Halonen, Shielding Against Damages for Ineffectiveness: The Limitations of Liability Available for Contracting Authorities - A Finnish Approach. Public Procurement Law Review (P.P.L.R.) 2015, 4, 111-121.
* Guest blogging at HTCAN: If you would like to contribute a blog post for How to Crack a Nut, please feel free to get in touch at a.sanchez-graells@bristol.ac.uk. Your proposals and contributions will be most warmly welcomed!