CJEU backs automatic exclusion of tenderers that had relied on no longer qualified third parties (C-223/16)

In its Judgment of 14 September 2017 in Casertana Construzioni, C-223/16, EU:C:2017:685, the Court of Justice of the European Union (CJEU) has confirmed the legality of the automatic exclusion of an economic operator that had relied on the capacities of an auxiliary undertaking, where the latter lost the required qualifications after the submission of the tender. The CJEU has ruled that the relevant provisions of Directive 2004/18/EC (Arts 47(2) and 48(3)) did not preclude such automatic exclusion, and that they did not require offering the concerned tenderer the possibility to replace the now not-qualifying auxiliary undertaking.

In doing so, the CJEU has followed the Opinion of Advocate General Wahl (criticised here), and created a precedent that is at odds with the new rules in Directive 2014/24/EU (Art 63) and that raises new interpretive difficulties. This post will first rehearse the main reasons why AG Wahl's and now the CJEU's approach is criticisable. It will then look into the interpretive difficulties that can carry through to the interpretation of Article 63 of Directive 2014/24/EU.

Not necessarily a proportionate or pro-competitive approach

In a nutshell, the reasons given by the CJEU to accept the automatic exclusion of a tenderer that relied on the capacities of an auxiliary undertaking that disappear once the offer has been submitted are the same as those of AG Wahl, and are summarised by the CJEU as follows:

as the Advocate General observed ..., the possibility afforded, unpredictably, exclusively to a consortium of undertakings to replace a third-party undertaking which belongs to that consortium and has lost a qualification that is required in order not to be excluded would amount to a substantial change of the tender and the very identity of the consortium. Indeed, such a change of the tender would compel the contracting authority to carry out new checks whilst at the same time granting a competitive advantage to that consortium which might attempt to optimise its tender in order to deal better with its competitors’ tenders in the procurement procedure at issue.

Such a situation would be contrary to the principle of equal treatment which requires that tenderers be afforded equality of opportunity when formulating their bids and which implies that the bids of all tenderers must be subject to the same conditions, and would amount to a distortion of healthy and effective competition between undertakings participating in a public procurement procedure (C-223/16, paras 39-40, emphasis added).

This encapsulates three reasons: (i) discrimination because one consortium is given the opportunity and other tenderers are not, (ii) discrimination because the beneficiary consortium can substantially alter the terms of its tender, and (iii) additional work for the contracting authority. In my opinion, the first reason is spurious because the opportunity to substitute would only arise where a consortium is affected by the loss of qualification of one of its auxiliary undertakings and, barring a case where two or more competing consortia found themselves in that predicament, there is no discrimination for allowing substitutions on a need basis.

The second reason is equally unpersuasive, in particular because it conflates the strict issue of substitution of the member of a consortium with the separate problem of changes to the content of the tender. As I said in relation to AG Wahl's Opinion, provided that the way in which the contracting authority allowed for the substitution between third entities on which capacity the tenderer relied did not confer a competitive advantage to the tenderer, there can be good reasons to allow it. For example, if the application of the qualitative selection criteria did not involve a ranking, but was rather on a pass / no pass basis, and where the terms of the tender were not altered at all because the new entity simply stepped into the shoes of the no longer capable entity, there seems to be limited scope to consider that the tenderer derives a competitive advantage (for more details, see here). Thus, rather than excluding the possibility altogether, the CJEU could have imposed conditions to establish what is an acceptable substitution of auxiliary undertakings and what is not.

Finally, the point on additional checks being required from the contracting authority is relevant. However, rather than considering it a sufficient reason to prevent the substitution, a proportionality assessment would have seemed more appropriate. Given that the exclusion narrows down competition for the contract, the contracting authority should be able to demonstrate that there are sufficient administrative difficulties to justify proceeding this way.

Thus, in outline, I would have preferred that the CJEU departed from AG Wahl's Opinion and declared that the general principles of EU procurement law, and in particular the principle of proportionality coupled with the principle of competition, oppose the automatic exclusion of tenderers that have relied on the capacities of third parties that later lose them, unless the contracting authority can demonstrate that allowing for the substitution of the third party would either infringe the principles of equal treatment, non-discrimination and the obligation of transparency (eg in a situation where the qualitative selection criteria were not assessed on a pass/no pass basis), or would create a disproportionate administrative burden or delay in the conclusion of the procurement procedure. This could create closer functional compatibility in the case law on reliance on third parties and on subcontracting, which I think are currently at risk of imposing functionally incompatible interpretations of the relevant EU public procurement rules.

In my view, my preferred interpretation is encapsulated in Article 63(1) of Directive 2014/24/EU, in particular as read in the light of the principle of competition in Article 18(1) thereof [see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Hart, 2015) 315-318]. However, the Casertana Judgment may raise some questions around that approach, which requires some closer analysis.

New doubts concerning Article 63(1) of Directive 2014/24/EU

In the Casertana Construzioni Judgment, the CJEU follows its previous approach in Partner Apelski Dariusz (paras 82-94, see here) and the Opinion of AG Wahl and rejects both (i) the application of Article 63(1) of Directive 2014/24/EU to the case ratione temporis (which is uncontroversial, as the tender took place in 2013) and (ii) the possibility of interpreting the rules of Directive 2004/18/EC in light of Article 63(1) of Directive 2014/24/EU. Casertana reiterates the finding in Partner that Article 63(1) of Directive 2014/24/EU introduces 'substantial amendments as regards the right of an economic operator to rely on the capacities of other entities in the context of public contracts' (C-223/16, para 26) and is therefore not suitable as an interpretive tool in relation to Directive 2004/18/EC because the latter is not affected by 'problems of interpretation' (C-223/16, para 28). However, the case is not limited to ignore Article 63(1), but rather seems to consolidate a strict interpretation of this provision. Additionally, given the divergence between Article 63(1) of Directive 2014/24/EU and the Casertana Judgment, the latter creates a potential difficulty concerning the cut-off point at which the possibility to replace non-qualified third parties ends.

Seemingly too restrictive (implicit) interpretation of Article 63(1) of Directive 2014/24/EU

Both the Partner and Casertana cases stress that the new rules foresee that "Article 63(1) of Directive 2014/24 now provides that economic operators may ‘only rely on the capacities of other entities where the latter will perform the works or services for which these capacities are required’ ... and that ‘the contracting authority shall require that the economic operator replaces an entity which does not meet a relevant selection criterion, or in respect of which there are compulsory grounds for exclusion’" (C-223/16, para 25). The second part of this statement has been discussed above (and could have been reconciled with the pre-2014 rules by operation of the principle of proportionality). The first part of the statement is problematic. 

Indeed, this incipient consolidation of the rules in Article 63(1) could trigger difficulties because, according to its literal wording, the restriction of reliance on third parties where they will perform the work or services for which the capacities are required solely concern "criteria relating to the educational and professional qualifications as set out in point (f) of Annex XII Part II [ie the educational and professional qualifications of the service provider or contractor or those of the undertaking’s managerial staff, provided that they are not evaluated as an award criterion], or to the relevant professional experience" -- or, in other words, economic operators are allowed to rely on financial, economic and other types of professional qualifications of third parties even if those parties will not directly carry out the works. This comes to allow for consultancy and technical support contracts to back up the tenders of economic operators that may not have all those resources in-house and is generally pro-competitive. By adopting a blanket approach to the requirement of direct involvement in the execution of the contract beyond the limited remit established in Article 63(1) of Directive 2014/24/EU, a broad reading of the Casertana and Partner cases could deactivate large parts of the flexibility for the formation of consortia that are inherent to the system.

In the specific case of Casertana, all we know is that 

Casertana participated in the call for tenders within the framework of an ad hoc tendering consortium under formation, as lead company, and declared that it relied, as regards the qualifications required by [the applicable Italian rules], on those of two auxiliary undertakings, one being Consorzio Stabile GAP. 

In the course of the procedure and after the end of the stage of admission to the call for tenders, that auxiliary undertaking [is Consorzio Stabile GAP] lost qualification for the required category of services, thus becoming qualified for a lower category of services only (C-223/16, paras 11-12).

Put simply, it is not known why Consorzio Stabile GAP saw its qualification reduced for a lower category of services. If the reasons were not linked to the educational and professional qualifications of its managerial staff or the relevant professional experience of the undertaking, then an acritical application of the decision of the CJEU to the case would imply an unnecessary (and illegal) restriction of the flexibility foreseen in Article 63(1) of Directive 2014/24/EU.

Unresolved timing issues -- when does Article 63(1) of Directive 2014/24/EU stop applying?

In Casertana, the CJEU simply indicated that there is no requirement to give the tenderer an opportunity to substitute auxiliary undertakings that have lost the required qualifications after the tender has been submitted because that would amount to allowing for a substantial change of the tender (see above). It also indicated that tenderers could not claim force majeure (or, more generally, the unpredictability of the loss of qualification by the auxiliary undertaking) to gain such an opportunity to substitute them because, although the procurement rules enable "a tenderer to rely on the capacities of one or more third party entities in addition to its own capacities in order to fulfil the criteria set by a contracting authority, that tenderer remains responsible, in its capacity as the lead undertaking in a consortium of undertakings, for the compliance of those undertakings with the obligations and conditions for participation in the call for tenders laid down by the contracting authority in the documents relating to the procurement procedure at issue" (C-223/16, para 41). A question arises on how to interpret these two issues in situations where Article 63(1) of Directive 2014/24/EU is applicable.

Taking the second aspect first, it seems clear that under Article 63(1) of Directive 2014/24/EU, the responsibility for ensuring compliance with the selection criteria included in the call for tenders is shared between the lead undertaking and the contracting authority. In that regard, it is worth emphasising that the provision foresees that

The contracting authority shall ...verify whether the entities on whose capacity the economic operator intends to rely fulfil the relevant selection criteria and whether there are grounds for exclusion ... The contracting authority shall require that the economic operator replaces an entity which does not meet a relevant selection criterion, or in respect of which there are compulsory grounds for exclusion. The contracting authority may require or may be required by the Member State to require that the economic operator substitutes an entity in respect of which there are non-compulsory grounds for exclusion.

Given this wording, and in case the contracting authority issues a favourable opinion on the qualifications held by a given auxiliary undertaking (or fails to check them, as was the case in Casertana, where the loss of qualification was only raised in the context of a counter-claim against Casertana's challenge to the award of the contract to a different consortium), issues will arise concerning legitimate expectations, in particular concerning the ability to replace no loner qualifying third parties at any point of the procurement process, all the way through to award (including any litigation concerning findings of loss of compliance with selection criteria at tender evaluation stage). However, this would be in stark contrast with the first aspect of the Casertana Judgment, which considers a substitution of auxiliary undertaking an impermissible tender modification. Therefore, the question will arise whether Article 63(1) is applicable throughout the procurement procedure, or only up to the point of submission of tenders.

In my view, the answer to the question cannot be all-or-nothing (as has been the case in AG Wahl's Opinion and in the Judgment), but rather require an analysis of the terms of the substitution (if the new auxiliary undertaking simply assumes all obligations of the previous undertaking in the exact same conditions, where is the advantage?), as well as a proportionality assessment of any new verification work required from the contracting authority as a result of the substitution (in the Casertana case, the issue revolved around qualifications administered by a third party [ie a Certification Body], so it would have seemed rather easy to substitute auxiliary undertakings without requiring much from the contracting authority). Failing that, there is a risk of limiting Article 63(1) to a one-shot remedial opportunity restricted to the contracting authority's first assessment of the tenderer's (and its auxiliary's) compliance with exclusion and qualitative selection rules. Even if this would be an improvement over the 2004 system (in particular as interpreted in Casertana), it would fall short from the flexibility that can be derived from a broader and more dynamic reading of Article 63(1) of Directive 2014/24/EU.

ECJ allows contracting authorities to require performance bonds as selection criteria (C-76/16)

In its Judgment of 13 July 2017 in INGSTEEL and Metrostav, C-76/16, EU:C:2017:549, the European Court of Justice (ECJ) has followed the Opinion of AG Campos (discussed here) and accepted the use of financial guarantees (performance bonds) as economic selection criteria rather than as contract compliance clauses (which was the Commission's approach). The ECJ has also set some minimum requirements of proportionality in their assessment. The Judgment is based on the 2004 public procurement rules, but will be relevant in the context of the 2014 Directive as well.

In the case at hand, the tender documentation “required the participants in the tendering procedure to provide a statement from a Slovak bank or a Slovak branch office of a foreign bank confirming that it would grant them credit in the amount of at least EUR 3 000 000, a sum which should be available to them throughout the entire duration of the contract. That statement was to be in the form of a loan agreement or credit facility agreement and have been given by a person authorised to commit the bank in question” (C-76/16, para 16, please note that the description is not entirely coincidental with that of the AG Opinion, which did not refer to a 'loan agreement or credit facility', but rather to a 'guarantee ... to ensure performance of the contract'; however, the issue of the legal nature of the requirement may not have played a significant role in the ECJ's decision).

The disappointed tenderer did not provide such a bank statement, but rather "a statement, given by a bank, which contained information on the opening of a current-account credit facility for an amount exceeding EUR 5 000 000, and a sworn statement from the tenderer certifying that, if its bid was successful, it would have available in its current account, at the time of conclusion of the contract for works and throughout the period of performance of the contract, a minimum amount of EUR 3 000 000" (C-76/16, para 17).

The difference in the content of the bank statements is important because the core of the issue was that, as argued by the disappointed tenderer, it would have been "objectively impossible for it to satisfy the requirements relating to economic and financial standing set by the contracting authority in any other way, drawing on statements made by Slovak banks questioned by the latter to the effect that a binding undertaking to grant credit, such as that required by the contract notice, could be issued only after approval of the transaction covered by the credit and satisfaction of all the requirements laid down by the bank for the conclusion of a loan agreement" (C-76/16, para 18).

Taking the view that the unsuccessful tenderer had not satisfied the economic and financial standing requirements, the contracting authority decided to exclude it from the tendering procedure. The rejection was eventually challenged before the Supreme Court of the Slovak Republic, and the preliminary reference to the ECJ derives from a procedure mainly aimed at assessing (i) whether the contracting authority could introduce this requirement in compliance with the rules on economic and financial standing (Art 47(1)(a) and (4) Dir 2004/18); and (ii) whether the contracting authority should have accepted the documentation as alternative to the specified bank certificate (Art 47(5) Dir 2004/18). Only the first point deserves analysis, as the ECJ has left the second point completely open and referred it back for assessment by the domestic court.

It is also worth stressing that the Commission had challenged the approach of assessing performance bond requirements as selection criteria and submitted that: (i) the requirement for financial guarantees that had to be effective post-award should be assessed as a contract compliance clause under Art 26 Dir 2004/18 and, further, (ii) that given that such provision does not exhaustively govern the special conditions for performance, those conditions may be assessed in accordance with primary EU law. AG Campos rejected the Commission's approach and invited the ECJ to assess the requirement in the framework of economic selection criteria. The ECJ has now followed that approach and, after reiterating its case law on the setting of economic and financial selection criteria and the discretion that contracting authorities enjoy to that effect (paras 25-34), it has established that

35      As regards, first, the requirement expressly laid down in the contract notice that the financial guarantee should be provided ‘to ensure performance of the contract’, it appears ... that the contracting authority believed that that requirement was not satisfied since the credit granted to the tenderer, although exceeding the amount required by the contract notice, was a current-account credit facility that was not tied to performance of the contract.

36      In this respect, it must be noted that a requirement to obtain a loan tied to performance of the contract is, objectively, a reasonable means of obtaining information on the economic ability of the tenderer to perform the contract successfully. As the European Commission noted, the grant of a loan is an appropriate means of establishing that the tenderer has at its disposal resources which it does not itself own and which are necessary for the performance of the contract (see, to that effect, judgment of 2 December 1999, Holst Italia, C‑176/98, EU:C:1999:593, paragraph 29). It is, however, once again for the referring court to confirm that the amount required in the contract notice is proportionate to the subject matter of the contract.

37      In respect, second, of the requirement, also laid down in the contract notice, regarding the grant of credit in a minimum amount of EUR 3 000 000 ‘for the period of performance of the contract (48 months)’, although, admittedly Article 47 of Directive 2004/18 does not expressly provide that the contracting authority may require a tenderer to have at its disposal the resources necessary for the performance of the contract throughout the duration of the performance of the contract, it must be noted, as the Advocate General observed in point 46 of his Opinion, that the contracting authority’s verification of the tenderer’s compliance with the economic and financial criteria in a tendering procedure, is intended to provide that authority with the assurance that the successful tenderer will indeed be able to use whatever resources it relies on throughout the period covered by the contract (see, to that effect, judgment of 14 January 2016, Ostas celtnieks, C‑234/14, EU:C:2016:6, paragraph 26 and the case-law cited).

38      Moreover, the continued availability of the amount required throughout the period of performance of the contract is a useful tool in assessing, in a tangible manner, the economic and financial standing of the tenderer with respect to its commitments. The proper performance of the contract is indeed intrinsically linked to whether the tenderer has the financial means for the execution of the contract.

39      Therefore, in the present case, the condition requiring the tenderer to have the funds available throughout the period of performance of the contract is appropriate for securing the objectives of Article 47(1) of Directive 2004/18.

40      However, it is for the national court to determine the relevance of the evidence provided by the tenderer for that purpose, in particular the contract opening a current-account credit facility.

41      It follows from the foregoing that the answer to the first question is that Article 47(1)(a) and (4) of Directive 2004/18 must be interpreted as meaning that a contracting authority may exclude a tenderer from a tender procedure on the ground that it does not fulfil the criterion regarding economic and financial standing laid down in the contract notice with respect to the provision of a statement given by a bank undertaking to grant credit in the amount specified in the contract notice and to guarantee that that amount will be available to the tenderer throughout the period of performance of the contract (C-76/16, paras 35-41, emphasis added).

In my view, and as I said in relation with the AG Opinion in this case, the analysis carried out by the ECJ is technically flawed. Put simply, the EU public procurement directives (both the 2004 and the 2014 generations) do not regulate the possibility for contracting authorities to demand financial guarantees from economic operators participating in tender procedures – neither tender/participation guarantees, nor performance/completion guarantees [see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 326-7 & 425-6]. Such requirements are not regulated as part of the assessment of the economic operator’s economic and financial standing for selection purposes – which is designed as an information-based screening process, not as a phase where the contracting authority can secure financial rights for itself –and this is also not related to the conditions for the performance of the contract. Moreover, a reinterpretation of the selection rules on economic and financial standing (but also on professional or technical standing) that made them forward looking creates significant distortions in the system of EU public procurement law, as well as potentially make it impossible to assess.

The specific reasoning of the ECJ in this case supports the fact that an assessment of performance bonds as selection criteria is problematic. The ECJ has stressed that the two main reasons why it considers these requirements acceptable concern the fact that (i) "a requirement to obtain a loan tied to performance of the contract is, objectively, a reasonable means of obtaining information on the economic ability of the tenderer to perform the contract successfully" (para 36), and that "the continued availability of the amount required throughout the period of performance of the contract is a useful tool in assessing, in a tangible manner, the economic and financial standing of the tenderer with respect to its commitments. The proper performance of the contract is indeed intrinsically linked to whether the tenderer has the financial means for the execution of the contract" (para 38).

In the abstract and taken into account in their own terms, these statements may seem uncontroversial. However, the extent to which they reflect the nature of the requirement for a performance bond or financial guarantee can be doubted. The economic and financial standing of the contractor is assessed in general terms at selection stage and the contracting authority always run an implicit risk that the economic and financial standing of the contractor may change during the execution of the contract, in particular if this is of a long duration. Thus, the requirement of performance-related financial guarantees does not have an informative aim, but rather a risk management aim and possibly a cashflow management aim.

By requiring the contractor to have an available credit of 12% of the procurement value (€3mn for a €25.5mn contract), the contracting authority seems to want to cover risks of mis- or under-performance (possibly through the imposition of contractual penalties) and/or to anticipate that the contractor will always be making investments ahead of expected payments for partial completion of the works. In that case, the function of the requirement is not to allow the contracting authority to assess the undertaking's financial standing, but rather to have access to implicit finance for the project and/or to reduce the financial risk of the project for the authority itself. Moreover, it is not clear whether the funds have to be 'frozen' and available throughout the duration of the contract, or if the contractor can use them to perform the contract. In the second case, assuming that a credit of 12% (or any other value, except for an excess of 100%) ensures adequate performance of the contract is only partially justified because at some point in the execution of the contract, the 12% funds will be exhausted and, barring the existence of other sources of finance (including payments by the contracting authority), the very same issues that the financial guarantee is supposed to exclude would arise.

From that perspective, in my opinion, both the suitability and the proportionality of the requirement need to be taken into account. It should be assessed whether the contracting authority has made efforts to design the contract in a cashflow neutral way (including initial downpayments, for instance), or if there are any other ways in which the management of risk can be satisfactorily conducted without requiring performance bonds. This is something that the ECJ has not done, and it has simply referred the issue back to the domestic court, so that it assesses "the relevance of the evidence provided by the tenderer for [the purpose of having funds available throughout the period of performance of the contract], in particular the contract opening a current-account credit facility" (C-76/16, para 40).

The problem, in my view, is that the ECJ has implicitly accepted that the requirement is legitimate and that contracting authorities can require undertakings to have specific levels of funds available to them during the execution of the contract as a matter of qualitative selection. This can be problematic because the creation of imbalanced cashflows can exclude undertakings from competition for the contract (in particular, SMEs) and because contracting authorities are not necessarily in the best position to assess the financial arrangements that undertakings have put in place for their operations. Moreover, if this was the best way of assessing the undertakings' economic and financial standing, then qualitative selection could be limited to demanding performance guarantees (possibly of 100% of the value) rather than assessing the undertakings' financial documentation. There would be no need to assess annual turnover or any other indicators, as contracting authorities would be absolutely certain that the contract would be financed. However, this clearly seems excessive and, in any way, excessive as compared to the role and purpose of qualitative selection. As the ECJ stressed in the INGSTEEL Judgment, 

the requirements in terms of economic and financial standing must be objectively such as to provide information on such standing of an economic operator and must be adapted to the size of the contract concerned in that they constitute objectively a positive indication of the existence of a sufficient economic and financial basis for the performance of that contract, without, however, going beyond what is reasonably necessary for that purpose (C-76/16, para 33, emphasis added).

In my view, requirements of performance bonds or financial guarantees do not aim to obtain "positive indications" of the financial viability of the project, but rather "positive assurances" to that effect. In that regard, they do not relate to the general standing of the undertaking, but rather to the specific risk profile of the tender, and as such need to be assessed as contract performance clauses and under a strict proportionality test. The fact that the ECJ has taken a different analytical approach is, in my view, a lost opportunity.

AG Wahl issues excessively formalistic Opinion on 'crumbling' reliance on third party capacities (C-223/16)

In his Opinion of 11 May 2017 in Casertana Costruzioni, C-223/16, EU:C:2017:365, AG Wahl has analysed the compatibility with the 2004 EU public procurement rules (Dir 2004/18/EC, Arts 47(2) and 48(3)) of national legislation providing for the automatic exclusion from the tendering procedure of a tenderer that relies on the capacities of another entity which, during that procedure, ceases to have the required capacities--without allowing for the the possibility of replacing that entity for another third party with the appropriate capacity. 

AG Wahl follows a functional approach close to that of AG Bobek in Esaprojekt, and submits that the rule on automatic exclusion is compatible with EU public procurement law. His reasoning deserves close scrutiny, in particular concerning the automaticity of the exclusion, which I am not convinced necessarily derives from his interpretation of previous case law.

At this stage, it is important to stress that AG Wahl follows the approach of the European Court of Justice (ECJ) in Partner Apelski Dariusz to the effect of excluding the possibility of resorting to Directive 2014/24/EU (Art 63) in search for interpretive criteria to be applied to the 2004 rules. In AG Wahl's view, "[i]n permitting economic operators to replace entities which are to be excluded or which do not meet the relevant criteria, Article 63(1) of Directive 2014/24 manifestly introduces new elements as compared to the rules laid down in Article 47(2) and Article 48(3) of Directive 2004/18" (para 36). Therefore, it seems clear that, whether the ECJ follows AG Wahl's Opinion or not in the Casertana Costruzioni Judgment, this will have limited practical effect because, under Directive 2014/24/EU, the automatic exclusion of a tenderer on the basis that its reliance on third party capacities has crumbled is no longer compatible with EU law.  

Referring back to procurement subjected to the 2004 rules, it is important to stress that AG Wahl conceptualises the core legal issue as concerning whether EU law requires Member States to permit the substitution of the entity that has lost the required capacity with one which possesses the required capacity. He rightly points out that this cannot be assessed in abstract terms, but rather needs to be linked to the relevant phase of the procurement procedure. In that regard, he distinguishes three situations, depending on whether the loss of capacity by the third party takes place (i) before the time limit for receipt of the bids expires, (ii) after the expiry of the time limit for receipt of the bids, but before the public authority makes the final award or (iii) after the award of the contract (see paras 18-25).

In AG Wahl's view, substitution of the third party cannot be allowed in situation (i) because in cases where the loss of capacity by the third party happens before the expiry of the time limit for the submission of bids, tenderers are free to withdraw the offer that is no longer compliant with the tender documentation and submit a new offer where they rely on the capacities of a different third party. AG Wahl does not express a view on situation (iii)--and, therefore, skips the opportunity to offer some clarification on the rules concerning the substitution of consortium members [for discussion, see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Hart, 2015) 339-340].

Most of AG Wahl's analysis thus concerns situation (ii), where the loss of capacity by the third party takes place during the evaluation stage of the award procedure (strictly, after the deadline for the submission of offers--although I would submit that the same approach should be followed in borderline situations between (i) and (ii), where the bidder only discovers the loss of capacity by the third party after the deadline for submission of tenders, or without sufficient time to submit a fresh offer). He clearly submits that the ECJ should declare that no EU rule or general principle of law requires national authorities to permit tenderers, in that situation, to replace the third party that has lost the required capacity. I am not convinced that this is the case.

Concerning explicit rules, AG Wahl is clear in emphasising that "Directive 2004/18 does not contain any provision which expressly requires Member States to allow tenderers to replace economic entities on whose capabilities they have relied, when those entities are to be excluded or do not meet the relevant criteria. Nor is there any provision, in that directive, that could be read as implicitly containing such a rule or principle"; and, consequently, due to the minimum harmonisation nature of the procurement Directive, "which leaves some regulatory discretion to the Member States for what is not expressly regulated therein", "the possible replacement of third parties on which a tenderer has relied ... is an aspect which is, in principle, for the Member States to regulate" (paras 41 and 42).

He then moves on to assess the situation in relation with the general principles of EU public procurement law, which could constrain Member States' legislative discretion. In that regard, he is also clear in establishing that "allowing a tenderer to replace an entity on whose capabilities it sought to rely cannot be regarded either as a clarification of, or as the correction of clerical errors in, its tender. In point of fact, such a change appears to constitute an amendment of an important element of the tender which is, therefore, in principle not permissible" (para 47, emphasis added), which he considers contrary to the requirements of the principles of equal treatment and non-discrimination and the obligation of transparency (para 45).

AG Wahl refers to AG Bobek's Opinion in Esaprojekt to indicate that

such a change may lead to the contracting authority being required to carry out additional checks and could even affect the choice of candidates being invited to present an offer. Furthermore, [Bobek] noted that giving a tenderer a second chance to decide on which entities’ capabilities it wishes to rely, ‘could certainly procure it an advantage that would be at odds with the requirement of equal treatment’.

I agree. I would also add that upholding Casertana Costruzioni’s argument would essentially amount to creating a judge-made rule that grants the possibility of amending bids at a late stage, a possibility which, in the light of the applicable national and EU rules, was not foreseeable by the other tenderers. As mentioned, that would hardly be reconcilable with the principle of equal treatment. Nor would it be compatible with the obligation of transparency incumbent upon the public authorities. Indeed, neither the Italian nor the EU rules in force at the material time provided for such a possibility. Nor was a specific provision on this point included in the invitation to tender (paras 49-50, footnotes omitted). 

On their facts, I am not sure that the comparison with the Esaprojekt case is helpful. Esaprojekt concerns a situation (i) in terms of AG Wahl's classification, in the sense that the third entity in which the tenderer relied (in that case, a consortium of which the tenderer itself formed part) did not meet the requirements of the tender documentation when the offer was submitted. Thus, this situation can be distinguished from the analysis in Casertana Construzioni in relation with situation (ii) scenarios. In the latter case, therefore, the issue does not seem to be framed in the most useful terms because it can be argued that, having taken place after the submission of the offer (which AG assumes to be the case, see para 24), the loss of capacity of the third party was not foreseeable by the tenderer either, which deactivates part of the reasoning bases on potential discrimination.

Moreover, provided that the way in which the contracting authority allowed for the substitution between third entities on which capacity the tenderer relied did not confer a competitive advantage to the tenderer, there can be good reasons to allow it. For example, if the application of the qualitative selection criteria did not involve a ranking, but was rather on a pass / no pass basis, and where the terms of the tender were not altered at all because the new entity simply stepped into the shoes of the no longer capable entity, there seems to be limited scope to consider that the tenderer derives a competitive advantage.

AG Wahl seems to take the opposite view on the basis of the reasoning underlying the ECJ's analysis of a prohibition to change subcontractors in Wall (which AG Wahl discusses in paras 53-56), in relation to which he stresses that it "could be considered [that the substitution of subcontractor] ‘[altered] an essential term of the concession and [thus necessitated] a new tender procedure’ because, in particular, ‘the concession-holder [had] relied on the reputation and technical expertise of the subcontractor when submitting its tender’." However, this is also conceptually problematic because it refers to a situation (iii), and the prohibition of the substitution of subcontractor can have more to do with the ECJ's requirement that contracting authorities are in a position to verify the standing of any subcontractors (as generally discussed by AG Sharpston in her Opinion in Borta, discussed here).

Ultimately, the difficulty with the assessment carried out by AG Wahl in Casertana Construzioni derives from the fact that he considers that "the capabilities of a third party which allow a tenderer to participate in a tender procedure can hardly be regarded as a non-essential element of a bid. The conclusion might have been different, obviously, if the tenderer had itself the required capabilities or if it had relied, for the same requirement, on more than one entity having those capabilities" (para 58, emphasis added). In my view, this is excessively formalistic and a more nuanced analysis would be required. In the specific case, and on the basis of the limited information about the factual situation, it seems that reliance on the third party capacity primarily (or exclusively) served the purpose of ticking the box of holding a formal classification via registration in the relevant classification system (see para 11). If that is the case, then it seems difficult to justify that this constitutes an essential element of the bid, as it could hardly affect its terms or the execution of the works. More generally, it is not clear that any aspect of reliance on third party capacity can be considered an essential element of a bid by definition, and a more detailed assessment seems necessary (along the lines established by the ECJ in Borta, see here).

From that perspective, the analysis based on discrimination and equal treatment does not seem the most relevant to me, and a focus on proportionality between the administrative burden linked to the substitution of third parties and the preservation of competition for the contract would be much more relevant--in which AG Wahl refuses to engage (see paras 62-65). In my view, this is the biggest flaw of the Opinion in this case. I would suggest that, contrary to what AG Wahl considers, the principle of proportionality should have provided the key legal test in this case.

Thus, I would rather have the ECJ depart from his Opinion and declare that the general principles of EU procurement law, and in particular the principle of proportionality coupled with the principle of competition, oppose the automatic exclusion of tenderers that have relied on the capacities of third parties that later lose them, unless the contracting authority can demonstrate that allowing for the substitution of the third party would either infringe the principles of equal treatment, non-discrimination and the obligation of transparency (eg in a situation where the qualitative selection criteria were not assessed on a pass/no pass basis), or would create a disproportionate administrative burden or delay in the conclusion of the procurement procedure. This could create closer functional compatibility in the case law on reliance on third parties and on subcontracting, which I think are currently at risk of imposing functionally incompatible interpretations of the relevant EU public procurement rules.

Can a requirement to furnish financial guarantees (performance bonds) be considered a selection criterion based on economic and financial standing (C-76/16)?

In his Opinion of 21 March 2017 in INGSTEEL and Metrostav, C-76/16, EU:C:2017:226, Advocate General Campos Sánchez-Bordona addressed the compatibility of tender requirements aimed at ensuring the (future) provision of performance guarantees related to the execution of a works contract with the rules of the 2004 EU public procurement directive (Dir 2004/18). He submitted to the European Court of Justice (ECJ) that such requirements are compatible with EU law and, in particular, with the rules on selection criteria based on the economic and financial standing of economic operators seeking to be awarded public contracts under Art 47 Dir 2004/18. In doing so, he rejected the European Commission’s submission that such requirements, inasmuch as they affected the phase of execution of the contract, ought to be assessed in accordance with the rules on the setting of conditions for the performance of contracts under Art 26 Dir 2004/18.

AG Campos also addressed a point on the time-sensitivity of remedies’ availability (ie whether challenges by disappointed tenderers are barred where the performance of the contract by the awardee is almost complete) under the EU Remedies Directive (Dir 89/665 as amended by Dir 2007/66). He considered that, as interpreted in connection with Art 47 of the European Charter of Fundamental Rights, the procedural rights created by the Remedies Directive do not lapse simply due to the fact that the successful tenderer has almost completed performance of the contract at the time the disappointed tenderer launches its challenge, or the review authority or court is to issue its ruling.

While I fully agree with AG Campos concerning the procedural aspects of his Opinion (which I would have thought both clear and uncontroversial), I think that his analysis of the substantive issues improperly characterises the requirement for the (future) provision of a performance guarantee as a valid selection criterion based on the economic operator’s economic and financial standing. On that point, I consider the analytical framework proposed by the European Commission (partially) preferable. This post develops the reasons why I think the ECJ should not follow AG Campos on the substantive points of his INGSTEEL and Metrostav Opinion.

In the case at hand, “the contract notice required a ‘statement by the bank (loan agreement or credit facility agreement) recording the bank’s undertaking to the effect that the tenderer, in the event of acceptance of its tender, will be in a position to provide a guarantee of EUR 3,000,000 to ensure performance of the contract. The evidence must show that the funds will be available to the tenderer after conclusion of the contract. The evidence must be certified by a person authorised by the bank for that purpose.’” (para 15, emphasis added).

It is hard to make sense of the requirement (which may be a translation issue), but this seems to concern the need to provide a stand-by financial guarantee to the benefit of the contracting authority, which the issuing bank commits to firm up upon award of the contract.

Be it as it may, the disappointed tenderer did not provide such a bank statement, but rather proof of the opening of a current-account credit facility for an amount exceeding EUR 5,000,000 and a sworn statement that, if awarded the contract, they would keep a minimum of EUR 3,000,000 for the duration of the contract (para 17). It is not clear from the factual description in the Opinion whether there was any commitment to provide a guarantee using those funds as collateral, but it does not seem to be the case.

The contracting authority did not accept these documents as evidence of the economic and financial standing of the tenderer and thus excluded it from further participation. The rejection was eventually challenged before the Supreme Court of the Slovak Republic, and the preliminary reference to the ECJ derives from a procedure mainly aimed at assessing (i) whether the contracting authority could introduce this requirement in compliance with the rules on economic and financial standing (Art 47(1)(a) and (4) Dir 2004/18); and (ii) whether the contracting authority should have accepted the documentation as alternative to the specified bank certificate (Art 47(5) Dir 2004/18). Only the first point deserves analysis.

It is important to note here that the European Commission has challenged the legal subsumption of the material facts under Art 47 Dir 2004/18 and submitted that “Article 47 of Directive 2004/18 relates to the economic and financial standing of the tenderer at the time of award of the contract. However, the tenderer’s economic and financial standing during performance of the contract is governed by Article 26 of that directive, concerning conditions for performance of the contract. At all events, in the light of the wording of the question, the Commission suggests that the condition imposed on the tenderer should be examined under both Article 26 and Article 47 of Directive 2004/18” (para 28).

Further, the Commission indicated that “Article 26 of Directive 2004/18 provides that the conditions for performance must appear in the contract notice, a requirement fulfilled in this case, and must be compatible with EU law. Citing the case-law of the Court, the Commission argues that, as Directive 2004/18 does not exhaustively govern the special conditions for performance, those conditions may be assessed in accordance with primary EU law” (para 29, emphasis added).

AG Campos disagreed with the Commission and considered that the approach of assessing the requirement as a performance clause was incorrect. He emphasised that Art 26 Dir 2004/18 is concerned with other issues “and applies, in particular, to social and environmental objectives” (para 43). More importantly, he considered that “in requiring certain minimum levels of economic and financial standing, the presumption in Articles 44 and 47 of Directive 2004/18 is that the proof of that standing must refer to the period of performance of the contract. It would not be reasonable to require economic and financial standing only at the time of award of the contract and for the contracting authority not to have the right to request guarantees that the future successful contractor will retain its economic and financial standing during the period of performance of the contract” (para 44 emphasis added).

Furthermore, after creating an analogy with the case law concerned with reliance on third party capacities, he gave significant weight to the functional criterion that “[w]hen financial or economic resources are concerned, it is reasonable that these should not be ephemeral but should last until the contractual obligations have been performed” (para 48). In any case, AG Campos explicitly saved the requirement due to the fact that the value (EUR 3,000,000) “was related and proportionate to the subject-matter of the contract” and that the duration of the financial guarantee “was the same as the period of performance of the contract” (para 50). However, he did not provide any reasons for the finding that a 12% financial guarantee is proportionate (the estimated value of the contract was just above EUR 25,000,000), or why a duration of 48 moths without a reduction in the value of the guarantee did not need to be assessed in relation to the potential evolution (ie reduction) of risk as the completion of the contract progressed.

In my view, even if the outcome of the analysis may be seen as defensible (of which I am not convinced), the analysis itself is technically flawed. Put simply, the EU public procurement directives (both the 2004, as well as the 2014 generation) do not regulate the possibility for contracting authorities to demand financial guarantees from economic operators participating in tender procedures – neither tender/participation guarantees, nor performance/completion guarantees [see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 326-7 & 425-6]. This not regulated as part of the assessment of the economic operator’s economic and financial standing for selection purposes – which is designed as an information-based screening process, not as a phase where the contracting authority can secure financial rights for itself –and this is also not related to the conditions for the performance of the contract. Moreover, a reinterpretation of the selection rules on economic and financial standing (but also on professional or technical standing) that made them forward looking would create significant distortions in the system created by EU public procurement law, as well as potentially make it impossible to assess.

In the absence of rules on financial guarantees in the relevant EU public procurement directives (ie Dir 2004/18), the analysis of requirements for economic operators to furnish them to the contracting authority should be analysed in accordance with primary EU law – as the Commission rightly stressed, although on the basis of the applicability of Art 26 Dir 2004/18, with which I disagree. In that context, the AG (and in the immediate future, the ECJ) should have assessed whether the requirement of providing a 12% financial guarantee for a duration of 48 months is a barrier to free movement – which I think it is – and whether it can be justified – which I am not sure it can be, as both (i) the public interest in reducing the financial exposure of contracting authorities engaging in public contracts is questionable, and (ii) it may well be (strictly) disproportionate due to the impact it can have on SME access to procurement.

Therefore, the analysis of proportionality need not be intra-tender or confined to the terms of the contract (which could already make it fail), but rather of a higher level of generality, concerning the policy of demanding financial guarantees and its justification from a public interest perspective. Given its detrimental effects for competition, I would not think that demanding these guarantees is necessarily exemptable under free movement rules, at least in relation with contracts that do not raise specific or extraordinary risks.

From that perspective, the proportionality assessment carried out by AG Campos in INGSTEEL and Metrostav almost obiter may not necessarily cover all bases, as it is carried out from the perspective of the link of the requirement to the subject matter of the contract, rather than the perspective of seeking to justify a restriction of a fundamental internal market freedom. But, even if the same result was to be achieved, the analytical path would still be important—ie the limited scope of the exercise of assessing economic operators’ economic and financial standing should not be unduly extended.

This can have major relevance, not least because of the change that the consolidation of the principle of competition in Art 18(1) Dir 2014/24 has brought about. In the future (ie, where Dir 2014/24 is applicable to the case), in my opinion, the inclusion of requirements to provide financial guarantees should be subjected to assessment from the perspective of a potential artificial narrowing of competition. If, in a case such as INGSTEEL and Metrostav, the contracting authority excludes a tenderer on the basis of some (seemingly) formal deviation of the way in which it proposes to provide financial assurance to the contracting authority, this is bound to infringe the requirements of the competition principle. Surely, this analysis could be carried out even if the requirement was considered to pertain to the assessment of the economic operator’s economic and financial standing, but the consolidated recognition of the contracting authorities’ discretion to set those requirements in the first place may muddy the analysis. It seems conceptually preferable to consider it an independent issue, and thus subject to general principles.

Therefore, I would urge the ECJ not to follow AG Campos’ Opinion in INGSTEEL and Metrostav and rather determine that the requirement of financial guarantees was not covered by the 2004 EU public procurement rules and must thus be subjected to a standard assessment under primary EU law (and a strict proportionality test). I would also submit that, under those rules, the requirement was contrary to EU law.

ECJ confirms that procurement rules do not apply to licences or authorisations (“concessions”) for betting and gambling services (C-225/15)

In its Judgment of 8 September 2016 in Politanò, C-225/15, EU:C:2016:645, the European Court of Justice (ECJ) followed the Opinion of Advocate General Wahl (see here) and confirmed that the 2004 procurement rules were not applicable to a public contest for the award of concessions (ie licences or authorisations) for the provision of betting and gambling services to the public.

The ECJ did not address AG Wahl’s obiter comments concerning the theoretical applicability of the 2014 Concessions Directive to an equivalent case but, in my view, the stress put by the ECJ in the analysis of the essential elements of remuneration and risk transfer in the definition of a (services) concession indicates that the ECJ would have likely ruled against that applicability.

In the Politanò Judgment, the ECJ addressed the question whether Directive 2004/18 was applicable to a call for tenders for the grant of “concessions” in the field of betting and gambling by focusing on the remuneration element that is necessary for the existence of a public contract.

After distinguishing public service contracts from services concessions by reference to the different modalities of remuneration they imply and the different risk structure that underlies those modalities of remuneration (paras 30 to 31), the ECJ focused on the plain and simple fact that ‘in the case in the main proceedings, the service provider receives no remuneration from the contracting authority and bears the entire risk associated with the activity of collecting and transmitting bets’ (para 32, emphasis added).

This led the ECJ to conclude that such “concessions” could not ‘be classified as a public contract for services within the meaning of … Directive 2004/18’ (para 33), which leaves them outside of its scope of application (para 34). The ECJ does not make an equivalent explicit conclusion concerning the classification of those “concessions” for the provision of betting and gambling services as services concessions because those were explicitly excluded from the scope of application of Directive 2004/18 in any case (para 29).

In my view, however, that conclusion would be unavoidable in an equivalent case that took place after the entry into force of Directive 2014/23 because its Art 5(1)(b) defines a services concession in the following terms:

a contract for pecuniary interest concluded in writing by means of which one or more contracting authorities or contracting entities entrust the provision and the management of services other than the execution of works ... to one or more economic operators, the consideration of which consists either solely in the right to exploit the services that are the subject of the contract or in that right together with payment (emphasis added).

Importantly, Art 5(1) in fine of Directive 2014/23 also requires that

The award of a works or services concession shall involve the transfer to the concessionaire of an operating risk in exploiting those works or services encompassing demand or supply risk or both ... (emphasis added).

Taking all of this into account, and on the basis of the same factual finding that in the case of licences or authorisations for the provision of betting and gambling services (typically) ‘the service provider receives no remuneration from the contracting authority and bears the entire risk associated with the activity of collecting and transmitting bets’ and, possibly more importantly, the fact that 'the "service" under analysis [is] not provided on behalf of the contracting authority' (see Opinion of AG Wahl, para 51), the only possible conclusion is that Directive 2014/23 is equally inapplicable to a call for tenders for the grant of “concessions” in the field of betting and gambling.

This simple and unsurprising conclusion is slightly more interesting when taken together with the also recent Judgment in Promoimpresa (see here) because, together, they provide some additional clarity on the limits of application (or rather, outright inapplicability) of public procurement rules to “concessions” in name that are actually regulatory systems of licences or authorisations to carry out specific economic activities, whether they involve the use of public assets (generally, parts of the public domain) or not.

CJEU opens door to manipulation of evaluations and fails to provide useful guidance on the use of 'soft quality metrics' in the award of public contracts (C-6/15)

In its Judgment of 14 July 2016 in TNS Dimarso, C-6/15, EU:C:2016:555, the Court of Justice of the European Union (CJEU) issued some important clarifications on the requirements applicable to the disclosure of evaluation methods under the EU public procurement rules. However, it also turned down the opportunity of clarifying what are the limits of the discretion that contracting authorities enjoy when deciding which evaluation methods to use and, more importantly, it failed to address the important and quite specific concerns about the use of 'soft quality metrics' that AG Mengozzi had raised in his Opinion in this case (as discussed here, where background to the case is offered).

The case broadly raised two main legal issues. First, whether in addition to the disclosure of the award criteria and their weighting (as required by Art 53(2) Dir 2004/18 and now Art 67(5) Dir 2014/24), contracting authorities must also disclose in the tender documentation, or at some point prior to the review of the offers, the evaluation methods they plan to use in the assessment of the tenders. Second, whether having disclosed a numerical weighting applicable to the quality and price criteria (50/100 each), the contracting authority was right to assess the quality criterion in accordance with a soft qualitative ‘high — satisfactory — low’ scale, not referred to in the contract documents.

no obligation to disclose (or indeed establish) evaluation rules prior to the review of the tenders

Regarding the first issue, after reiterating its case law on the purpose of the rules on disclosure of award criteria and their weighting, and stressing their relevance in ensuring equality of treatment between tenderers both when they formulate their tenders and when those tenders are being assessed by the contracting authority (para 22), the CJEU adopted a position that I find surprising. The CJEU stressed that

it is possible for a contracting authority to determine, after expiry of the time limit for submitting tenders, weighting factors for the sub-criteria which correspond in essence to the criteria previously brought to the tenderers’ attention, provided that three conditions are met, namely that that subsequent determination, first, does not alter the criteria for the award of the contract set out in the tender specifications or contract notice; secondly, does not contain elements which, if they had been known at the time the tenders were prepared, could have affected their preparation; and, thirdly, was not adopted on the basis of matters likely to give rise to discrimination against one of the tenderers (see judgment of 21 July 2011 in Evropaïki Dynamiki v EMSA, C‑252/10 P, not published, EU:C:2011:512, paragraph 33 and the case-law cited) (C-6/15, para 26). 

However, it did not apply this reasoning by analogy to evaluation methods as could have been expected. On the contrary, the CJEU adopted a very lenient approach and, after confirming that neither the rules in the Directive nor the previous case law referred to an obligation to disclose evaluation methods, it went on to establish that

29 ... an evaluation committee must be able to have some leeway in carrying out its task and, thus, it may, without amending the contract award criteria set out in the tender specifications or the contract notice, structure its own work of examining and analysing the submitted tenders (see judgment of 21 July 2011 in Evropaïki Dynamiki v EMSA, C‑252/10 P, not published, EU:C:2011:512, paragraph 35).

30 That leeway is also justified by practical considerations. The contracting authority must be able to adapt the method of evaluation that it will apply in order to assess and rank the tenders in accordance with the circumstances of the case.

31 In accordance with the principles governing the award of contracts provided for in Article 2 of Directive 2004/18 and in order to avoid any risk of favouritism, the method of evaluation applied by the contracting authority in order to specifically evaluate and rank the tenders cannot, in principle, be determined after the opening of the tenders by the contracting authority. However, in the event that the determination of that method is not possible for demonstrable reasons before the opening of the tenders, as noted by the Belgian Government, the contracting authority cannot be criticised for having established it only after that authority, or its evaluation committee, reviewed the content of the tenders.

32 In any event, pursuant to the principles governing the award of contracts ... the determination by the contracting authority of the method of evaluation after the publication of the contract notice or the tender specifications cannot have the effect of altering the award criteria or their relative weighting (C-6/15, paras 29-32, emphasis added). 

The reasoning of the CJEU raises two surprising issues, in my view. First, the CJEU seems to conflate the need for the contracting authority to establish an evaluation method that is adapted to the particularities of a given tender (which seems correct, para 30) with the need for the contracting authority to be able to do that at any time (which seems incorrect, para 31). Accepting that the contracting authority can design ad hoc evaluation methods for each of the contracts it tenders does not imply that it can leave this important aspect of the evaluation process for a late stage. Logically, it would seem that setting the award criteria, their weighting and establishing the rules according to which they will be evaluated are different aspects of one same decision: how will the tenders be evaluated so that the contracting authority can decide which one is the most economically advantageous?

It does not seem diligent for the contracting authority to set out the award criteria and their weighting without having determined the way these will be applied in the evaluation. It also seems to create unnecessary uncertainty to tenderers. This is very clear in relation to the use of automatic formulae in electronic auctions, which need to be disclosed to the tenderers prior to their use (Art 54(5) Dir 2004/18 and Art 35(6) Dir 2014/24).  There does not seem to be a good reason for these considerations not to apply to the use of evaluation methods and to require that the contracting authority is diligent in setting them up in a timely manner (ie when it is setting out the award criteria and their weighting).

Second, and more surprisingly, the CJEU fails to extend to the evaluation method the most obvious and minimal guarantee to avoid (impossible to prove) discrimination, ie determining the illegality of establishing (evaluation) criteria relevant for the assessment of the tenders after the evaluation committee has reviewed them (para 31). Before anything else, it must be noted that the CJEU accepts that 'the method of evaluation applied by the contracting authority in order to specifically evaluate and rank the tenders cannot, in principle, be determined after the opening of the tenders by the contracting authority'. The reasoning should not have been as a matter of principle, but as a point of absolute requirement.

However, it is not clear why the CJEU concedes that 'in the event that the determination of that method is not possible for demonstrable reasons before the opening of the tenders, as noted by the Belgian Government, the contracting authority cannot be criticised for having established it only after that authority, or its evaluation committee, reviewed the content of the tenders'. There is no indication whatsoever in the Judgment of which reasons may have been adduced by the Belgian Government to try to justify the impossibility of establishing the evaluation method before having reviewed the tenders. This is amazing because it makes it impossible to understand where the threshold of impossibility lies and, more importantly, because there do not seem to be any good reasons to accept that a diligent evaluation committee can be allowed to decide on the evaluation method after it has already seen the content of the tenders. Whether this is done in a presential meeting or remotely, there is no justification for the assessors not to agree on the evaluation rules first (and document them), and then proceed to the evaluation. In my view, the CJEU has neglected the need to ensure the right to good administration and, in particular, the need to ensure the most basic guarantees that tenderers are treated impartially and fairly, and that relevant matters are dealt with in a timely fashion (as required by Article 41(1) Charted of Fundamental Rights).

The final protection that the CJEU tries to (re)establish in the case by stressing that 'the determination by the contracting authority of the method of evaluation after the publication of the contract notice or the tender specifications cannot have the effect of altering the award criteria or their relative weighting' is inane and insufficient because the possibility of establishing and playing with evaluation rules after having seen the content of the tenders leaves way too much scope to coming up with rules that allow for an ex post rationalisation of the choice of a given winning in tender without necessarily violating the pre-disclosed information on the applicable award criteria and weightings. This deserves stern criticism.

the use of 'soft quality metrics' in the evaluation of tenders

Moving on to the second issue concerning the use of 'soft quality metrics', such as the ‘high — satisfactory — low’ scale in the case at issue, in my opinion, the CJEU also carried out a defective analysis. The shortcomings of the analysis derive from the fact that the CJEU uses the answer to this second aspect to try to compensate for the weakness of its answer to the first question. Indeed, the CJEU premises the analysis of the use of the 'soft quality metrics' on the assessment of whether their use altered the applicable award criteria and their relative weighting. The reasoning of the CJEU is as follows:

35 It appears that that procedure did not make it possible to reflect, when ranking the tenderers in order to identify the most economically advantageous tender, differences in the quality of their tenders relative to their price, while taking account of the relative weighting of the award criteria resulting from the indication ‘(50/100)’. In particular, it appears that that procedure was capable of affecting the price criterion by giving it decisive weight relative to the tenders ranked in the [‘high — satisfactory — low’] scale of quality ... It is for the referring court to ascertain whether the relative weighting of each of the award criteria published in the contract notice was in fact complied with by the contracting authority during the evaluation of the tenders.

36 While the contracting authority may use a scale for the evaluation of one of the award criteria without it being published in the call for tenders or the tender specifications, that scale may not, however ... have the effect of altering the relative weighting of the award criteria published in those documents (C-6/15, paras 35-36, emphasis added). 

I find this problematic because it does not address the core problem of using 'soft quality metrics' at all. Should they have been disclosed to tenderers or, more importantly, should they have been published in the tender documentation together with an explanation of why specific weightings could not be established, the use of this scale would be unobjectionable under the TNS Dimarso test, while still allowing for very subjective and difficult to objectively verify comparisons of the tenders. This leaves the question of which evaluation rules are compatible with the two main requirements in the evaluation of tenders--ie that the award rules, not only the award criteria themselves and their weighting, have to '(i) to be linked to the subject matter of the contract (ie, to be ‘relevant’), and (ii) to allow the contracting authority actually to determine which tender is economically the most advantageous (ie, to be ‘enabling’)' [A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 380]. By failing to clarify that 'soft quality metrics' are not enabling and do not provide sufficient objectivity to the evaluation process so as to make sure that the contracting authority does not overstep the limits of its discretion, in my view, the CJEU has left too much space for manipulation in the assessment of tenders.

This is something I had criticised [A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 388], even if in relation to the award criteria (but the arguments apply equally to evaluation rules meant to assess them] considering the following:

Restrictions Derived from the Inclusion of Non-Quantifiable or Subjective Award Criteria, and the Ensuing Need to Objectify Treatment of Qualitative Criteria. Another way in which the selection and weighting of award criteria could give rise to distortions of competition—and, probably, to discrimination amongst tenderers—would be through the introduction of non-quantifiable criteria, or essentially qualitative or subjective criteria that significantly diminished the possibilities of an overall objective appraisal of the tenders or conferred on contracting authorities unrestricted freedom of choice amongst tenderers. In this regard, even if article 67(2)(a) of Directive 2014/24 allows for the taking into consideration of this type of criterion—referring, in general terms, to criteria such as ‘technical merit’ or ‘aesthetic characteristics’—the requirements of relevance and enabling character of the award criteria (see above, this section), as well as the need to avoid conferring on contracting authorities unrestricted freedom of choice and to ensure that the award criteria make provision for an objective assessment of tenderers, should be taken into particular consideration and constrain the decisions adopted by the public buyer.[1]

As regards the requirement of relevance of such qualitative award criteria, it should be stressed that the circumstances under which considerations such as aesthetic characteristics or technical merit will be relevant and material to the subject-matter of the contract are relatively limited (at least if they are unrelated to performance or functional requirements, which are quantifiable and, hence, do not generate significant difficulties). Moreover, it is submitted that they will generally be associated with tenders that should be ruled by the requirements applicable to design contests—which are specifically regulated and set special rules in this respect (see arts 78 to 82 of dir 2014/24),[2] particularly aimed at ensuring the objectivity and independence of the members of the committee entrusted with the evaluation of qualitative or subjective elements of the proposals. Consequently, aesthetic characteristics or technical merit might be assigned very limited relevance in other types of tendering procedures. The substantial irrelevance of such qualitative or non-quantifiable aspects will, then, require only limited consideration in the majority of the cases, if at all.

Moreover, in order to ensure transparency and impartiality, contracting authorities should (as far as possible) set objective or quantifiable proxies to measure primarily subjective or qualitative characteristics of the tenders; or, at least, set up mechanisms (possibly based on the rules regarding design contests) to ensure an impartial appraisal of subjective or qualitative dimensions of the tenders. If such quantification, or ‘proximisation’ or approximation, is possible, the possibilities for discrimination or distortion of competition will be smaller. Consequently, the adoption of this requirement seems desirable whenever its implementation is feasible.

Therefore, a restrictive approach towards the permissibility of the use of these criteria as the basis for the award of contracts—again, in cases other than design contests—seems appropriate. Consequently, this type of consideration should remain as a secondary criterion, or as a rather marginal complement, to objective and easily quantifiable criteria used to determine the award of the contract to the most economically advantageous tender. Along these lines, and attending to the subject-matter of the contract, contracting authorities should give proper weighting to qualitative or subjective criteria (even if ‘quantified’)—which, in our opinion, should be rather limited and marginal in most instances.

To sum up, it is submitted that contracting authorities are bound to ensure the objective and transparent assessment of tenders, particularly by i) avoiding undue recourse to qualitative or non-quantifiable (subjective) award criteria in procedures other than design contests, and ii) assigning them a proper (limited) weighting; and, in general, they are under a duty to exercise self-restraint in their decisions regarding such criteria, particularly when failure to do so could result in their exercise of unrestricted freedom of choice amongst tenderers and/or generate distortions of competition or discrimination of tenderers.

[1] See: S Arrowsmith, The Law of Public and Utilities Procurement. Regulation in the EU and the UK, Vol. 1, 3rd edn (London, Sweet & Maxwell, 2014) 766–71.
[2] See S Arrowsmith, The Law of Public and Utilities Procurement, 2nd edn (London, Sweet & Maxwell, 2005) 829–39;  PA Trepte, Public Procurement in the EU: A Practitioner’s Guide, 2nd edn (Oxford, Oxford University Press, 2007) 232–4; and C Bovis, EC Public Procurement: Case Law and Regulation (Oxford, Oxford University Press, 2006) 248–51.

How far can Member States push formal requirements in self-certifications? Will the CJEU give Member States a wake up call? (a propos AG Wathelet in C-46/15 )

In his Opinion of 3 March 2016 in Ambisig, C-46/15, EU:C:2016:137, Advocate General Wathelet explored the limits of the formal requirements that Member States can impose on self-certifications provided by tenderers in public procurement procedures. The case discusses the limits under the 2004 rules of EU public procurement, where the use of self-certification was certainly exceptional. However, it is interesting to consider this case as an opportunity for the Court of Justice of the European Union (CJEU) to give Member States a wake up call in the roll-out of the 2014 EU public procurement rules, where self-certification has pretty much become the rule rather than the exception. Not least, because AG Wathelet has invited the CJEU by engaging in arguments regarding the future rules.

Why will this ruling be relevant in the future?

Under the 2004 rules [specifically, Art 48(2)(a) of Dir 2004/18], economic operators taking part in public procurement procedures were allowed to furnish evidence of their technical abilities by one or more specified means of proof, which included a list of the principal deliveries effected or the main services provided in the past three years. If the contracting authority indicated that it wishes to receive such a list [Art 48(6) Dir 2004/18], evidence of delivery and services provided had to be be given in the form of certificates issued or countersigned by the competent authority that received the services or deliveries or, 'where the recipient was a private purchaser, by the purchaser’s certification or, failing this, simply by a declaration by the economic operator' [Art 48(2)(a)(ii) of Dir 2004/18, emphasis added]. Thus, the use of such self-declaration of private sector experience was foreseen as a mechanism of last resort or escape clause.  This has now been significantly amended in the 2014 rules.

On the one hand, the system now relies in the self-declarations underlying the European Single Procurement Document [ESPD, Art 59 Dir 2014/24 and , see Part IV, Section B, para (1a), fn 40], which allows economic operators to simply declare that they meet the the relevant selection criteria that have been set out by the contracting authority. Only at the request of the contracting authority, and ideally only if they are chosen for the award of the contract, must economic operators furnish certificates and means of proof backing up their self-declaration [Art 59(4) Dir 2014/24]. There is no doubt, then, that the system is one where self-declarations are now the norm.

Moreover, on the other hand, it should be taken into account that '[c]ontracting authorities shall indicate the required conditions of participation ... together with the appropriate means of proof, in the contract notice or in the invitation to confirm interest' [Art 58(5) Dir 2014/24]. Their choice of means of proof is however limited. Contracting authorities shall not require means of proof other than those referred to in Article 60 Dir 2014/24. For our purposes, according to the relevant provision, the requirement remains that evidence of the economic operators’ technical abilities may be provided by one or more of several specified means of proof, which include a list of the principal deliveries effected or the main services provided over at the most the past three years (Part II of Annex XII Dir 2014/24). However, there is no specific reference of the way in which these lists need to be backed up by economic operators. Thus, the rule disputed in Ambisig that where the recipient was a private purchaser, the economic operator must back-up the relevant entry in its experience list 'by the purchaser’s certification or, failing this, simply by a declaration by the economic operator ' is gone.

The question remains, though, how will Member States (or contracting authorities) deal with self-certifications of experience under the new rules at a practical level. It does not seem too far-fetched to assume that they will carry on as usual and require the same types of supporting (self)certifications that they are used to handle under the 2004 rules. Thus, an analysis of the Opinion of AG Wathelet in Ambisig is relevant, not only in relation to the already phasing out 2004 rules, but also for the proper roll-out of the 2014 rules.

The issues surrounding formalities in Ambisig under the 2004 rules

The dispute in Ambisig was multi-dimensional, particularly because the Portuguese interpretation of Art 48(2)(a)(ii) of Dir 2004/18 was rather complex (or rather, exceedingly formalistic) when it came to the possibility of accepting certifications from private purchasers, which was expressed in the following stylised terms in the contract notice of the procurement in dispute: In order to be selected, the candidates must submit the following application documents: ... a declaration by the client on headed, stamped paper confirming ... in accordance with the model declaration in Annex ... to this contract notice. The declaration must bear a signature certified by a notary, lawyer or other competent entity, specifying the capacity of the person signing.

This raises many issues, particularly in relation with the impossibility to provide a mere self-declaration by the economic operator itself (which is no longer a legal issue under the 2014 rules). However, for the purposes of assessing the relevance of this case for the future, the relevant question before the CJEU, and towards which AG Wathelet's Opinion provides an interesting answer is as follows:

Must Article 48(2)(a)(ii), second indent, of Directive 2004/18 be interpreted to the effect that it precludes the application of rules laid down by the contracting authority, which, on pain of exclusion, require the private purchaser’s certification to contain authentication of the signature by a notary, lawyer or other competent entity?

In my view, for the reasons explained above, this will apply mutatis mutandi to any requirements applicable to certificates to be provided as back of an ESPD self-declaration of experience under the 2014 rules.

Interestingly, after engaging in another tripping exercise of law and language where a literal analysis of several language versions of the contested provision are compared and contrasted without reaching any firm position on its proper interpretation (for a recent previous case of such analysis, on that occasion by the General Court, see here), AG Wathelet considers the following:

62. First of all, the Court has consistently held that Article 48 of Directive 2004/18 establishes a closed system which limits the methods of assessment and verification available to contracting authorities and, therefore, limits their opportunities to lay down requirements.

63. The Court has also stated that even within the framework of an open system ... contracting authorities’ freedom is not unlimited and the aspects chosen must be ‘objectively such as to provide information on such standing … without, however, going beyond what is reasonably necessary for that purpose’.

64. The same considerations apply, a fortiori, to the requirements laid down in the closed evidential system under Article 48 of Directive 2004/18. In my opinion, requiring authentication of the signature of a private purchaser attesting to a delivery effected or a service provided by an economic operator who has applied for a contract goes beyond what is necessary to prove the technical ability of the operator in question and is excessively formalistic when compared to the straightforward declaration by the economic operator, which is the subsidiary form of evidence permitted under the second indent of Article 48(2)(a)(ii) of Directive 2004/18.

65. If the contracting authority has concerns about the veracity of the document submitted to it, it may also, in my view, request additional information to demonstrate the authenticity of the certification provided. Indeed, as part of the contextual analysis, it must be recalled that Article 45(2)(g) of Directive 2004/18 makes it possible to exclude from the contract any operator who ‘is guilty of serious misrepresentation in supplying the information required’ (Opinion in C-46/15, paras 62-65, references omitted, emphasis in italics in the original, emphasis in bold added).

AG Watheler's glimpse into the future

Remarkably, after carrying out a historical analysis of the way in which the 2004 rules came to have their wording, AG Wathelet uses the 2014 rules as an interpretation tool. Beyond the time-consistency (or not) of such an approach to statutory interpretation, his analysis includes policy arguments around the following considerations:

73. ... Directive 2014/24 ... goes even further in the sense of reducing evidential formalities by removing all references to certification by the purchaser.

74. From now on, Article 60(4) of that directive — which replaces Article 48(2) of Directive 2004/18 — simply provides that ‘evidence of the economic operators’ technical abilities may be provided by one or more of the means listed in Annex XII Part II, in accordance with the nature, quantity or importance, and use of the works, supplies or services’.

75. Under Annex XII Part II(a)(ii) of Directive 2014/24, the means of evidence attesting to economic operators’ technical abilities are ‘a list of the principal deliveries effected or the main services provided over at the most the past three years, with the sums, dates and recipients, whether public or private, involved. Where necessary in order to ensure an adequate level of competition, contracting authorities may indicate that evidence of relevant supplies or services delivered or performed more than three years before will be taken into account’. The need for this list to be accompanied by a certification from the purchaser has therefore disappeared.

76. Even though Directive 2014/24 does not apply to the dispute in the main proceedings, this new directive, which repeals Directive 2004/18, is relevant in that it expresses the current intention of the EU legislature. It may therefore be of assistance in ascertaining the current meaning of an earlier, similar provision, provided, however, that such interpretation is not contra legem.

77.  In the present case, it seems to me that Directives 92/50 and 2014/24 confirm the EU legislature’s continuing intention not to make evidence of the technical ability of an economic operator subject to any specific formality and do so in a way that does not conflict with the wording of the applicable provision.

78. In other words, viewed in its context and from a historical perspective, the second indent of Article 48(2)(a)(ii) of Directive 2004/18 imposes no other requirement than the assurance or confirmation, by the purchaser, that the service on which the economic operator relies with a view to securing the contract was actually provided (Opinion in C-46/15, paras 73-78, references omitted, emphasis added).

I am not sure that AG Wathelet's consideration in para 75 would necessarily be the natural interpretation of Annex XII Part II(a)(ii) of Directive 2014/24, because contracting authorities may well be tempted to consider that the Directive does not actually exclude any mechanisms of certification from the purchaser (it simply just not foresees them) and, in any case, they could be tempted to exercise their prerogative to 'invite economic operators to supplement or clarify the certificates received' [Art 59(4) in fine Dir 2014/24] by requesting similarly formalised (private) purchaser certifications. Thus, his interpretation, which I personally very much share, runs against that possibility and an explicit endorsement by the CJEU would be most welcome.

In any case, what is clear is that, in AG Wathelet (and my) opinion, the 2004 and ad maiorem the 2014 EU public procurement rules preclude 'the application of rules laid down by a contracting authority which, on pain of exclusion, require the private purchaser’s certification to bear a signature certified by a notary, lawyer or other competent entity'. We can just hope that the CJEU will endorse this approach.

Restrictions on subcontracting under EU public procurement rules: à-propos the Opinion of AG Sharpston (C-406/14)

(c) Gregory Fox

In her Opinion of 17 November 2015 in Wrocław - Miasto na prawach powiatu, C-406/14, EU:C:2015:761, Advocate General Sharpston assessed to what extent contracting authorities tendering contracts under the EU public procurement rules can limit the percentage of the contract that the winning tenderer can subcontract to third parties. The Judgment in this case will be important because it addresses an area of EU public procurement law bound to be of growing relevance, particularly if Member States develop the supply-chain related tools that Directive 2014/24 has created in Art 71 (see here). It will also be important because it technically deviates from previous cases on reliance on third party capacities (comments here).

In the case at hand, the contracting authority imposed a requirement whereby '[t]he economic operator is required to perform at least 25% of the works covered by the contract using its own resources'. In her Opinion, AG Sharpston proposes that the Court of Justice of the European Union (CJEU) declares that such requirement runs contrary to EU public procurement law--ie that Directive 2004/18 on public procurement precluded a contracting authority from stipulating in the tender specifications of a public works contract that the successful tenderer is required to perform part of the works covered by that contract, specified in abstract terms as a percentage (in that case, 25%), using its own resources.

Given that the specific circumstances of the case did not allow for an assessment of the subcontracting requirement at the stage of qualitative selection (which was the approach followed by previous case law, see paras 36-37), AG Sharpston's analysis rests heavily on Art 25 of Directive 2004/18, according to which

In the contract documents, the contracting authority may ask ... the tenderer to indicate in his tender any share of the contract he may intend to subcontract to third parties and any proposed subcontractors. This indication shall be without prejudice to the question of the principal economic operator's liability.

The reasoning of AG Sharpston would apply equally to Directive 2014/24, which Art  71 reiterates the same rules in paras 2 and 4. In that regard, it is interesting to stress how, in AG Sharpston's view,

30 Directive 2004/18 is designed not only to avoid obstacles to freedom to provide services in the award of public service contracts or public works contracts but also to guarantee the opening-up of public procurement to competition. Recital 32 in the preamble to that directive states that the possibility of subcontracting is liable to encourage small and medium-sized undertakings to get involved in the public contracts procurement market. Subcontracting enables such undertakings to participate in tendering procedures and to be awarded public contracts regardless of the size of those contracts. Subcontracting thus contributes to achieving the directive’s objectives by increasing the number of potential candidates for the award of public contracts.

31. Accordingly, Article 25 of Directive 2004/18 not only envisages that a tenderer may subcontract part of the contract but also sets no limit in that regard. Indeed, Directive 2004/18 confirms explicitly that an economic operator may, where appropriate and for a particular contract, rely on the economic, financial, technical and/or professional capacities of other entities, regardless of the legal nature of the links which it has with them. Consequently, a party may not be eliminated from a procedure for the award of a public service contract solely because it proposes, in order to carry out the contract, to use resources which are not its own but belong to one or more other entities. 

32. That said, contracting authorities do have a legitimate interest in ensuring that the contract will be effectively and properly carried out. Where an economic operator intends to rely on capacities of other economic operators in a tendering procedure, it must therefore establish that it actually will have at its disposal the resources of those operators which it does not itself own and whose participation is necessary to perform the contract. A tenderer claiming to have at its disposal the technical and economic capacities of third parties on which it intends to rely if it obtains the contract may be excluded by the contracting authority only if it fails to meet that requirement. 

33. The contracting authority may not always be in a position to verify the technical and economic capacities of the subcontractors when examining the tenders and selecting the lowest tenderer. The Court has held that in such cases Directive 2004/18 does not preclude a prohibition or a restriction on subcontracting the performance of essential parts of the contract. Such a prohibition or restriction is justified by the contracting authority’s legitimate interest in ensuring that the public contract will be effectively and properly carried out. Directive 2004/18 does not require a contracting authority to accept performance of essential parts of the public contract by entities whose capacities and qualities it has been unable to assess during the contract award procedure.

34. In my view, considering the essential role subcontracting plays in promoting the objectives of Directive 2004/18, no other prohibition or restriction is permissible. It is true that, in Swm Costruzioni 2 and Mannocchi Luigino, the Court considered that there may be works with special requirements necessitating a certain capacity which cannot be obtained by combining the capacities of more than one operator which individually would be unable to perform that work. In those specific circumstances, the Court has held that the contracting authority is justified in requiring that the minimum capacity level concerned be achieved by a single economic operator or, where appropriate, by relying on a limited number of economic operators ... as long as that requirement is related and proportionate to the subject-matter of the contract at issue. However, that is not a specific ground for prohibiting or restricting subcontracting as such. Nothing precludes that ‘single economic operator’ or ‘limited number of economic operators’ from being a subcontractor or subcontractors of the successful tenderer(s).

35. It follows that a stipulation such as that in issue in the main proceedings [ie that the economic operator is required to perform at least 25% of the works covered by the contract using its own resources] is clearly not consistent with Directive 2004/18 (Opinion in C-406/14, paras 30-35, references omitted and emphasis added).

In my view, this proposed interpretation should be generally welcome, not least because the imposition of this sort of requirements could neutralise the open-ended character of the qualitative selection phase through the back door. I developed some thoughts regarding subcontracting in Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 353-355, where I reached the complementary and compatible conclusion that 'contracting authorities should refrain from mandating or inducing subcontracting (in particular, by using the percentage of subcontracted work as an award criterion)'. A contrario, as AG Sharpston proposed, contracting authorities should also be prohibited from imposing a 'ceiling' on the amount of work to be subcontracted.

More generally, I would submit that contracting authorities generally do not have much to say about the distribution of works between a contractor and its subcontractors. They can insist on mechanisms that ensure proper expertise, actual availability of means, proper mechanisms of liability (of the prime contractor and any subcontractors). They can also implement measures to monitor the supply-chain, particularly as legal compliance is concerned (provided they have the expertise and resources to do so). However, they seem not to be in a good position to intervene in the market by choosing some productive structure (of minimum or maximum vertical integration) over others. 

Thus, the CJEU would do well in following AG Sharpston's advice and, more generally, in clarifying the limited role of rules on subcontracting for the purposes of imposing specific productive structures (if they can have any role in that regard at all).

Nothing is what it seems: A different concept of 'body governed by public law' for public procurement and VAT (C-174/14)

In its Judgment of 29 October 2015 in Saudaçor, C-174/14, EU:C:2015:733, the Court of Justice of the European Union (CJEU) followed the Opinion of Advocate General Jääskinen (of 25 June 2015, C-174/14, EU:C:2015:430, paras 59-67) and ruled that the concept of ‘other bodies governed by public law’ within the meaning of Article 13(1) of Directive 2006/112 on the common system of value added tax (VAT) must not be interpreted by reference to the definition of ‘body governed by public law’ in Article 1(9) of Directive 2004/18 on public procurement (now substituted by Art 2(4) of Directive 2014/24). 

This is an important Judgment because it consolidates the atomisation of concepts that are increasingly relevant for the application of EU economic law in a scenario of ever growing recourse to private law institutions by the public sector in the organisation of its activities. Thus, it is worth looking closely at the reasons that led to this disconnect between concepts of 'body governed by public law' for the purposes of different branches of EU economic law (namely, taxation and public procurement).

In the Saudaçor case, the dispute concerned the VAT treatment of Sociedade Gestora de Recursos e Equipamentos da Saúde dos Açores SA (Saudaçor). This entity was created by Regional Legislative Decree No 41/2003/A of the Autonomous Region of the Azores (RAA) transforming the Institute of Financial Management of the Health Service of the RAA into a limited company with exclusively public capital, that company being wholly owned by that region. 

Saudaçor has the task of providing services of general economic interest in the field of health and, particular, the planning and management of the regional health system and associated information systems, infrastructure and facilities and the completion of construction, conservation, rehabilitation and reconstruction work on health establishments and services, in particular in areas covered by natural disasters and in areas regarded as risk areas. 

Saudaçor had not been charging VAT to the RAA for the provision of these services. It relied on the exemption as a non-taxable person under Article 13(1) of Directive 2006/112, according to which

States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with those activities or transactions.

However, when they engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition.

In this setting, the Public Treasury opened an investigation and considered that the services provided by Saudaçor in respect of the planning and management of the regional health service concern areas of activity involving private initiative, which means that treatment as a non-taxable person for VAT purposes might lead to distortions of competition, thus challenging Saudaçor's status as a non-taxable person.

The appeals of the case went all the way up to the Supreme Administrative Court of Portugal, who harboured doubts as to the interpretation of the concept 'other bodies governed by public law' used by the judge of instance, which had decided that 

for the purpose of interpreting the rule laid down in the first subparagraph of Article 13(1) of Directive 2006/112, under which bodies governed by public law are not regarded as taxable persons for VAT purposes, there is no need to refer to the concept of ‘body governed by public law’ defined, in the context of public procurement law, in Article 1(9) of Directive 2004/18 since the latter concept is understood in a broad sense, whereas the concept of ‘body governed by public law’ within the meaning of the first subparagraph of Article 13(1) of Directive 2006/112 must be interpreted strictly when applying the rule of treatment as a non-taxable person for VAT purposes because that rule constitutes an exception to the general rule of taxation of any economic activity (C-174/14, para 24).

The Supreme Administrative Court of Portugal considered that

whilst it is clearly established in the [CJEU]’s case-law that only the activities of bodies governed by public law acting as public authorities are excluded from liability to VAT, it cannot be determined on the basis of that case-law whether an entity such as Saudaçor, having regard to its legal status as a limited company originating from the transformation of a State entity, comes within that concept of body governed by public law. The question arises in particular whether the scope of that concept tallies with the scope of the concept of ‘body governed by public law’ in Article 1(9) of Directive 2004/18 in the context of the definitions of the various categories of ‘contracting authorities’ (C-174/14, para 28, emphasis added).

In his Opinion, AG Jääskinen considered that there was no need to consider the compatibility of the definition in Article 13(1) of Directive 2006/112 and that in Article 1(9) of Directive 2004/18. In his view, such irrelevance of the concept of ‘body governed by public law’ within the meaning of Directive 2004/18 for the interpretation of Article 13(1) of Directive 2006/112 derived from the following reasons

63. Article 13 has been regarded in the Court’s case-law as an exemption which should be placed in the general context of the common system of VAT. Thus, as a derogation from the principle that any activity of an economic nature must be subjected to VAT, the first subparagraph of Article 13(1) of Directive 2006/112 must be interpreted strictly. Obviously, this also holds for the interpretation of the concept of ‘other bodies governed by public law’ in the first subparagraph of Article 13(1).

64. By contrast, in the light of the objectives pursued by the provisions of Union law on the coordination of the procedures for the award of public contracts, and in particular the dual objective of opening up competition and transparency, the concept of ‘body governed by public law’ within the meaning of Article 1(9) of Directive 2004/18 should be given a broad and functional interpretation.

65. It should be stated that the meanings of, on the one hand, ‘body governed by public law’ for the purposes of Directive 2004/18 and, on the other, ‘other bodies governed by public law’ for the purposes of Directive 2006/112 cannot be the same, as those two directives have very different objectives (sic) [...]

66. It should be added that, as was rightly pointed out by the United Kingdom Government, the Union legislature made the deliberate choice not to make reference in Directive 2006/112 to the concept of ‘body governed by public law’ which appears in Directive 2004/18. In other contexts, where it considered that a link should be made between two instruments of EU law, the Union legislature chose to adopt the definition used in Directive 2004/18 by means of a cross-reference (Opinion of AG Jääskinen in C-174/14, paras 63-66, references omitted and underlining added--other emphasis in the original).

In my view, this approach creates two difficulties. Firstly, if concepts of identical wording are to be interpreted differently depending on the ultimate goals of the rules of EU economic law in which they are inserted, legal certainty can hardly be satisfied. Secondly, the narrow interpretation of Article 13 could have been implemented through a strict approach to the concept of  'activities or transactions in which they engage as public authorities', or to the existence of 'distortions of competition'. This would have been preferable to the dissociation of concepts that are meant to determine the subjective scope of application of rules of EU economic law--which, by the way, are meant to be applied concurrently to the those entities.

In its final Judgment, the CJEU followed the Opinion of AG Jääskinen and ruled that

46 By defining in broad terms the concept of ‘body governed by public law’ and, as a result, the concept of ‘contracting authorities’, Article 1(9) of Directive 2004/18 seeks to define the scope of that directive in a sufficiently extensive manner so as to ensure that the rules on, in particular, transparency and non-discrimination which are required in connection with the award of public contracts apply to all State entities which do not form part of the public administration but which are nevertheless controlled by the State, in particular by means of their financing or their management.

47 However, the context of the concept of ‘other bodies governed by public law’ referred to in Article 13(1) of Directive 2006/112 is fundamentally different.

48 That concept is not intended to define the scope of VAT but, on the contrary, makes an exception to the general rule on which the common system of that tax is based, namely the rule that the scope of that tax is defined very broadly as covering all supplies of services for consideration, including those provided by bodies governed by public law (see, to that effect, judgment in Commission v Netherlands, C-79/09, EU:C:2010:171, paragraphs 76 and 77) (C-174/14, paras 46-48, emphasis added).

I have difficulty accepting the reasoning of the CJEU as persuasive. Taken literally, it would mean that the rules that determine the (material, and personal?) scope of application of a norm are only those of a positive nature--ie rules of inclusion--whereas the negative rules that free situations or agents from coverage by that norm--ie rules of exclusion--would not be seen as able to construct its scope. This is logically confusing, as delineating the actual scope of application of a norm involves taking into account both the elements that determine what is included and those that determine what is not included therein [for a discussion on the validity and effectiveness of restrictive legal norms, see K Larenz, Metodología de la Ciencia del Derecho, 2a ed (Madrid, Ariel, 2001) 252-253].

Moreover, when the CJEU engages in the determination of whether Saudaçor meets the requirements to be considered within the category of ‘other bodies governed by public law’ for the purposes of Article 13(1) of Directive 2006/112 (paras 55 and ff), the CJEU uses criteria that are fundamentally aimed at determining if: 1) it has powers that traditionally would belong to the public sector (paras 58-59), 2) the region that owns it can exercise decisive control over it (paras 60-65), and 3) it engages in any competition with private providers (para 66). Implicitly, the CJEU also considers whether more than 50% of its funding comes from the public sector (para 63), and it stresses that the activity carried out by Saudaçor is a service of general economic interest (para 67), to the effect of (implicitly) determining that it is not of a purely commercial nature. 

Thus, in my view, these are fundamentally the same criteria and considerations that would apply under the test designed to determine whether an entity is a body governed by public law under the applicable public procurement rules. Functionally, then, the analysis actually carried out by the CJEU is convergent in the fields of taxation and procurement. I consequently struggle to see what was there to be won in the position that "the concept of ‘other bodies governed by public law’ within the meaning of Article 13(1) of [Directive 2006/112] must not be interpreted by reference to the definition of ‘body governed by public law’ in Article 1(9) of Directive 2004/18". 

It seems that the CJEU is only willing to engage in functionalism in the application of the rules, but not in the formulation of the concepts that underpin them. This creates significant confusion and threatens legal certainty. Specially when it is impossible to know in which situations where it is confronted with (almost) identically drafted provisions of EU economic law the CJEU will adopt a single 'EU law' autonomous concept or more than one... Nothing is what it seems under EU economic law...

Are future (lease) contracts covered by the EU public procurement directives? (C-213/13)

In his Opinion of 15 May 2014 in case C-213/13 Impresa Pizzarotti (not available in English, so the following discussion is based on my reading of the Spanish version), Advocate General Nils Wahl has addressed the tricky issue whether future lease contracts, or contracts for the lease of buildings that are yet to be constructed, are covered by the EU public procurement Directives (in particular, by Directive 2004/18, but the interpretation will remain relevant under the new Directive 2014/24, which scope has not changed as far as works contracts are concerned).

 

The factual background of the case is rather complicated as the Commune di Bari and the Italian Ministry of Justice kept changing the conditions of the financial arrangements concerned with the building and rental of Bari's new city of justice; but, as AG Wahl indicates in his Opinion, the legal issue to be addressed is whether transactions relating to future buildings may fall within the exception to the application of the rules on public contracts--as foreseen in Article 16(a) of Directive 2004/18 [or art 10(a) Dir 2014/24], which indicates that the Directive "shall not apply to public service contracts for: (a) the acquisition or rental, by whatever financial means, of land, existing buildings or other immovable property or concerning rights thereon".

 

In his view, the exception in Art 16(a) Directive 2004/18 [and now art 10(a) Dir 2014/24] can under no circumstances be interpreted in a way that covers works which execution has not yet started (para 54). On the ultimate basis of the principles of the protection of the internal market's fundamental freedoms and the promotion of effective competition (para 56), AG Wahl clearly argues that

With respect to the exclusion relating to the acquisition or lease of real estate, understood in the broad sense, I believe that it can only refer to existing assets. Indeed, a tender under the application of the rules on public procurement will have little purpose when referred to the lease or sale of an existing and well determined bulding, which is inappropriate for a confrontation with others because of its unique character. Furthermore, it appears from some preparatory works that the exclusion of contracts for lease or purchase of real estate was initially motivated by the local and non cross-border nature of these contracts. However, given that the activities in question involve the future construction of real estate and, therefore, the execution of works, the tendering process and transparency required by these rules are not inappropriate at all and therefore should be applied. Further, in my view, the reference that the provisions in question make ​​to "other (immovable) property" should be understood in the sense that it relates to assets other than land and buildings, and not to goods whose construction has yet to be conducted. [...] In the event that a public administration chooses, within the framework of the installation of certain services, for a formula for the purchase or lease of a work to be constructed, this operation shall be subject to the procurement procedures established by the relevant regulation (Opinion in C-213/13 at paras 60 and 61, own translation from Spanish, references ommitted and emphasis added).

 

This reasoning must be shared, given the need to interpret the exclusions to the Directives in a restrictive manner (as the AG stresses in his Opinion, at para 58). Incidentally, it is also interesting to stress that in AG Wahl's Opinion, the fact that the aggregated consideration for the lease of the future building does not cover the costs of its construction is insufficient to alter any conclusion as to the existence of a works contracts that should have been tendered under the relevant EU rules (para 80).

 

In my view, this is an important case, as the adoption of the interpretation suggested by AG Wahl would come to limit the possibilities to exclude certain types of contracts that fall within the broad category of public-private cooperation from the remit of the procurement directives, and seems to put some pressure on the (increased) use of either design contests or full-fledged procurement procedures (probably, from now on, the competitive procedure with negotiation under art 29 dir 2014/24) when contracting authorities seek to have dedicated buildings constructed. Let's hope that the CJEU follows this Opinion.

Tendering for licences and tendering for contracts: Consistency of the approach (AG in case C‑569/10)

AG Cruz Villalon has delivered his Opinion of 20 November 2012 in case C-569/10 European Commission v Poland, which concerns a potential infringement of Art 3 of Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons. The analysis offered in relation to tendering procedures for mining licences resembles that followed in public procurement cases and, consequently, it is interesting to see to what extent the criteria applicable to both types of tendering are being developed consistently by the EU Courts.

According to Art 3 Dir 94/22, Member States must take ‘the necessary measures to ensure that authorisations [for the exercise of the activities of prospecting, exploring for and producing hydrocarbons] are granted following a procedure in which all interested entities may submit applications’ (emphasis added). This requirement was incorporated in Polish law by means of Article 11(2) of the Geological and Mining Law of 4 February 1994, which provides that: ‘Without prejudice to Article 12(1), the creation of mining usufruct rights covering the prospection, exploration for and exploitation of natural gas, oil and its natural derivatives ... shall be preceded by a competitive tendering procedure' (emphasis added). According to such Art 12(1), however,  ‘[a]n undertaking that has explored and documented mineral deposits belonging to the Treasury and has prepared geological documents to the level of accuracy required for the granting of a concession for production of the mineral, may apply for the grant of mining usufruct rights with priority over other parties’ (emphasis added).

Therefore, Polish law creates two sets of independent authorisations: one for exploration (and preparation of the ensuing geological documentation) and one for production rights and, in general, subjects their granting to a prior tendering procedure (which would be in line with the requirements of Art 3 Dir 94/22). However, the priority given to holders of exploration rights (or to subsequent buyers of the ensuing geographical documentation) to obtain the production concession raised an issue of compatibility with EU Law. The European Commission considered that this would exclude any effective tendering for production rights and that, consequently, the Polish system breached Art 3 Dir 94/22. On its part, Poland considered that the existence of a tendering procedure in respect of the granting of the exploration rights was sufficient, as the procedure for granting the production concession is in the nature of a mere ‘formality’, albeit compulsory, involving only the undertaking to which the initial rights had been granted.

AG Cruz Villalon concurs with the Commission's view. In his Opinion, he submits that:

79. In effect, Article 12 of the Geological and Mining Law gives priority – for a period of two years and over any other person – in seeking the creation of mining usufruct rights to the person who has explored and documented mineral deposits and prepared the relevant geological documentation [...]

82. The Polish Government seeks to justify this outcome by arguing that the exclusive rights to the geological documentation and the priority given to the holder of such rights constitute fair remuneration for the investment made at the earlier prospecting and exploration stage.

83. In my opinion, this argument cannot succeed.

84. Much as it may seem fair that the person who has borne the costs involved in preparing the geological documentation should be remunerated, that investment may in no circumstances be rewarded in such a way as to distort the authorisation procedure to the point of rendering illusory the tendering procedures required under Directive 94/22.

85. That is, or at least may be, what happens if the Polish system is applied. The interplay of priorities and exclusive rights introduced by the Geological and Mining Law may give rise to a situation in which the holder of the exclusive rights to the geological documentation obtains the mining usufruct rights without a genuine competitive tendering procedure being held. In fact, it would not be feasible to follow such a procedure if the priority referred to in Article 12(1) means – as the term ‘priority’ would, on the face of it, suggest – a true preferential right to the creation of the usufruct.

86. It would be a different matter (sic) if the ‘priority’ were taken to mean that the investment in the preparation of the geological documentation constitutes a positive factor to be taken into account in the tendering procedure; a positive factor for evaluation, perhaps, but certainly not to the extent of determining the outcome of the tendering procedure. Giving this factor its proper weight may constitute reasonable remuneration for the investment, without going as far as the case put by the Polish Government.

87. In this regard, we should bear in mind that ownership of exclusive rights to the geological documentation may not be as central to the authorisation process as it is under the Polish system. Ownership of such rights does, of course, demonstrate that the holder has the skills needed to prepare geological documentation. Clearly, however, such skills are not necessarily in themselves sufficient to demonstrate the skills relevant for the purposes of granting an authorisation to exploit mineral resources. It seems to me obvious that, basically, the Polish system attributes too much importance to the position of undertakings whose main capability is the production of geological documentation, with the position of other undertakings which can also demonstrate capability in the area of mining being entirely subordinated to the interests of the former.

88. So, the Polish system of ‘authorisation’ within the meaning of Directive 94/22 comprises two stages (the creation of the mining usufruct rights and the concession itself), the outcome of which may be dictated entirely by the exercise of exclusive rights to the geological documentation that is needed in order to obtain the actual authorisation to exploit the mineral resources. Those exclusive rights are granted to the undertaking that has obtained geological documentation through exploration and investigation which, in accordance with Article 33(1) of the Geological and Mining Law, do not always require a concession and would therefore not be the result of a tendering procedure.

89. Consequently, given that in certain circumstances the Polish legislation allows the authorisation required for the activities of prospecting, exploring for and producing to be granted following a procedure which does not involve a genuine tendering procedure, I am of the opinion that the first part of the second plea and the second part of the first plea in the Commission’s application should be upheld in their entirety (AGO C-569/10 at paras 79-89, emphasis added).

As briefly mentioned, in my view, the AG's reasoning resounds of the arguments that prevent direct awards of construction or other works contracts on the basis of the 'mere' development of a design project under EU public procurement rules [Dirs 2004/18 and 2004/17]. In that regard, where the rights or contracts to be awarded non-competitively at the second stage are worthier than the initial rights or contracts, it seems sensible to require a second round of competition to take place. 

However, I do not agree with the AG's obiter dicta remarks in paragraph 86 of his Opinion, where he considers that "It would be a different matter (sic) if the ‘priority’ were taken to mean that the investment in the preparation of the geological documentation constitutes a positive factor to be taken into account in the tendering procedure; a positive factor for evaluation, perhaps, but certainly not to the extent of determining the outcome of the tendering procedure. Giving this factor its proper weight may constitute reasonable remuneration for the investment, without going as far as the case put by the Polish Government." Such preference in the second round of competition would only allow the incumbent to extract unnecessarily advantageous conditions from the contracting / licensing authority. In that regard, I would suggest that it is of the utmost importance to neutralize any first comer advantages in the second round of competition, at least for evaluation purposes, as I have further developed elsewhere [Sanchez Graells, Public Procurement and the EU Competition Rules (Oxford, hart Publishing, 2011) pp. 333-338]. Otherwise, the system may be compliant with the tendering requirements of Dir 94/22 or Dirs 2004/18 and 2004/17, but not (fully) effective competition will arise in the second round of tendering.

Therefore, I would suggest that the CJEU should follow the AG in its final Judgment in case C-569/10, but dismissed the obiter dicta remarks in paragraph 86. Otherwise, the law on (re)tendering risks being developed in a less than (fully) competition-promoting manner.