Last month, the Court of Justice issued a confusing and potentially revolutionary Judgment in the Irgita case, which concerned the award of a contract to an in-house entity. In this blog post, Dr Willem A Janssen and Erik Olsson, LLM give us a sketch of the deep implications that the case could have and the interpretive complications it is already generating. Their ideas provide plenty food for thought and will probably be expanded in a forthcoming (even) more detailed academic article.
Janssen & Olsson make a very timely reference to another confusing and complicated recent Judgment, that in the TenderNed case, where the position that eProcurement can be classified as an SGEI withstood appeal before the CJEU. Keep an eye on the blog for a comment of that case soon.
The public cooperation-saga continues in Irgita: harmonization, competition & free movement
Many contracting authorities across the European Union (EU) sighed with relief when article 12 of Directive 2014/24/EU was adopted in 2014. After years of lingering uncertainties not solved by the case-law of the Court of Justice of the EU (CJEU), the new rules in article 12 provided more legal leeway and clarity for institutionalized and non-institutionalized cooperation between public authorities. Some perhaps even hoped it would also put an end to legal discussions about in-house and public-public cooperation in the public procurement context. With new laws, however, come new uncertainties. It did not take too long for the CJEU to show that the public procurement law community will still continue to discuss these exemptions in the future—for when a door closes, a window opens. Indeed, the CJEU has once again shaken the foundations of the ‘public house’ exemptions to the EU public procurement rules with its Judgment of 3 October 2019 in the Lithuanian case Irigita (C-285/18, EU:C:2019:829).
After providing a short overview of the Irgita case (Section 1), we scrutinize some of the CJEU’s conclusions and provide an initial mapping exercise to gage their potential implications for future discussions in this post. More specifically, we discuss the third preliminary question about the legality of national rules that limit the scope of the institutionalised exemption of article 12 Dir 2014/24/EU through adjusted or additional criteria (Section 2). We expect, however, that most future discussions will delve into the Court’s answer to the fourth preliminary question, whereby the CJEU’s reasoning seemingly created two new requirements, including that the ‘conclusion of an in-house transaction which satisfies the conditions laid down in Article 12(1)(a) to (c) of Directive 2014/24 is not as such compatible with EU law’, for such provision ‘cannot relieve the Member States or the contracting authorities of the obligation to have due regard to, inter alia, the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency’. This position is far from clear and potentially raises far-reaching consequences for the general functioning of article 12 (Section 3). Hence, we discuss – at least - two interpretative issues, namely what the legal relevance of the impact on competition caused by a cooperation is (Section 3.1), and if the fulfillment of article 12’s criteria provides a general exception from EU law (Section 3.2). We also offer some concluding remarks.
1. A short introduction to the Irgita case
The legal context and circumstances of the Irgita case can be summarized as follows. The Lithuanian legislature implemented article 12 Dir 2014/24/EU through Article 10 of the Law on Public Procurement (as applicable on 1 July 2017). This was not a copy-paste implementation. The legislature clearly limited the application of article 12 through additional criteria in both the Law on Public Procurement and the Competition Act (Irgita, par. 8-10). For instance, the scope of article 12 Dir 2014/24/EU was limited by article 10(2) Law on Public Procurement, which required that:
‘an in-house transaction may be concluded only in an exceptional case, when the conditions set out in paragraph 1 of this article are satisfied and the continuity, good quality and availability of services cannot be ensured if they are purchased through public procurement procedures.’
Article 4 Competition Act also contains an additional criterion:
‘when carrying out the assigned tasks relating to the regulation of economic activities within the Republic of Lithuania, entities of public administration must ensure freedom of fair competition’.
The Lithuanian legislature also banned private capital participation in an institutionalised cooperation entirely (Irgita, par. 9). This is an example of an altered implementation of article 12(1)(c), which contrarily does allow some categories of private participation (‘non-controlling and non-blocking forms of private capital participation required by national legislative provisions, in conformity with the Treaties, which do not exert a decisive influence on the controlled legal person’).
The Irgita case takes place within this legal framework. Shortly said, there are two relevant awards of public contracts in this case. Firstly, the municipality of Kaunus awarded a contract for the maintenance and management of plantations, forests and forest parks following a public procurement procedure to Irgita (a private operator) in February of 2014. Secondly, the municipality decided to directly award a contract for similar services to another entity, the publicly-controlled Kauno švare, in March 2016. This latter contractual relationship fulfilled the control-, activities- and private participation-criteria of the institutionalised exemption (i.e. 100% shares, more than 90% of activities for the municipality, etc.). Irgita challenged the validity of the second award in light of the Lithuanian competition provision, whilst acknowledging that the criteria of the institutionalised exemption were indeed fulfilled.
Following a legal battle trough the national courts, the Lithuanian Supreme Court posed questions to the CJEU [as discussed at the time by Dr Deividas Soloveičik in this same blog]. As mentioned above, we consider the third and fourth preliminary questions particularly relevant.
2. Harmonization of self-organisation
The third preliminary question (part a) considered the discretionary power of the Lithuanian legislature to implement the additional or altered criteria mentioned above in light of article 12 Dir 2014/24/EU. This is also relevant for other Member States, such as Finland, Italy and Poland, which have in their own way also limited the scope of this provision.
We argue that this question requires scrutiny of the harmonisation method of article 12. Milestone cases, such as Rätti (C-148/78, EU:C:1979:110) and Gallaher (C-11/92, EU:C:1993:262), had clarified that the 1) objective, 2) structure and 3) wording of a legal provision are relevant to determine if it concerns total or minimum harmonisation. The latter would leave discretion for national legislatures to introduce additional and adjusted criteria, whereas the former would not.
Amongst other arguments, we argue that it would, for instance, be relevant to consider that a limited implementation of article 12 in fact aids the coming about of the internal market, thereby implying that this provision concerns minimum harmonisation. This is also the approach taken by Advocate-General Hogan in his opinion of 7 May 2019 in Irgita (C-285/18, EU:C:2019:369) [for such a full analysis based on the Lithuanian and Finnish context, see also W A Janssen, ‘Swimming against the Tide: The Harmonisation of Self-organisation trough Article 12 Directive 2014/24/EU’ (2019) 14(3) European Procurement & Public Private Partnership Law Review 145-155).
Contrary to the Advocate-General, however, the Court does not mention the relevance of the type of harmonisation in article 12 Dir 2014/24/EU, but instead emphasises the following (Irgita, par. 45-46):
‘The freedom of the Member States as to the choice of means of providing services whereby the contracting authorities meet their own needs follows moreover from recital 5 of Directive 2014/24, which states that ‘nothing in this Directive obliges Member States to contract out or externalise the provision of services that they wish to provide themselves or to organise by means other than public contracts within the meaning of this Directive’, thereby reflecting the case-law of the Court prior to that directive.
Thus, just as Directive 2014/24 does not require the Member States to have recourse to a public procurement procedure, it cannot compel them to have recourse to an in-house transaction where the conditions laid down in Article 12(1) are satisfied.’
Despite the granted clarity on the relevant discretion to legislate, it is unclear why this reasoning would provide a conclusive and final argument for the national legislatures to legislate additional or adjusted criteria. Whereas an analysis of harmonisation would provide it, the CJEU’s arguments seem to only be the first step in a more extensive analysis. It supports the long-standing idea that the EU legislature cannot impinge on the discretion of the Member States to organise themselves as they see fit [in accordance with their chosen socio-economic model, as discussed in detail in A Sanchez-Graells, ‘Against the Grain? Member State Interests and EU Procurement Law’, in M Varju (ed), Between Compliance and Particularism: Member State Interests and European Union Law (Springer 2019) 171-189; see chapter 3, W A Janssen, EU Public Procurement Law & Self-organisation: A Nexus of Tensions & Reconciliations (Eleven Publishers 2018) on the development of a right to self-organisation in article 4(2) TEU]. The subsequent argument to be made would be to consider the discretion of national legislatures to legislate.
The second paragraph above perhaps attempts to make this explicit, but could also be a response to the Advocate-General’s conclusion. Whilst arguing in favour of minimum harmonisation, the Advocate-General surprisingly stated that article 12 could not concern total harmonisation, because it would mean that contracting authorities would be obliged to apply the institutionalised exemption if the criteria were met (A-G’s opinion in Irgita, par. 46). The Court seems to explicitly take the contrary position. More practically, however, the outcome of the Court’s approach or an argumentation based on harmonisation is still the same: the Member States can in principle limit the scope of article 12.
Finally, the CJEU does rightly emphasise two aspects. Firstly, the Court concludes that additional or adjusted criteria cannot result in a limitation of the internal market, namely a violation of the fundamental freedoms and the derived principles (Irgita, par. 48). Secondly, it concludes that the principle of transparency must be interpreted as meaning that the conditions to which the Member States subject the conclusion of in-house transactions must be made known by means of precise and clear rules of the substantive law governing public procurement, which must be sufficiently accessible, precise and predictable in their application to avoid any risk of arbitrariness (see preliminary question 3b in Irgita, par. 57).
3. Issues of cooperation, competition & free movement
In a rather lengthy fourth preliminary question, the Lithuanian Supreme Court aimed to further inquire if the fulfillment of the criteria of article 12(1)(a-c) Dir 2014/24/EU (i.e. control, activities, and private participation) would deem the entire transaction in the Irgita case compatible with the entire body of EU law. The Supreme Court referred in its question to a variety of legal obligations, including to article 2 of Directive 2004/18/EC and 2014/24/EU, articles 18, 49, 56, 106 TFEU, and the case law of the CJEU on institutionalized cooperation (ANAV, Teckal, Sea, Undis Servizi and others). The general gist of the CJEU’s dictum was not surprising (Irgita, par. 64):
‘The answer therefore to the fourth question is that the conclusion of an in-house transaction which satisfies the conditions laid down in Article 12(1)(a) to (c) of Directive 2014/24 is not as such compatible with EU law.’
This conclusion appears correct, because the institutionalized exemption vested in article 12 only exempts the application of Directive 2014/24/EU in which it is included. However, the Court’s reasoning raises various difficult interpretative issues. We have attempted to categorize them into issues relating to (1) competition and (2) free movement. Furthermore, we aim to shed some light on possible interpretations.
3.1. Competition & cooperation
After the CJEU repeated the relevance of the control-, activities- and private participation criteria as stipulated by article 12(1) Dir 2014/24/EU in its answer to the fourth question (Irgita, par. 59), a seemingly new notion appears on the stage in paragraph 62:
‘It must moreover be observed that recital 31 of that directive states, in relation to cooperation between entities belonging to the public sector, that it should be ensured that any cooperation of that kind, which is excluded from the scope of that directive, does not result in a distortion of competition in relation to private economic operators.’
The question can be raised what the significance of this inclusion is. Two potential interpretations seem to be relevant. One more limited, the other rather open-ended. A third interpretation strikes some sort of balance between the two, but is also linked to the free movement rules, and is thus discussed in Section 3.2 below.
1st interpretation: an existing obligation
Paragraph 62 could be a general reference to the already existing private participation criterion of the institutionalised exemption. A similar consideration was included in light of the non-institutionalised exemption, when the CJEU introduced this criterion in the milestone case of Commission/Germany (C-480/06, EU:C:2009:357, par. 47):
‘the principal objective of the Community rules on public procurement, that is, the free movement of services and the opening-up of undistorted competition in all the Member States’
and the Court continued by stating in the same paragraph:
‘that no private undertaking is placed in a position of advantage vis-à-vis competitors’.
In Stadt Halle (C-26/03, EU:C:2005:5), the CJEU referred to such a consideration in relation to the institutionalised exemption (par. 59):
‘Second, the award of a public contract to a semi-public company without calling for tenders would interfere with the objective of free and undistorted competition and the principle of equal treatment of the persons concerned, referred to in Directive 92/50, in particular in that such a procedure would offer a private undertaking with a capital presence in that undertaking an advantage over its competitors.’
This was also interpreted in an expansive manner in Centro Hospitalar de Setúbal and SUCH (C-574/12, EU:C:2014:2004; as discussed by Sanchez-Graells in this same blog). Article 12 sub 1(c) Dir 2014/24/EU is a codification of this ban on private participation, and could thus be a mere reference to the ratio of this article. If such an interpretation is correct, paragraph 59 merely re-emphasises a current obligation and, thus, provides nothing new under the sun. This is further confirmed again in paragraph 61, which would imply that the private participation criterion is indeed relevant, because the Court refers to these principles prior to its reference to competition:
‘As follows, in essence, from paragraph 48 of the present judgment, the fact that an in-house transaction, within the meaning of Article 12(1) of Directive 2014/24, does not fall within the scope of that directive cannot relieve the Member States or the contracting authorities of the obligation to have due regard to, inter alia, the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency.’
This interpretation would also fit in well with the last part of recital 31 Dir 2014/24/EU, which the Court did not include in paragraph 62 of its Irgita ruling, and which states that:
‘It should be ensured that any exempted public-public cooperation does not result in a distortion of competition in relation to private economic operators in so far as it places a private provider of services in a position of advantage vis-à-vis its competitors.’ (emphasis added)
If the above were correct, paragraph 62 would contain a simple repetition of an existing obligation. Contrarily, it could be argued that the references in Commission/Germany and Stadt Halle are in fact distinct from the notion that is introduced in Irgita. Whereas these cases refer to an economic operator that can benefit from an exempted contract, the Irgita case concerns a scenario in which the exempted contract could affect competition in a different manner. This is supported by the facts of the Irgita case, which do not refer to a scenario in which private participation was included, because the municipality was a 100% shareholder in the in-house entity. Consequently, it questions why the Court would have included this paragraph in the first place and does not explain why the Court would consider competitive concerns in a scenario between a public-public cooperation and an private operator (public-private) in addition to a competitive scenario between economic operators (private-private).
2nd interpretation: a new general criterion for the institutionalised exemption
Alternatively, paragraph 62 could generate much more significant consequences if it introduces a new criterion for the institutionalised exemption. It could require cooperating public authorities to consider the impact of their cooperation on the market. This introduction of a ‘distortion of competition’ test could require cooperation authorities to analyse if their presence on the market, should they use the discretion granted by article 12 to engage in market activities up to 20% of turnover, would create a distortion of competition. Questionably, however, this test is already covered by the state aid rules (Arts 106 to 108 TFEU), which aim to prevent such distortions—and a straightforward application of the competition rules (Arts 101 and 102 TFEU) to the in-house entity would also serve the same purpose. Furthermore, it could also mean that the use of exemptions like article 12 decreases the potential volume available on the market, thereby also distorting competition.
This interpretation might in fact make the application of the institutionalised exemption entirely impossible, because such distortion would always exist. It seemingly also undermines the standpoint that the Member States are free to organise their public tasks on the national level through cooperation as they see fit, which finds its roots in, amongst other things, article 345 TFEU, art 14 TFEU, article 4(2) TEU and CJEU cases, such as Remondis (C-51/15, EU:C:2016:985) and Stadt Halle (see reference above in Sanchez-Graells 2019; Janssen 2018). If anything, it definitely feeds into discussion about the existence of a principle of competition and its effects within EU public procurement law (A. Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd ed, Bloomsbury-Hart 2015).
3.2. Free movement & cooperation
In addition to the competition issues, the most pertinent issue is the relationship between article 12 Dir 2014/24/EU and, amongst other things, the free movement rules. In its answer to preliminary question 4, the CJEU considers in paragraph 63:
‘In this case, it is particularly the task of the referring court to assess whether, by concluding the in-house transaction at issue in the main proceedings, the subject matter of which overlaps with that of a public contract still in force and performed by Irgita, as the party to whom that contract was awarded, the contracting authority has not acted in breach of its contractual obligations, arising from that public contract, and of the principle of transparency; whether it had to be established that the contracting authority failed to define its requirements sufficiently clearly, in particular by not guaranteeing the provision of a minimum volume of services to the party to whom that contract was awarded, or, further, whether that transaction constitutes a substantial amendment of the general structure of the contract concluded with Irgita.’
Prior to this paragraph, the CJEU states that article 12 provides an exemption from Directive 2014/24, and that contracting authorities must ‘have due regard to, inter alia, the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency’ (Irgita, par. 61). Again, this paragraph brings about interpretative difficulties for which - at least - two interpretations could be relevant.
1st interpretation: an onerous double test of public-public cooperation
The least favorable interpretation would have a significant legal impact, because it would introduce an onerous double test for public-public cooperation. It would mean that, even though the criteria of article 12 are met, that the first contract awarded to Irgita and the second contract awarded to the in-house entity are still under an obligation to fulfill the requirements of the free movement rules (Irgita, par. 63). One effect of this interpretation would be that an exempted in-house contract would still need to comply with the transparency principle.
This interpretation would go against the idea that the EU Public Procurement Directives, which legal basis is found in the internal market, are in fact a specification of the free movement rules. It is, therefore, often assumed that an exemption of these Directives would automatically also cover the free movement rules. Furthermore, the CJEU clarified already in Parking Brixen (C-458/03, EU:C:2005:605), a case about service concessions, that the criteria of the institutionalized exemption could also be applied under the free movement rules (Parking Brixen, par. 62), thereby implying that this exemption is relevant within and outside Directive 2014/24/EU. Needless to say, this interpretation would defeat the added value of the exemption altogether, because an in-house entity might still not be awarded an in-house contract should a double test indeed exist.
One softer - yet unlikely - interpretation of a double test could be that the principle of transparency would require contracting authorities to announce the fact that they are relying on the institutionalized exemption, and that these entities consider the relevant criteria fulfilled. This would fill a crevice that currently exists, which is the absence of knowledge about exempted contracts, thereby allowing these parties to challenge their legality. It is, needless to say, unknown if this is what the Court intended to refer to as the Irigita case is silent on this issue.
2nd interpretation: a double test only applies where a procurement has been made
A second – and seemingly most favorable - interpretation in which two scenarios are relevant for the free movement principles, would be as follows.
The first scenario in which the free movement principles apply concerns national legislatures that have chosen to limit the scope of the institutionalized exemption at the national level. This has been discussed in Section 2 in relation to preliminary question 3a and b. Member States can, thus, clearly limit this exemption through national legislation, and will, if they choose to implement such limitations, be subjected to the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency. This appears to be a classic application of the principles underlying the free movement rules to national legislation.
The second scenario relates to the relationship between the two contract awards in the Irgita case, which would integrate free movement and competitive issues discussed in this post. It would first require, however, to establish that the CJEU erroneously introduced the concept of ‘in-house transaction’ (Irgita, par. 58) as a separate concept under EU law. The Court appears to grant individual weight to this concept, because its repeatedly refers to it as a independent concept that includes both awards of contract (1. to Irgita and 2. to the in-house entity). The Court then implicitly poses the question if the fulfillment of the criteria of article 12 would exempt both awards from the scope of EU law. Other than phrasing it under the new umbrella of ‘in-house transaction’, this is not a new conclusion if one agrees that both awards of contract require separate scrutiny of EU law. In this light, it is not surprising that the Court states that, despite the fulfillment of article 12, the other award to economic operator Irgita still needs to uphold the principle of transparency, amongst other things in relation to contract amendments. Hence, this individual analysis per contract is then extended by the Court to the relationship between the two contracts.
Accordingly, the principle of transparency requires that it is made clear to a reasonably informed tenderer what is to be expected if they are awarded a contract. If the second award of contract to the in-house entity undermines this transparency requirement, it would constitute a sort of “after the fact” breach of this requirement with regards to the first award of contract. Such a breach would be contrary to what can be reasonably expected from an economic operator in the first proceeding and, thus, undermine the effectiveness of Directive 2014/24/EU. Consequently, it could be argued that the national court should interpret and apply national contract law to the first contract that was awarded to Irgita based on the reasonable expectation of transparency based on this Directive.
In a national legal order in which reasonable expectations of the contracting parties are an important tool to interpret a contract, a national court could find that the principle of transparency would require a contracting authority to clearly spell out any right for the contracting authority to choose to purchase the services covered by the contract from a different supplier during the duration of the contract. In fact, Swedish courts have on a few occasions found that there is arguably an obligation for a contracting authority to be clearer and more precise in a contract that has been awarded following a public procurement procedure than what would be the case with a ‘normal’ contract (see Hovrätten för Nedre Norrland, case nr. T-678-14 and Hovrätten över Skåne och Blekinge, case nr. 2798-16).
This interpretation of Irgita’s free movement issue fits in the CJEU’s reasoning, when it focusses on the fact that the scope of the second contract “overlaps with that of a public contract still in force” and on whether the contracting authority has “acted in breach of its contractual obligations” (Irgita, par. 63). As a consequence, this interpretation means that the free movement rules would only apply to a scenario that is similar to the Irgita case in which two overlapping contract awards were made. The double test would in such situations basically be limited to the question of whether the contracting authority was transparent enough when it concluded the first contract about their intent to award a second contract for similar services during the term of the first contract. In other words, this obligation would not preclude the contracting authority from using the institutionalized exemption in the future (see comparatively, and perhaps even contrarily, the General Court’s and the CJEU’s ruling relating to the Dutch TenderNED case (C-687/17, EU:C:2019:932) in which e-procurement was deemed a Service of General Interest, and thus that EU law left room for national organization of procurement functions.)
Finally, it is also possible to construe the same scenario for the competition issues discussed in Section 3.1. Despite the general terminology of the CJEU in its reasoning, it could be that the reference to distortion of competition is solely related to the relationship between the two awards of contract in the Irgita case, making its impact significantly less than discussed in light of potential other interpretative scenarios. No conclusive answers can, however, be given at this point in time.
4. Concluding remarks
The above discussion has shown that the cooperation saga in the procurement context continues. It is clear that the Irgita case provides an interesting stomping ground for discussions about public-public cooperation, harmonization, competition and free movement. We have aimed to provide some initial thoughts on this case. More often than not, it has required us to read between the lines and fill interpretative gaps in an attempt to understand the CJEU’s reasoning.
Overseeing this case and its potential major consequences, we are still uncertain if the Court consciously aimed to change the playing field of cooperation or if the different interpretations have simply arisen due to the Lithuanian case-specific circumstances. Time - and perhaps future CJEU cases - will tell, but for now we are nonetheless left to wonder: is there still room for contractual cooperation between public authorities within EU law?
