Interesting AG Opinion on State aid analysis of procurement compliance, definition of public works contracts, and ‘strategic’ use of remedies by contracting authorities (C-28/23)

On 11 April 2024, AG Campos Sánchez-Bordona delivered his Opinion in NFŠ (C-28/23, EU:C:2024:306). The NFŠ Opinion is very interesting in three respects. First, in addressing some aspects of the definition of public works contracts that keep coming up in litigation in relation to relatively complex real estate transactions. Second, in addressing the effects of a State aid decision on the assessment of compliance with procurement law of the legal structure used to implement the aid package. Third, in addressing some limits on the ‘strategic’ use of remedies by contracting authorities that have breached procurement law. Before providing some comments on the Opinion, I need to make two disclaimers.

The first one is that, exceptionally, I have been involved in the legal proceedings before the ECJ. At the request of NFŠ, I wrote an expert statement addressing some of the issues raised by the case. I am very pleased to see that my own legal analysis coincides with that of AG Campos Sánchez-Bordona, and I hope the Court will also share it in the forthcoming Judgment.

Second, it is worth stressing that this is not a bread and butter procurement case and referring to the legal structure can be cumbersome or confusing if not done precisely. Unfortunately, this has happened in the English translation of the AG Opinion, which is rather poor in some areas. In particular, crucial paragraphs 81 and 96 are incorrectly translated and convey a confusing position. To avoid those issues, I rely on my own translation of the Spanish and French versions of the Opinion (and highlight it where my own translation deviates from the ECJ’s one by placing the relevant parts in [square brackets and italics]).

Background

In short, the case arises from a dispute between the Slovak Government and NFŠ in relation to the Slovak national football stadium. Despite having provided State aid for the construction of the stadium, the State is now unwilling to purchase it from NFŠ in the terms of the aid package. This has resulted in domestic litigation. The request from a preliminary reference emerges in this context.

In 2013, the Slovak Government entered into a grant agreement with NFŠ to support the construction of the national football stadium in Bratislava. However, construction did not immediately proceed and the level of financial support was in need of review. The grant agreement was revised in 2016 (the ‘grant agreement’). In addition to the grant for the construction of the stadium, the Slovak Government also granted NFŠ a unilateral put option to sell the stadium to the State, under certain conditions, during the five years following its completion (the ‘agreement to enter into a future sales agreement’ or ‘AFSA’).

Slovakia notified this set of agreements to the European Commission as State aid. In 2017, the Commission declared those measures to be compatible with the internal market by Decision State Aid SA.46530. The State aid Decision made it clear that the total volume of aid comprised the direct grant plus the value of the put option, and that those modalities and that level of aid were justified in view of the need to provide sufficient financial incentives to get the stadium developed. In relation to the put option, the Commission stated that ‘The option given to the beneficiary allows it to sell the Stadium back to the State in case it wishes to do so. Should the beneficiary decide to exercise the option, the Stadium would become a property of the State’ (para 22). In relation to the obligation to subject the construction of the stadium to competitive public procurement, the State aid Decision also explicitly stated that ‘The construction works financed through the grant … will be subject to a competitive process, respecting the applicable procurement rules’ (para 8).

NFŠ undertook the development of the stadium and awarded contracts for different parts of the works under competitive tender procedures compliant with the Slovak transposition of EU law. All tenders were advertised in the Official Journal of the European Union and in the Slovak official journal. Once the stadium was completed and in operation, NFŠ decided to exercise the put option and called on the Slovak Government to purchase the stadium in the terms foreseen in AFSA.

Simply put, in order to try to avoid the obligation to purchase the football stadium in the terms set out in AFSA, the Slovak Government is arguing that the agreements are null and void because, combined and from the outset, the grant agreement and AFSA would have had the unavoidable effect of getting the stadium built and transferred to the State, and thus cover up the illegal direct award of a public works contract to NFŠ. This part of the dispute concerns the definition of ‘public works contracts’ under Directive 2014/24/EU (section 1 below).

Relatedly, the Slovak Government states that despite containing explicit references to the tendering of the construction of the stadium, the State aid Decision cannot preempt a fresh assessment of the compliance of this legal structure with EU procurement rules. Perhaps surprisingly, this position has been supported by the European Commission, which denied that the explicit mention of compliance with procurement law formed an integral part of its assessment of the compatibility of the set of agreements with EU internal market law. This is a crucial issue and the outcome of this case can provide much needed clarity on the extent to which the Commission does, and indeed must, take procurement law into account in the assessment of State aid measures that involve the award of public contracts. This part of the dispute thus concerns the effect of State aid decisions relating to aid packages with a procurement element (section 2 below).

Finally, it is also important in the case that the State seeks confirmation of the possibility of having the ineffectiveness of the grant agreement and AFSA recognised ex tunc under domestic law, without this being a breach of the Remedies Directive. This relates to the ‘strategic’ use of procurement remedies by contracting authorities that have breached procurement law (section 3 below).

The AG Opinion deals with these issues and is interesting in all respects, but specially the latter two, where it breaks new ground.

1. Definition of a ‘public works contract’

The first issue addressed in the AG Opinion concerns whether the grant agreement and AFSA create such a set of obligations on NFŠ as beneficiary of the aid and developer of the stadium that, in reality, they amount to the illegal direct award of a public works contract for the construction of the stadium. There are three main issues that require detailed consideration:

• whether the contractor had assumed a legally enforceable direct or indirect obligation to carry out the works;

• whether the works should be executed in accordance with the requirements specified by the contracting authority, which thus had decisive influence over the project; and

• whether the contracting authority would obtain a direct economic benefit.

The AG Opinion provides a helpful summary of the case law on these issues (see paras 52-54) and additional guidance on how to apply them in the case, raising significant questions on whether these criteria were met—although the final assessment must be carried out by the referring court.

Legally Enforceable Obligation

First, the Opinion stresses that it is unclear that NFŠ was placed under a legally enforceable obligation to build and transfer the stadium as a result of the grant agreement and AFSA. Importantly, the AG distinguishes the existence of an enforceable obligation to carry out the works from the existence of legal consequences from deciding not to do so. As the Opinion makes clear, the simple existence of the agreements to subsidise the development of the stadium does not ‘support the inference that the Slovak State would have any right to take legal action against NFŠ to compel it to build the stadium should that undertaking ultimately decide not to do so. [A different issue is whether], in that event, NFŠ would not have received the grant, or would have lost it, or would [have been] obliged to pay it back. This in itself, however, has nothing to do with the performance of a works contract’ (para 59).

This is important because it sets the threshold at which a ‘commitment’ to carry out works becomes a legally enforceable obligation for the purposes of EU public procurement law. It reflects an understanding that there has to be a right (in principle) to require specific performance (performance in natura), not solely the existence of legal consequences arising from a decision not to follow through with such a commitment. This is further supported in the fact that ‘the mere grant of a State subsidy involving the [disbursement] of public funds (in the present case, for the purpose of constructing a stadium) does not in itself amount to the conclusion of a public works contract. As recital 4 of Directive 2014/24 states, “the Union rules on public procurement are not intended to cover all forms of disbursement of public funds, but only those aimed at the acquisition of works, supplies or services for consideration by means of a public contract”’ (para 48, underline emphasis in the original).

The Opinion further stresses that:

in order for there to be a genuine works contract, it is essential that the successful tenderer should specifically take on the obligation to carry out the works forming the subject of the acquisition and that that obligation should be legally enforceable [in court]. The contracting authority … must acquire the [building] on which the works are carried out and, [where applicable], [be able to] take legal action [in court] to compel the tenderer awarded the contract to [transfer it], if it holds [legal title covering the encumbrance of the works for the purposes of public use] (para 60, underline emphasis in the original).

This concerns the legal enforceability of the put option from the perspective of the State. In that regard, it will be necessary for the referring court to establish ‘whether NFŠ, once the sports infrastructure had been built, had a legally enforceable obligation to transfer it to the Slovak State, which the latter could assert’ (para 61). The Opinion suggests that this is highly implausible, given that ‘all the indications are that the agreement to enter into a future sales agreement gave NFŠ the option either to remain the owner of the stadium and continue to operate it (or assign its operation to third parties), or to transfer it [to] the Slovak State, if [doing so suited that undertaking]’ (para 62).

Moreover, and this is a crucially interesting aspect of the case, the Opinion stresses that the assessment of the legal enforceability of the put option had already been the object of analysis by the European Commission in its State aid decision and that the Commission had confirmed that it enabled NFŠ ‘ (but does not oblige it) to sell the infrastructure to the Slovak State if that undertaking wishes to do so’ (para 63). This will be particularly relevant in view of the effects of the State aid Decision discussed in section 2 below.

Specifications by the Contracting Authority

A second issue of relevance in the case is that the aid package required for the stadium to meet ‘UEFA Regulations on the construction of category 4 stadiums and those contained in the general Slovak rules on sports infrastructure projects’ (para 65). This raises the question whether the contracting authority could exercise ‘decisive influence over the construction project’ by requiring compliance with those requirements (ibid) and participating in a monitoring committee. The Opinion focuses on the material impact of those circumstances on the development of the project.

Interestingly, the Opinion stresses that ‘UEFA criteria … consist of a number of mandatory parameters in relation to the minimum structural requirements which a stadium must meet in order to be classified in a certain category. However, those criteria are amenable to a variety of architectural solutions that can be developed within very broad margins of professional creativity’; and that ‘The design of football stadiums that comply with the UEFA criteria allows for an extensive range of creative alternatives, both in the external configuration of the stadium and in the structuring of its internal amenities. Those criteria do not … contain the detailed technical solutions which a true proprietor of the work could impose on the tenderer awarded the contract’ (paras 66-67, reference omitted).

This part of the Opinion is interesting in the context of drawing the boundaries between real estate transactions that will be caught or not by the procurement rules because it comes to develop the guidance offered by previous case law (recently C‑537/19, EU:C:2021:319) on the extent to which the specifications need to be sufficiently detailed to exceed the usual requirements of a tenant (C‑536/07, EU:C:2009:664). The further clarification is, in my view, that the specifications should be such as to significantly constrain or predetermine architectural solutions in the design of the works.

Direct Economic Benefit to the Contracting Authority

The Opinion directly refers to the case law on the need that ‘In a public works contract, the contracting authority receives a service consisting of the realisation of works which it seeks to obtain and which has a direct economic benefit for it’ (para 52). In that regard, the Opinion stresses that it is not sufficient for the Slovak State to have an ‘interest (and subsequent indirect benefit) … confined to the generic promotion of the national sport’ (para 64). This is also important because it clarifies the threshold of ‘directness’ and magnitude of the interest that must arise for a legal transaction to be classed as a public contract.

2. Effect of State aid decisions relating to aid packages with a procurement element

Perhaps the most interesting issue that the AG Opinion deals with is the extent to which a State aid Decision declaring a legal structure with explicit procurement implications compatible with the internal market pre-empts a separate assessment of its compliance with EU public procurement law.

As mentioned above, in the NFŠ case, the State aid notification had provided details on the grant agreement and AFSA, and made it explicit that the beneficiary of the aid would run public tenders for the competitive award of contracts for the subsidized works. The Commission explicitly referred to this in the Decision, indicating that ‘The construction works financed through the grant … will be subject to a competitive process, respecting the applicable procurement rules’.

As a starting point, AG Campos stresses that, consequently, any assessment of compliance with EU law cannot ignore ‘the considerations set out by the Commission in Decision SA.46530 in connection with the content of the grant agreement and the agreement to enter into a future sales agreement, where it found that, through those agreements, the Slovak State had granted public aid compatible with the internal market’ (para 47).

In more detail, the AG stresses that ‘the Commission examined the grant agreement and the agreement to enter into a future sales agreement. In Decision SA.46530, it evaluated the public aid associated with those agreements and declared it to be compatible with the internal market’ and that ‘A reading of paragraph 8 shows that what mattered to the Commission was that the construction of the stadium (which represents the very essence of a works contract, whether public or private) should be [subjected to] a competitive process respecting the rules applicable to public contracts’ (para 72, reference omitted, and para 74, underline emphasis in the original).

The AG stressed that the Commission confirmed that this was ‘an essential condition for the compatibility of the aid with the internal market’ (para 73). This led the AG to find that the State aid Decision had the effect of triggering the application of the EU procurement rules by NFŠ, ‘which was put in a situation analogous to that of a contracting authority’ (para 75) and, implicitly, that compliance with EU procurement law concerned the contract/s for the works to be tendered by NFŠ, not the award of the State aid to NFŠ.

Crucially, AG Campos spelled out the implications of such consideration by the Commission of the procurement implications of the State aid package within the procedure for State aid control. In his view:

The Commission can actively intervene in defence of competition where public procurement does not comply with the rules laid down in, inter alia, Directive 2014/24 in order to safeguard this objective [to ensure that “public procurement is opened up to competition”]. I do not see any reason why it should not do so when faced with an examination of the viability of State aid measures resulting from agreements concluded by public authorities with private entities.

In particular, it is my view that the Commission could not have failed to examine whether the form in which the public aid granted to NFŠ was structured masked the existence of a public contract which should have been put out to tender. To my mind, it did so implicitly, which explains paragraph 8 of its Decision SA.46530.

In short, Decision SA.46530 is based on the premiss that there was no obligation to transfer ownership of the stadium to the Slovak Republic. That assumption, to which I have already referred, cannot be called into question by the referring court, which must respect the Commission’s assessment of the factors determining the existence of State aid (paras 77-79, underline emphasis in the original, other emphasis added).

This sets out two important implications. The first one, of relatively more limited scope but crucial practical importance, is that as an implicit effect of the Commission’s monopoly of enforcement of the State aid rules, a previous State aid decision does preclude a fresh assessment of a legal structure for the purposes of its compliance with public procurement law. A national court called upon to assess such legal structure cannot call the Commission’s assessment and must respect the Commission’s assessment of the factors determining the existence of State aid. In the NFŠ case, given that the Commission had clearly assessed the put option as entirely discretionary for NFŠ, it is not now possible for the referring court to deviate from that assessment and consider that it established an obligation legally enforceable by the Slovak Government. This carries the additional implication that the legal structure cannot be classed as a public works contract for the purposes of Directive 2014/24/EU.

Therefore, on this point, the AG could have been clearer and made it explicit that, even if the referring court is in principle tasked with the clarification of the relevant circumstances and their legal classification, in this case and given the prior binding assessment of the Commission, it is not possible to rely on the put option under AFSA to class the legal structure as a public works contract because there was no legally binding obligation concerning the transfer of the stadium. However, this conclusion is plain from the joint reading of paras 63 and 79 of the Opinion.

The second implication is that, by way of principle, there is a general obligation for the Commission to assess the compatibility with the EU public procurement law of State aid measures that have procurement implications. I think this is a clarification of the existing case law on the duty on the Commission to assess State aid measures for compliance with other sets of EU internal market law and a very welcome development given the very close connection between State aid and procurement, as evidenced amongst other sources in the Commission’s guidance on the notion of State aid.

3. ‘Strategic’ use of procurement remedies by contracting authorities

A final issue which is also very interesting is that the case provides a very uncommon set of circumstances whereby the same authority that had granted State aid and accepted the legality of the legal structure creating the put option under which it would be purchasing the stadium is later on (under different political circumstances) trying to get out of its obligations and, in doing so, seeks to gain support for its position from the rules on contractual ineffectiveness in the Remedies Directive—with any such effectiveness arising from its own alleged circumvention of EU procurement law.

Of the treatment of this issue in the AG Opinion, I think the following passages are particularly relevant:

Directive 89/665 is not designed to protect the public authorities from infringements which they themselves have committed, but to allow those who have been harmed by the actions of those contracting authorities to challenge them.

Article 2d of Directive 89/665 presupposes that a person entitled to challenge the conduct of the contracting authority has made use of the relevant review procedure. If, at the end of that review, the body adjudicating on it declares the contract in question to be ineffective, the provisions contained in the various paragraphs of that article will be triggered. As I have already said, however, Directive 89/665 does not make provision for the contracting authority to challenge its own decisions.

[A different issue is whether] national law provides ways for a public authority (or an administrative review body) to review the legality of its previous decisions. Such an eventuality is governed not by Directive 89/665 but by the relevant provisions of national law, in accordance with which it will fall to be determined to what extent an exception may be made to the classic rule venire contra factum propium nulli conceditur (paras 88-90, reference omitted, emphasis added).

I think this may have not needed spelling out except in a bizarre case such as NFŠ. However, I also think that this clarification can have broader implications in relation to the (separate) trend to recognize ‘subjective rights’ to contracting authorities under EU public procurement law (see eg in relation to exclusion decisions in (C-66/22, EU:C:2023:1016; for discussion see here).

Final thoughts

I think NFŠ will be an important case and I very much hope that the Court will follow AG Campos in this case. I also hope that the clarification of the aspects concerning the effect of State aid decisions and, more importantly, the general duty for the Commission to assess compliance of State aid measures with EU public procurement law, will explicitly feature in the judgment of the Court. I also hope the remarks on the inaccessibility of procurement remedies for the contracting authorities that have infringed EU procurement law will feature in the judgment. All of this will provide helpful clarity on issues that should be uncontroversial under general EU law, but which seem to be susceptible of fueling litigation at domestic level.

Procurement tools for AI regulation by contract. Not the sharpest in the shed

I continue exploring the use of public procurement as a tool of digital regulation (or ‘AI regulation by contract’ as shorthand)—ie as a mechanism to promote transparency, explainability, cyber security, ethical and legal compliance leading to trustworthiness, etc in the adoption of digital technologies by the public sector.

After analysing procurement as a regulatory actor, a new draft chapter for my book project focuses on the procedural and substantive procurement tools that could be used for AI regulation by contract, to assess their suitability for the task.

The chapter considers whether procurement could effectively operationalise digital regulation goals without simply transferring regulatory decisions to economic operators. The chapter stresses how the need to prevent a transfer or delegation (ie a privatisation) of regulatory decisions as a result of the operation of the procurement rules is crucial, as technology providers are the primary target in proposals to use procurement for digital regulation by contract. In this post, I summarise the main arguments and insights in the chapter. As always, any feedback will be most warmly received: a.sanchez-graells@bristol.ac.uk.

Background

A first general consideration is that using procurement as a tool of digital regulation requires high levels of digital and commercial skills to understand the technologies being procured and the processes influencing technological design and deployment (as objects of regulation), and the procurement rules themselves (as regulatory tools). Gaps in those capabilities will jeopardise the effectiveness of using procurement as a tool of AI regulation by contract, beyond the limitations and constraints deriving from the relevant legal framework. However, to assess the (abstract) potential of procurement as a regulatory tool, it is worth distinguishing between practical and legal challenges, and to focus on legal challenges that would be present at all levels of public buyer capability.

A second general consideration is that this use of procurement could be seen as either a tool of ‘command and control’ regulation, or a tool of responsive regulation. In that regard, while there can be some space for a ‘command and control’ use of procurement as a tool of digital regulation, in the absence of clear (rules-based) regulatory benchmarks and legally-established mandatory requirements, the responsive approach to the use of procurement as a tool to enforce self-regulatory mechanisms seems likely to be predominant —in the sense that procurement requirements are likely to focus on the tenderers’ commitment to sets of practices and processes seeking to deliver (to the largest possible extent) the relevant regulatory attributes by reference to (technical) standards.

For example, it is hard to imagine the imposition of an absolute requirement for a digital solution to be ‘digitally secure’. It is rather more plausible for the tender and contract to seek to bind the technology provider to practices and procedures seeking to ensure high levels of cyber security (by reference to some relevant metrics, where they are available), as well as protocols and mechanisms to anticipate and react to any (potential) security breaches. The same applies to other desirable regulatory attributes in the procured digital technologies, such as transparency or explainability—which will most likely be describable (or described) by reference to technical standards and procedures—or to general principles, such as ethical or trustworthy AI, also requiring proceduralised implementation. In this context, procurement could be seen as a tool to promote co-regulation or (responsible) self-regulation both at tenderer and industry level, eg in relation to the development of ethical or trustworthy AI.

Against this background, it is relevant to focus on whether procurement tools could effectively operationalise digital regulation goals without simply transferring regulatory decisions to economic operators—ie operating as an effective tool of (responsive) meta-regulation. The analysis below takes a cradle-to-grave approach and focuses on the tools available at the phases of tender preparation and design, tender execution, and contract design and implementation. The analysis is based on EU procurement law, but the functional insights are broadly transferable to other systems.

Tender preparation and design

A public buyer seeking to use procurement as a tool of digital regulation faces an unavoidable information asymmetry. To try to reduce it, the public buyer can engage in a preliminary market consultation to obtain information on eg different technologies or implementation possibilities, or to ‘market-test’ the level of regulatory demand that could be met by existing technology providers. However, safeguards to prevent the use of preliminary market consultations to advantage specific technology providers through eg disclosure of exchanged information, as well as the level of effort required to participate in (detailed) market consultations, raise questions as to their utility to extract information in markets where secrecy is valued (as is notoriously the case of digital technology markets—see discussions on algorithmic secrecy) and where economic operators may be disinclined (or not have the resources) to provide ‘free consultancy’. Moreover, in this setting and given the absence of clear standards or industry practices, there is a heightened risk of capture in the interaction between the public buyer and potential technology providers, with preliminary market consultations not being geared for broader public consultation facilitating the participation of non-market agents (eg NGOs or research institutions). Overall, then, preliminary market consultations may do little to reduce the public buyer’s information asymmetry, while creating significant risks of capture leading to impermissible (discriminatory) procurement practices. They are thus unlikely to operate as an adequate tool to support regulation by contract.

Relatedly, a public buyer facing uncertainty as to the existing off-the-shelf offering and the level of adaptation, innovation or co-production required to otherwise achieve the performance sought in the digital technology procurement, faces a difficult choice of procurement procedure. This is a sort of chicken and egg problem, as the less information the public buyer has, the more difficult it is to choose an adequate procedure, but the choice of the procedure has implications on the information that the public buyer can extract. While the theoretical expectation could be that the public buyer would opt for a competitive dialogue or innovation partnership, as procedures targeted at this type of procurement, evidence of EU level practice shows that public buyers have a strong preference for competitive procedures with negotiations. The use of this procedure exposes the public buyer to direct risks of commercial capture (especially where the technology provider has more resources or the upper hand in negotiations) and the safeguards foreseen in EU law (ie the setting of non-negotiable minimum requirements and award criteria) are unlikely to be effective, as public buyers have a strong incentive to avoid imposing excessively demanding minima to avoid the risk of cancellation and retendering if no technology provider is capable (or willing) to meet them.

In addition, the above risks of commercial capture can be exacerbated when technology providers make exclusivity claims over the technological solutions offered, which could unlock the use of a negotiated procedure without prior publication—on the basis of absence of competition due to technical reasons, or due to the need to protect seclusive rights, including intellectual property rights. While the legal tests to access this negotiated procedure are in principle strict, the public buyer can have the wrong incentives to push through while at the same time controlling some of the safeguarding mechanisms (eg transparency of the award, or level of detail in the relevant disclosure). Similar issues arise with the possibility to creatively structure remuneration under some of these contracts to keep them below regulatory thresholds (eg by ‘remunerating in data’).

In general, this shows that the phase of tender preparation and design is vulnerable to risks of regulatory capture that are particularly relevant when the public buyer is expected to develop a regulatory role in disciplining the behaviour of the industry it interacts with. This indicates that existing flexible mechanisms of market engagement can be a source of regulatory risk, rather than a useful set of regulatory tools.

Tender execution

A public buyer seeking to use procurement as a tool of digital regulation could do so through the two main decisions of tenderer selection and tender evaluation. The expectation is that these are areas where the public buyer can exercise elements of ‘command and control’, eg through tenderer exclusion decisions as well as by setting demanding qualitative selection thresholds, or through the setting of mandatory technical specifications and the use of award constraints.

Tenderer selection

The public buyer could take a dual approach. First, to exclude technology providers with a previous track record of activity falling short of the relevant regulatory goals. Second, to incentivise or recompense high levels of positive commitment to the regulatory goals. However, both approaches present challenges.

First, the use of exclusion grounds would require clearly setting out in the tender documentation which types of digital-governance activities are considered to amount to ‘grave professional misconduct, which renders [the technology provider’s] integrity questionable’, and to reserve the possibility to exclude on grounds of ‘poor past performance’ linked to digital regulation obligations. In the absence of generally accepted standards of conduct and industry practices, and in a context of technological uncertainty, making this type of determinations can be difficult. Especially if the previous instance of ‘untrustworthy’ behaviour is being litigated or could (partially) be attributed to the public buyer under the previous contract. Moreover, a public buyer cannot automatically rely on the findings of another one, as the current EU rules require each contracting authority to come to its own view on the reliability of the economic operator. This raises the burden of engaging with exclusion based on these grounds, which may put some public buyers off, especially if there are complex technical questions on the background. Such judgments may require a level of expertise and available resources exceeding those of the public buyer, which could eg justify seeking to rely on third party certification instead.

Relatedly, it will be difficult to administer such tenderer screening to systems through the creation of lists of approved contractors or third-party certification (or equivalent mechanisms, such as dynamic purchasing systems administered by a central purchasing body, or quality assurance certification). In all cases, the practical difficulty will be that the public buyer will either see its regulatory function conditioned or precluded by the (commercially determined) standards underlying third-party certification, or face a significant burden if it seeks to directly scrutinise economic operators otherwise. The regulatory burden will to some extent be unavoidable because all the above-mentioned mechanisms foresee that (in some circumstances) economic operators that do not have access to the relevant certification or are under no obligation to register in the relevant list must be given the opportunity to demonstrate that they meet the relevant (substantive) qualitative selection criteria by other (equivalent) means.

There will also be additional challenges in ensuring that the relevant vetting of economic operators is properly applied where the digital technology solution relies on a long (technical) supply chain or assemblage, without this necessarily involving any (formal) relationship or subcontracting between the technology provider to be contracted and the developers of parts of the technical assemblage. This points at the significant burden that the public buyer may have to overcome in seeking to use qualitative selection rules to ‘weed out’ technology providers which (general, or past) behaviour is not aligned with the overarching regulatory goals.

Second, a more proactive approach that sought to go beyond exclusion or third-party certification to eg promote adherence to voluntary codes of conduct, or to require technology providers to justify how they eg generally ‘contribute to the development and deployment of trustworthy digital technologies’, would also face significant difficulties. Such requirements could be seen as unjustified and/or disproportionate, leading to an infringement of EU procurement law. They could also be altogether pre-empted by future legislation, such as the proposed EU AI Act.

Tender evaluation

As mentioned above, the possibility of setting demanding technical specifications and minimum requirements for tender evaluation through award constraints in principle seem like suitable tools of digital regulation. The public buyer could focus on the technical solutions and embedding the desired regulatory attributes (eg transparency, explainability, cyber security) and regulatory checks (on data and technology governance, eg in relation to open source code or interoperability, as well as in relation to ethical assessments) in the technical specifications. Award criteria could generate (further) incentives for regulatory performance, perhaps beyond the minimum mandatory baseline. However, this is far from uncomplicated.

The primary difficulty in using technical specifications as a regulatory tool relates to the challenge of clearly specifying the desired regulatory attributes. Some or most of the desired technological attributes are difficult to observe or measure, the processes leading to their promotion are not easy to establish, the outcomes of those processes are not binary and determining whether a requirement has been met cannot be subject to strict rules, but rather to (yet to be developed) technical standards with an unavoidable degree of indefinition, which may also be susceptible of iterative application in eg agile methods, and thus difficult to evaluate at tender stage. Moreover, the desired attributes can be in conflict between themselves and/or with the main functional specifications for the digital technology deployment (eg the increasingly clear unavoidable trade-off between explainability and accuracy in some AI technologies). This issue of the definitional difficulties and the incommensurability of some or most of the regulatory goals also relates to the difficulty of establishing minimum technical requirements as an award constraint—eg to require that no contract is awarded unless the tender reaches a specific threshold in the technical evaluation in relation to all or selected requirements (eg explainability). While imposing minimum technical requirements is permitted, it is difficult to design a mechanism to quantify or objectify the evaluation of some of the desired technological attributes, which will necessarily require a complex assessment. Such assessment cannot be conducted in such a way that the public buyer has an unrestricted freedom of choice, which will require clarifying the criteria and the relevant thresholds that would justify rejecting the tender. This could become a significant sticking point.

Designing technical specifications to capture whether a digital technology is ‘ethical’ or ‘trustworthy’ seems particularly challenging. These are meta-attributes or characteristics that refer to a rather broad set of principles in the design of the technology, but also of its specific deployment, and tend to proceduralise the taking into account of relevant considerations (eg which impact will the deployment have on the population affected). Additionally, in some respects, the extent to which a technological deployment will be ethical or trustworthy is out of the hands of the technology provider (eg may depend on decisions of the entity adopting the technology, eg on how it is used), and in some aspects it depends on specific decisions and choices made during contract implementation. This could make it impossible to verify at the point of the tender whether the end result will or not meet the relevant requirements—while including requirements that cannot be effectively verified prior to award would most likely breach current legal limits.

A final relevant consideration is that technical specifications cannot be imposed in a prescriptive manner, with technology providers having to be allowed to demonstrate compliance by equivalence. This limits the potential prescriptiveness of the technical specifications that can be developed by the public buyer, at least in relation to some of the desired technological attributes, which will always be constrained by their nature of standards rather than rules (or metrics) and the duty to consider equivalent modes of compliance. This erodes the practical scope of using technical specifications as regulatory instruments.

Relatedly, the difficulties in using award criteria to pursue regulatory goals stem from difficulties in the operationalisation of qualitative criteria in practice. First, there is a set of requirements on the formulation of award criteria that seek to avoid situations of unrestricted freedom of choice for the public buyer. The requirements tend to require a high level of objectivity, including in the structuring of award criteria of a subjective nature. In that regard, in order to guarantee an objective comparison and to eliminate the risk of arbitrary treatment, recent case law has been clear that award criteria intended to measure the quality of the tenders must be accompanied by indications which allow a sufficiently concrete comparative assessment between tenders, especially where the quality carries most of the points that may be allocated for the purposes of awarding the tender.

In part, the problem stems from the absence of clear standards or benchmarks to be followed in such an assessment, as well as the need to ensure the possibility of alternative compliance (eg with labels). This can be seen, for example, in relation to explainability. It would not suffice to establish that the solutions need to be explainable or to use explainability as an award criterion without more. It would be necessary to establish sub-criteria, such as eg ‘the solution needs to ensure that an individualised explanation for every output is generated’ (ie requiring local explainability rather than general explainability of the model). This would still need to be further specified, as to what type of explanation and containing which information, etc. The difficulty is that there are multiple approaches to local explainability and that most of them are contested, as is the general approach to post hoc explanations in itself. This puts the public buyer in the position of having to solve complex technical and other principled issues in relation to this award criterion alone. In the absence of standard methodologies, this is a tall order that can well make the procedure inviable or not used (with clear parallels to eg the low uptake of life-cycle costing approaches). However, the development of such methodologies parallels the issues concerning the development of technical standards. Once more, when such standards, benchmarks or methodologies emerge, reliance on them can thus (re)introduce risks of commercial determination, depending on how they are set.

Contract design and implementation

Given the difficulties in using qualitative selection, technical specifications and award criteria to embed regulatory requirements, it is possible that they are pushed to to the design of the contract and, in particular, to their treatment as contract performance conditions, in particular to create procedural obligations seeking to maximise attainment of the relevant regulatory goals during contract implementation (eg to create specific obligations to test, audit or upgrade the technological solution in relation to specific regulatory goals, with cyber security being a relatively straightforward one), or to pass on, ‘back-to-back’, mandatory obligations where they result from legislation (eg to impose transparency obligations, along the lines of the model standard clauses for AI procurement being developed at EU level).

In addition to the difficulty inherent in designing the relevant mechanisms of contractualised governance, a relevant limitation of this approach to embedding (self-standing) regulatory requirements in contract compliance clauses is that recent case law has made clear that ‘compliance with the conditions for the performance of a contract is not to be assessed when a contract is awarded’. Therefore, at award stage, all that can be asked is for technology providers to commit to such requirements as (future) contractual obligations—which creates the risk of awarding the contract to the best liar.

More generally, the effectiveness of contract performance clauses will depend on the contractual remedies attached to them and, in relation to some of the desirable attributes of the technologies, it can well be that there are no adequate contractual remedies or that the potential damages are disproportionate to the value of the contract. There will be difficulties in their use where obligations can be difficult to specify, where negative outputs and effects are difficult to observe or can only be observed with delay, and where contractual remedies are inadequate. It should be stressed that the embedding of regulatory requirements as contract performance clauses can have the effect of converting non-compliance into (mere) money claims against the technology provider. And, additionally, that contractual termination can be complicated or require a significant delay where the technological deployment has created operational dependency that cannot be mitigated in the short or medium term. This does not seem necessarily aligned with the regulatory gatekeeping role expected of procurement, as it can be difficult to create the adequate financial incentives to promote compliance with the overarching regulatory goals in this way—by contrast with, for example, the possibility of sanctions imposed by an independent regulator.

Conclusion

The analysis has stressed those areas where the existing rules prevent the imposition of rigid regulatory requirements or demands for compliance with pre-specified standards (to the exclusion of alternative ones), and those areas where the flexibility of the rules generates heightened risks of regulatory capture and commercial determination of the regulatory standards. Overall, this shows that it is either not easy or at all possible to use procurement tools to embed regulatory requirements in the tender procedure and in public contracts, or that those tools are highly likely to end up being a conduit for the direct or indirect application of commercially determined standards and industry practices.

This supports the claim that using procurement for digital regulation purposes will either be highly ineffective or, counterintuitively, put the public buyer in a position of rule-taker rather than rule-setter and market-shaper—or perhaps both. In the absence of non-industry led standards and requirements formulated eg by an independent regulator, on which procurement tools could be leveraged, each public buyer would either have to discharge a high (and possibly excessive) regulatory burden, or be exposed to commercial capture. This provides the basis for an alternative approach. The next step in the research project will thus be to focus on such mandatory requirements as part of a broader proposal for external oversight of the adoption of digital technologies by the public sector.

New lengthy reference by Lithuanian Supreme Court raises a range of difficult questions (C-927/19, Klaipėdos regiono atliekų tvarkymo centras) [guest post by Dr Deividas Soloveičik*]

This guest post by Dr Deividas Soloveičik provides interesting background and critical remarks on a recent Lithuanian reference to the Court of Justice for a preliminary ruling on issues concerning several aspects of the 2014 rules, in particular interesting boundary issues between qualitative selection and technical specifications, as well as exclusion of consortium partners. It will be interesting to keep an eye on the case, as it brings an opportunity for the CJEU to expand its case law.

Some difficult questions

The very end of the 2019 was highlighted by a new lengthy preliminary reference to the CJEU by the Supreme Court of Lithuania (the Supreme Court), in a case that raises a broad range of issues concerning economic and financial standing requirements, the boundary between qualitative selection and technical specification criteria, confidentiality of procurement documents in the context of ensuing litigation and the consequences of the provision of false information. This case and the initial findings of the Supreme Court will be  assessed in this “executive summary” of the references sent to the CJEU—which, at the time of writing (17 January 2020) are yet to be admitted (although the referral has been assigned case number C-927/19, Klaipėdos regiono atliekų tvarkymo centras).

Before proceeding to the analysis, it is worth recalling that, in relation specifically to the point on submission of false information and its impact on the potential exclusion of the tenderer concerned the Supreme Court was perfectly aware of the recent Judgments in Meca (C-41/18, EU:C:2019:507, not available in English) and Delta (C-267/18, EU:C:2019:826) case-law at the time of the reference to the CJEU. However, the Court extends its query and mainly is seeking to find out whether (i) the act of provision of false information by one of the consortium partners “infects” the rest of the team and (ii) what the role of the national court hearing this kind of legal case in the light of the above-mentioned Meca and Delta case-law is, when the CJEU previously specifically emphasized the importance of the discretion of the contracting authority while handling these kind of legal (procurement) situations.

Background

The Lithuanian contracting authority started an open tender for the services of municipal waste gathering and removal to landfill treatment facilities. The procurement procedure was regulated by national and Directive 2014/24/EU. The procurement documents inter alia included the following requirements:

• Technical specification: the service provider uses vehicles for waste management services that are in line with the requirements of EURO 5 standard; all vehicles must have installed constantly functioning GPS transmitters that would allow the contracting authority monitoring the exact location and movement route of the vehicle. The supplier must allow the contracting authority and the administration of the Neringa municipality to use its installed GPS as much as it is necessary to monitor the location and movement routes of the vehicles used in providing the services of waste management and transporting waste to landfill. If sub-suppliers are involved, this requirement is also applicable for their vehicles.

• Technical and professional capacity: the supplier must own or lease (or possess otherwise) the necessary quantity of vehicles needed to execute the public contract and these must comply with the requirements listed in the technical specifications. The requirements for qualification and technical specification were almost identical.

• Financial and economic capacity: tenderers’ average annual operating income from carrying out the activities related to the management of mixed municipal waste during the past 3 financial years (or the period since the supplier’s registration date if the supplier carried out the activities for a period less than 3 financial years) had to be not less than EUR 20,000 EUR excluding VAT.

There were three tenderers in a procedure: the plaintiff, another company and an awardee of the public contract, which was a consortium comprised by three individual companies. The plaintiff took second place. The plaintiff submitted the claim against the contracting authority claiming that the winner had not complied with the: (i) technical specifications – the vehicle indicated by the supplier is not for the mixed waste transportation and considering the years of manufacture – it does not comply with the requirements of the EURO 5 standard; (ii) financial and economic requirements - the average annual operating income of the supplier while carrying out the activities related to the management of mixed municipal waste during the past 3 financial years must be not less than EUR 20 000 EUR excluding VAT, but one of the joint venture partners of the supplier does not carry out waste management activities overall. The crux of the dispute was thus the following: one of the consortium partners made a statement that it had experience in management of mixed municipal waste. The claimant contended that this might not have been the truth because this partner of the consortium had never rendered any services of this type. So the claimant maintained that (a) this consortium partner did not have the needed qualification and (b) that this consortium partner made a false statement. This must have led, in the opinion of the claimant, to rejection of the consortium’s tender.

The court of first instance dismissed the claim but the appeal was successful, and the court obliged the contracting authority to re-execute the evaluation of the tenders. The Court of Appeals considered that the winner of the tender did not prove that it had the technical capacity, because the original tender did not include the information on the required vehicles, which were provided by the tenderer only after the submission of the bid to the contracting authority.

The initial awardee of the contract did not agree with the findings of the Court of Appeals and filed a cassation complaint which was accepted by the Supreme Court.

Regarding the financial and economic capacity as a qualification criterion

By raising the question on the scope of the qualification requirement to hold a relevant financial and economic capacity, the Supreme Court addressed the above-mentioned statements of the procurement documentation which required each tenderer to have an annual operating income from carrying out the activities related to the management of mixed municipal waste during the past 3 financial years or the period since the supplier’s registration date (if the supplier carried out the activities for a period less than 3 financial years) of not less than EUR 20,000 EUR excluding VAT. There were three legal aspects which triggered the Court’s doubts.

First, by reading Art. 58(3) of Directive 2014/24/EU the Supreme Court was prone to conclude that the latter limited the discretion of the contracting authority to require the suppliers to have a turnover from a very specific (niche) economic (business) activity as a sole and main financial criterion. The Court reasoned that the main goal of Art. 58(3) of the Directive was to help contracting authorities finding a financially trustworthy and economically stable contract partner. Therefore, the Court believed that, on the one hand, it allowed the contracting authorities to request from the tenderers having a general financial turnover (as specified in the procurement documentation) and, on the other hand, it left leeway to request the proof of the financial (monetary) capacity gained from a more specific business activity, because the wording of Art. 58(3) of the Directive 2014/24 contains a statement “... including a certain minimum turnover in the area covered by the contract”. However, the Court considered that any requirement for the suppliers’ qualification which is based on Art. 58(3) of Directive 2014/24 (and respectively the national procurement law) should (or even must) a priori address the general financial turnover and must not use a turnover from a niche commercial activity autonomously (i.e. as a sole requirement for financial and economic qualification). In the given case, it seems that the Supreme Court doubted if the contracting authority had a right to require an annual operating income to be received from carrying out the activities related to the management of mixed municipal waste as a single selection ground. The wording of the ruling suggests that the Supreme Court deemed that the contracting authority had a right to require a general turnover (e.g. 200,000 EUR annually) and an income from a specific activity (e.g. 20,000 EUR from management of mixed municipal waste), but not only the latter.

Second, by reading a text of the ruling it seems that the Supreme Court reasoned that if the interpretation of the Art. 58(3) of the Directive 2014/24 was otherwise, i.e. as allowing the contracting authority to require financial and economic standing on the basis of a narrow experience (like in a given case from management of mixed municipal waste), then, in the Supreme Courts’ view, there would be a blurred line between the qualification related to financial and economic standing and the one connected to technical and professional ability. There would hardly be a difference between Art. 58(3) and Art. 58(4) of Directive 2014/24. In other words, the Supreme Court considered that even if legally the requirement for qualification was named as a financial and economical one, it in fact would be the requirement for technical and professional ability when it required financial flows to be gained from a very specific practice. Therefore, it might be said that the Court’s question to the CJEU has an indirect perspective, namely the Court wants the CJEU to clarify the lines between Arts. 58(3) and 58(4) of the Directive 2014/24/EU.

Third, the Court went on to examine the CJEU case-law in Esaprojekt (C-387/14, EU:C:2017:338) and its possible application to the case at hand. It must be recalled that the awardee of the public contract was a consortium of three companies. One of these companies (say company A) constantly held that it had the required financial qualification, because it maintained that this requirement was not personal and could be relied upon as a capacity gained from the execution of a previous public contract which was executed by the consortium to which company A was a member. However, company A did not itself render the services related to the management of mixed waste and therefore it had not received any income from that.  Therefore, the claimant contended that the company A could not hold that it had received any income from the management of mixed municipal waste and, therefore, it did not have a required qualification. The Court recalled that in Esaprojekt the CJEU stated that an economic operator cannot refer to the qualification gained by the whole consortium and may only be deemed to be qualified to the extent it itself executed the relevant (part of) public contract. Therefore, the Supreme Court wonders if this ratio decidendi, delivered in Esaprojekt in respect of technical and professional ability as a qualification requirement, should be applied on the same grounds while dealing with financial and economic standing of the suppliers.

In the light of these considerations, the Court asked the CJEU to answer:

(i) if the requirement to prove the annual income of the relevant size, received from a specific commercial activity (the management of mixed municipal waste), should be subsumed under Art. 58(3) or Art. 58(4) of the Directive 2014/24;

(ii) if the answer to the previous question had any effect on the application of the rules, provided in Esaprojekt, namely, whether it is allowed under the EU public procurement law to disregard the financial and economical capacity, gained during the joint bidding and execution of the previous public contract, if this capacity in corpore is relied upon by a single member of consortium in a later procurement procedure. In other words, the Supreme Court seeks to find out if a consortium member (company A) in a present tender can rely on a qualification, gained by another consortium, to which this company A was also a member, although company A did not actually and directly execute the part of the contract to which it seeks to rely in the later (present) tender (in this case – the management of mixed waste).

Regarding the separation between professional and technical capacity and technical specifications

It is a consistent and already an old national case-law which makes a very clear and precise dividing line between the requirements of the suppliers’ qualification (selection criteria) and technical specification. The Supreme Court maintains a principle that this separation has a substantial practical implication because under the settled case-law of the Lithuanian courts each discrepancy of the tender that is related to qualification (missing document, insufficient provision of required information on qualification, etc.), may be easily rectified. This means that it is forbidden to reject the a tender without at least requesting for a decent explanation from the supplier. The Supreme Court holds that such approach is in line with the view of the CJEU, expressed in such cases as SAG ELV Slovensko (C-599/10, EU:C:2012:191) or Manova (C-336/12, EU:C:2013:647). Meanwhile, any part of the tender that is connected to the requirements of technical specification cannot be amended, rectified or explained by an economic operator at a later stage of procurement in such a way as to turn the non-compliant original tender into a compliant one.

It must be recalled that in this case the requirements for the technical and professional capacity (the supplier must own or lease (or possess otherwise) the necessary quantity of technical measures needed to execute the public contract) were copy-pasted to the technical specification. Therefore, the situation itself became confusing: if those conditions were deemed as criterion for qualification, then there must have been a possibility to provide the additional information upon the request of the contracting authority (what was one of the arguments by the respondent in a case). Meanwhile, in case of an opposite legal approach, i.e. that such requirements are a part of technical specification, any amendment to the original tender after the submission deadline would undergo a much stricter test.

Therefore, the Supreme Court cast doubts on the legal possibility of the mentioned technical and professional qualification requirement. Although the Court referred to Commission v. Netherlands case (C-368/10, EU:C:2012:284) as the one allowing “relevant similar simultaneous requirements both as a condition of technical specification and criteria for entering into a public contract or its execution”, the Supreme Court was not sure if the qualification criterion can be so detailed and exhaustive as it was in the disputed procurement. The Court went on with its reasoning that the more detailed the requirement on qualification was, the more likely it was already a condition of the technical specification and not a selection criterion. In other words, it seems that the Supreme Court was prone to consider that the requirement on qualification cannot be so detailed as it should be in case of technical specification.

Thus, the Court asked the CJEU if the requirement of the procurement documentation that the economic operator used the vehicles needed for waste management services, that were in line with the requirements of EURO 5 standard; all vehicles must have had installed constantly functioning GPS transmitters, that would have allowed the contracting authority monitoring the exact location and movement route of the vehicle fell within the scope of regulation of Directive 2014/24 a) Art. 58(4), b) Art. 42 together with the Annex VII or c) Art. 70.

Regarding the scope of obligation of confidentiality in the light of effective remedies in public procurement

Although since Varec (C-450/06, EU:C:2008:91) there has not been a major development of the concept of confidentiality in public procurement law, on the contrary, in Lithuania it is one of the hottest legal topics during the recent five years. It has been circulated in all possible layers of the legal world, starting from the legislation and ending with the widely elaborated case-law [more on this might be read here: D Soloveičik, ‘Rethinking the confidentiality in public procurement: does public mean naked public?’ (2018) 1 UrT 11-26; for comparative perspectives, see the contributions to K-M Halonen, R Caranta & A Sanchez-Graells (eds), Transparency in EU Procurements. Disclosure Within Public Procurement and During Contract Execution (Elgar 2019)). In a nutshell the current national legal ecosystem in respect of confidentiality could be described as promoting extreme transparency in public procurement and thus limiting the disclosure of competitors’ information in very rare cases, mostly related to top commercial secrets of private parties. The Supreme Court considers that the mentioned “pro disclosure” case-lawis in line not only with the requirements of the principle of effectiveness of remedies in public procurement, but also with the regulation of Directive 2016/943/EU on the protection of trade secrets.

Despite the legal ecosystem, where the transparency should prosper, paradoxically the administrative practice during the procurement procedure is usually different. The contracting authorities, albeit being precisely aware of the mentioned juridical requirements to grant access to the relevant documentation, still are very disclosure averse. In a majority of procurement cases the contracting authorities deny the tenderers their right to gain the access to the competitors’ commercial proposal by arguing that this might lead to an illicit leak of a commercial secret. Moreover, while rejecting the claims of the tenderers, contracting authorities tend to give very abstract and uncomprehensive answers.

This leads to a situation where tenderers launch their legal challenges in from of the courts without having seeing the full picture of the procurement process and, therefore, being refused  an effective protection of their rights as required by the EU public procurement remedies directives. Usually in such cases the situation is rectified by the courts, which tend to disclose the information if it is not a commercial secret. As there is a two-layer procurement dispute system in Lithuania, where access to the court is guaranteed only after the prior submission of the claim to the contracting authority itself, the Supreme Court raised the issue of consistency and rationality of such practice when contracting authorities try to hide the information (usually the winners’) and then such information is only gained at the stage of litigation in court. This makes the procurement dispute at the stage of contracting authority useless. Therefore, the Court referred to Art. 1(1)(3) of Directive 89/665/EEC, Art. 21 of Directive 2014/24/EU and Directive 2016/943/EU and asked the CJEU if:

(i) if the contracting authority must deliver to the requesting tenderer the information comprising the competitors’ tender if such request is related to a legal challenge of such tender and is needed to verify its compliance with the requirements of the procurement documentation, subject to the fact that the claiming tenderer previously asked for this information. It is interesting to note that actually the main point of that question is whether the contracting authorities should be obliged to disclose the required information in order to avoid the mentioned practice that the information is locked during an early stage of the dispute, meanwhile it will still most likely be unlocked when it reaches the court. The hidden idea of the inquiry is that if it appears that the answer to the question is positive and the contracting authorities would be obliged to be almost fully open, then less disputes might reach the courts as the tenderers, after seeing the competitors’ tender, may find out that their claim would be unfounded.

(ii) In case the contracting authority rejects the suppliers’ claim, if its answer must be comprehensive, clear and informative, even though such an answer and its wording may disclose the confidential information. In other words, the Supreme Court wants to know to what extent the contracting authorities may be reserved while replying to the disclosure requests from tenderers, on the grounds that providing a detailed justification for the rejection could in itself constitute a breach of confidential treatment.

(iii) The mentioned provisions of the EU law must be understood as allowing the tenderer to separately challenge before the court the decision of the contracting authority each time it decides to reject the suppliers’ request for access to the competitors’ bid. It has to be mentioned that it is a long-standing national case-law which allows this kind of legal action in Lithuania. So, it seems that the Supreme Court knows the answer because it gave it to all the practitioners itself a long time ago. However, the inquiry sent to the Luxembourg is more an implicit request for verification if such case-law is in line with the EU legal regulation. An additional aspect to this inquiry is that the Supreme Court wanted to know if in the above-mentioned legal situations the tenderer may claim only the denial of the access to information, leaving the rest of possible legal claims, related to the competitors bid, aside. It seems that the Court is prone to think that if the answer to this question was positive, it would most likely mean that such tenderer would not lose its right to challenge these additional irregularities of the competitors’ tender after it receives the relevant information from the contracting authority, even if it is done with the assistance of the court. In other words, this part of the question is related to possible (non)application of limitation of actions.

(iv) Another two questions were related to a procedural law. The Court asked if the national court, hearing the public procurement dispute, in all cases must require the information on the challenged competitors’ tender from the contracting authority, despite its previous actions during the public procurement procedure. And a related question: if Art. 9(2)(3) of Directive 2016/943/EU must be understood as requiring the court, which declined the disclosure of the competitors’ tender to the claimant (but having this information in a file), to take this information into consideration while deciding on a merits of the case. In other words, the Supreme Court is asking whether the courts hearing the public procurement cases and having the information on one of the tenderers’ tender and which they decided to leave locked (meaning that the claimant would not see this data), are under an obligation to examine such information ex officio and take it into consideration while deciding the case. This means that in case of a positive answer to that question, the claimant might still have a chance to win the case, even without seeing the whole materials of a case-file, if there were actual irregularities of the competitors’ tender and the court spotted them.

Regarding the legal consequences of submitting false information and the courts’ discretion to decide upon this

Under the national provisions of the Law on Public Procurement, economic operators can be “blacklisted” if they provide false information to the contracting authority during the procurement procedure. In case of a joint bidding, all of the consortium members are included into this list.

In the case before the Court, one of the members of the consortium that was awarded the public contract was presenting to the contracting authority an inconsistent information regarding its previous financial income. The Supreme Court mentioned that according to the Esaprojekt ruling (above), there is no need to identify the intentional misbehavior of the tenderer in order to reject its bid. The Court reminded that purely negligent actions are sufficient to disqualify the tenderer if such actions could seriously mislead the contracting authority and negatively affect the result of the procurement. Therefore, taking into consideration the facts of a case, the Supreme Court stated that the actions of the mentioned consortium member, in Court’s view, might be considered as negligent.

After the Court came to such a conclusion, on the one hand it most likely must have decided that the tender of the consortium was invalid and that all the members were blacklisted. On the other hand, the Court was stopped from moving towards this legal direction because of two reasons. Firstly, the contracting authority was of the opposite opinion. It did not hold the tenderer negligent and neither it considered the consortiums’ given information as false. Therefore, the Court had a doubt if it can decide on its’ own initiative completely opposite to the direct will of the contracting authority. Secondly, these doubts were amplified by the recent findings of the CJEU in the above-mentioned Delta and Meca cases, where the Court of Luxembourg emphasized that it is a contracting authority, and only it, which is empowered to decide regarding the reliability of the economic operator. In the light of these conclusions, the Supreme Court decided to stay proceedings and request for explanation from the CJEU on the scope and limits of the discretion of national courts in such legal situations.

Besides, the Supreme Court raised a question on whether in case of submission of false information to the contracting authority the consequences of blacklisting must be applied to all members of the consortium. The Court noted that it is natural to expect the possibility of legal risks, related to the participation in a tender (e.g. the need to replace the partner due to its default, etc.). However, the Supreme Court considered that any such risk should be limited to the particular procurement and not be implemented in a way of a total ban on participation for a specified period of time and for all the consortium members. Although the Court did not use this wording, but it implied that this might be disproportionate.

Therefore, the Court asked the CJEU two following questions:

(i) If, in the light of the Art. 57(4)(h) of Directive 2014/24/EU and the Delta case, the national court is allowed, despite the will of the contracting authority, to ex officio decide that the economic operator intentionally or by negligence provided the contracting authority with false information and must have been excluded from the public tender.

(ii) If, in the light of the Art. 57(4)(h) of Directive 2014/24/EU and the principle of proportionality, the disqualification of a tenderer from a procurement procedure with the possible consequences of being “blacklisted” for the specified period of time is applicable against all the members of a joint bidding consortium or just against the economic operator responsible for such misbehavior.

Conclusion

There is no doubt that the Lithuanian Supreme Court triggered important issues related to public procurement practice. The answers from the CJEU are much awaited because procurement professionals face similar situations daily. Some of the areas, such as confidentiality, are extremely different across many EU jurisdictions, albeit all procurers operate under the same EU law on public procurement. Therefore, the interpretation suggested by the CJEU will be used to further unify practice across the internal market.

Dr. Deividas Soloveičik, LL.M

Dr Deividas Soloveičik is a Partner and Head of Public Procurement practice at COBALT Lithuania. He represents clients before national courts at all instances and arbitral institutions in civil and administrative cases, provides legal advice to Lithuanian and foreign private clients and contracting authorities, including the European Commission , on the legal aspects of public procurement and pre-commercial procurement.

Dr Soloveičik is an Associate Professor and researcher in commercial law at Vilnius University and a contributor to legal publications. He also closely cooperates with globally recognized academic members of the legal profession. Since 2011, MCIArb. Dr Soloveičik is a member of the Chartered Institute of Arbitrators; since 2016, he is a member of the European Assistance for Innovation Procurement – EAFIP initiative promoted by the European Commission and a recommended arbitrator at Vilnius Court of Commercial Arbitration.

* Guest blogging at HTCAN: If you would like to contribute a blog post for How to Crack a Nut, please feel free to get in touch at a.sanchez-graells@bristol.ac.uk. Your proposals and contributions will be most warmly welcomed!

Feedback welcome on working paper on smart urban mobility and procurement

I have been invited to present a paper at a workshop on smart urban mobility organised by the Max Planck Institute for Innovation and Competition on 22-23 November 2019. I have uploaded on SSRN a work-in-progress version of the paper I am preparing, on which I would really welcome any feedback. The title of the paper is ‘Some public procurement challenges in supporting and delivering smart urban mobility: procurement data, discretion and expertise‘, and its abstract is as follows. Thank you in advance for any comments you may send me to a.sanchez-graells@bristol.ac.uk.

This paper explores three of the challenges that public buyers face when designing public tenders to support the delivery of smart urban mobility initiatives and when supervising the execution of the relevant contracts. First, the paper covers emerging issues around access and reuse of transport data that may be hindering ‘out of the box’ thinking and the deployment of artificial intelligence in this area. Second, the paper also discusses some well-known issues ‘within the regulatory box’ around the exercise of discretion in the choice of sustainable technical solutions, the constraints surrounding certain types of complex and collaborative procurement and the difficulties in monitoring contract compliance clauses. Third, the paper arrives at the realisation that the main challenges in delivering and supporting smart urban mobility through procurement relate to the higher-level or cross-cutting challenge of the professionalisation of the procurement taskforce and the need to bridge significant (and growing) knowledge gaps, and thus explores existing policy interventions aimed at the professionalisation and networking of procurement officials. The paper concludes with some overall reflections and a call for a more active role by the new Von der Leyen Commission.

When will you show me the papers? Technical capacity, technical dossiers and verification during the procurement process (C-14/17)

By Avius Quovis

In his Opinion of 28 February 2018 in VAR, C-14/17, EU:C:2018:135 (not available in English), AG Campos Sánchez-Bordona addressed a tricky preliminary question regarding the procurement of spare parts for buses, trolleybuses and tramways under the 2004 Utilities Procurement Directive (Dir 2004/17/EC). The legal dispute concerned the procedural stage at which contracting authorities must require tenderers to provide certificates attesting compliance with the applicable technical specifications. AG Campos suggested that such phase needs not always be prior to the award of the contract.

This case is relevant in the context of the contracting authorities’ verification duties prior to the award of the contract. In my view, while couched in promising pro-competitive terms aimed at preventing the imposition of disproportionate participation requirements, the approach followed by AG Campos can create legal uncertainty and an irreconcilable functional tension with prior cases such as EVN and Wienstrom (C-448/01, EU:C:2003:651). Therefore, the VAR Opinion merits some critical discussion.

Background

It is important to note that the VAR case has the relevant peculiarity that the contracting authority (presumably) owning a stock of vehicles of a given brand, had specified for the spare parts to be of such named brand ‘or equivalent’ as part of the technical specifications. Therefore, the relevant certificates were not of compliance with functional technical specifications or prescribed technical standards, but rather ‘certificates of equivalence’ between the offered parts and the named branded parts. The contracting authority had indicated in the tender documentation that such certificates of equivalence had to be submitted with the first supply of equivalent parts. As a result, the chosen tenderer was awarded the contract without having provided documentary evidence of the equivalence between the (cheaper) offered parts and the (pricier) branded ones. As could be expected, after the contract was awarded to the competing supplier, the ‘original equipment manufacturer’ (OEM, or owner of the brand) challenged the decision on the grounds that Dir 2004/17 required submission of the relevant certificates pre-award and that the contracting authority could not legally award a contract without having carried out minimal technical compliance verification.

The canonical view

The position taken by the disappointed tenderer that equivalence certificates should have been required prior to the award of the contract represents, in my opinion, the canonical view. Indeed, this was also the position of the Italian Government and the European Commission in this case, both of which held that a systemic interpretation of the relevant rules (ie Art 34(8), in relation to Art 34(3) and 34(4) Dir 2004/17) leads to the conclusion that certificates must be required prior to the award of the contract (see AGO, para 22).

As AG Campos sums up their arguments (see paras 38-41), such systemic/functional interpretation would derive from the fact that (i) proof of technical equivalence is a necessary element for the contracting authority to reach a judgment on which is the most economically advantageous tender amongst those received; (ii) in the absence of a prior verification of the tenderers’ ability to deliver on their contractual obligations, a contracting authority faced with non-compliant supplies would only be left with the option to terminate the contract, which is undesirable; and (iii) given that Art 34(8) Dir 2004/17 solely establishes the exceptionality of the recourse to a named brand and prohibits it except if twinned with the explicit mention of the acceptability of equivalent solutions, the general requirements for verification of technical compliance under Arts 34(3) and 34(4) Dir 2004/17—both of which require pre-award submission of documentation—should be applicable to cases where the contracting authority has made use of the exceptional reference to branded products.

In my view, this reflects the correct interpretation of the rules on verification of technical compliance under Dir 2004/17—and the same logic that remains applicable under the revised rules of the 2014 Public Procurement Package.

An alternate view

However, taking an alternate view, AG Campos suggested that Dir 2004/17 does not necessarily require tenderers to provide—and, implicitly, does not necessarily require contracting authorities to demand that tenderers submit—the relevant certificates prior to award of the contract if (i) the contracting authority has specified products of a named brand ‘or equivalent’, and (ii) it has indicated that such documents need only be submitted with the first supply of spare parts (para 74). The reasons given for this approach—which are flanked by thought-provoking references to the competition law rules applicable to the distribution of vehicles and their parts (not to be discussed in this post)—can be summarised as follows (see paras 42 and ff):

(1) AG Campos considers that the possibility to use a direct reference to branded products ‘or equivalent’ changes the contours of the technical verification to be undertaken by the contracting authority. The rules requiring pre-award verification are justified by the uncertainty or indetermination derived from the discretion conferred to the contracting authority in the way it can set technical specifications (eg by performance requirements alone, or mixed with technical standards). In contrast, “[w]hat explains the singular mention of a trademark, a patent or similar figures (always with the addition of their ‘equivalents’) is that the space of indetermination disappears. When, for example, it is only possible to supply spare parts for vehicles corresponding to a single brand …, or their equivalents, the contracting authority has already chosen to make "a sufficiently precise and intelligible description of the object of the contract". This is the key difference with respect to paragraphs 3 and 4 of Article 34 of Directive 2004/17, which makes it possible to deal disparately with the requirements on certificates of equivalence” (AGO C-14/17, para 43, own translation from Spanish). In other words, the reference to the brand ‘or equivalent’ would have made the technical specifications so precise that no verification of technical compliance would be necessary prior to the award of the contract.

In my view, this is a functionally and logically untenable position. Given that the use of a reference to branded products is only acceptable “on an exceptional basis, where a sufficiently precise and intelligible description of the subject-matter of the contract pursuant to paragraphs 3 and 4 is not possible”, the recourse to the brand can only be considered as short-hand or a proxy for what are otherwise insufficiently precise or inintelligible technical descriptions of the goods to be supplied. This cannot be seen as excluding the need to assess technical equivalence, but simply as setting the technical benchmark against which such verification needs to be carried out—for otherwise, how could the contracting authority make sure that the supplies of anyone by the OEM meet the requirements?

(2) AG Campos also considers that there is a clash of public and private interests that excludes a requirement of unavoidable pre-award verification of technical compliance. Or, in other words, “[i]t is of course legitimate to have the concern not to frustrate the success of the procedure, which could happen if the contracting authority that had not previously required [the equivalence certificates] would find, in the end, that the successful tenderer is not in a position to prove the equivalence of the pieces … That aspiration, however, cannot supersede the essential principles of public procurement, in particular, the need to guarantee bidders have equal access and are not confronted with ‘unjustified obstacles to the opening of public contracts to competition’” (AGO C-14/17, paras 48-49, own translation from Spanish).

This clash of interests between the contracting authority’s interest in carrying out sound pre-award technical compliance verification and the tenderers’ interest in being allowed access to the tender is constructed on the assumption that, for a supplier to be able to participate in a tender requiring the supply of original or equivalent spare parts, it would need to have individualised certificates for each and every one of the spare parts to be supplied (in the case at hand, over 2,000 parts). This would indeed give an advantage to the OEM manufacturer, which is of course under no need to certify compliance with its own technical standards.

However, this seems like an extremely rigid approach to technical compliance verification through documentation, which is only explained by the conflation of qualitative selection and technical verification carried out in the next set of reasons. A contracting authority could have taken a proportionate approach eg by requiring the submission of samples with the tender, together with a certificate of equivalence of the sample parts or sufficient technical information about the sample parts as to demonstrate that equivalence of the contractual supplies would be achieved. That would allow for a non-restrictive design of the tender procedure not requiring the award of the contract without carrying out sufficient verification of technical compliance.

(3) As AG Campos explains in his Opinion (see paras 57 and ff), in the case at hand, the contracting authority was able to award the contract without the need to receive documentation attesting technical equivalence because it had carried out an unduly restrictive qualitative selection by requiring that tenderers demonstrated experience in supplying a high value of spare parts of the named brand or equivalent in the previous three years. Indeed, he considers that “[p]rocurement documentation drawn up in those terms is restrictive, since it circumscribes the circle of recipients to those who have already manufactured spare parts of the [named] brand, whether original or equivalent, which excludes the participation of other manufacturers … the procuring entity, which had already imposed this rigorous conditions, could reasonably rely on them as criteria to assess the technical standing of the tenderers, without having to require them, in addition, to initially provide the certificates of equivalence of the 2,195 pieces referred to in the supply contract” (AGO C-14/17, para 60, own translation from Spanish).

In my view, this determines the existence not of one, but two, breaches of EU public procurement law. First, because the qualitative selection criteria are indeed too narrow and exclude the possibility for other OEMs or other ‘generic spare parts’ manufacturers to tender for the supply of pieces equivalent to the specific named brand on the basis of technical capability and previous experience in delivering original or equivalent pieces of other named brands (or OEMs). Second and on an alternative understanding of the facts, because in VAR the contracting authority would not have actually waived its obligation to carry out pre-award technical compliance certification by accepting certificates with the first supplies, but it would rather have carried out the verification at qualitative selection stage—which does not seem in line with the distinction between qualitative selection and award criteria according to Lianakis (C-532/06, EU:C:2008:40). Indeed, from a functional perspective, it seemed clear that in VAR the contracting authority screened potential suppliers on the basis of their ability to meet the particular technical specifications of the supplies it required, rather than on the basis of general technical capabilities to produce original or equivalent spare parts for buses, trolleybuses and tramways.

By taking the (inadvertent?) position that ‘two wrongs make a right’, AG Campos may have missed an additional important point. In practice, his position would allow contracting authorities to include requirements in the tender documentation that they have no intention of verifying prior to the award of the contract. This runs functionally contrary to the precedent of EVN and Wienstrom. There, the CJEU clearly established that “where a contracting authority lays down an award criterion indicating that it neither intends, nor is able, to verify the accuracy of the information supplied by the tenderers, it infringes the principle of equal treatment, because such a criterion does not ensure the transparency and objectivity of the tender procedure” (C-448/01, para 51). The difficulty here is not that the information cannot be verified at all, but that the information cannot be verified during the tender procedure—which in my view is a logical implication of the EVN and Wienstrom Judgment. Even if I would not support such an approach, this possibility for deferred verification during contractual execution could maybe only change now that contract modification is explicitly regulated in the 2014 Public Procurement Package; but any such logic would not apply to procurement covered by the 2004 Utilities Directive.

Moreover, the deferral of verification of technical compliance to contract execution and award of the contract without documentary or sample-based checks would create two undesirable effects: (i) opening up the possibility of self-certification of technical compliance by the tenderers and (ii) conflating verification of compliance with technical specifications for award purposes and quality control for contract performance purposes, which are not necessarily identical functions and certainly serve two distinct legal aims; respectively, ensuring the objectivity and probity of the award decision and ensuring compliance with contractual obligations.

Overall consideration

On the whole, in my view, the VAR Opinion is flawed by a misconstruction of the tests and verification carried out by the contracting authority, as well as by a misunderstanding of the technical simplification expected to derive from the exceptional recourse to branded ‘or equivalent’ supplies. As a matter of principle, contracting authorities should not be allowed to award contracts without carrying out sound checks on technical compliance. They should also not be allowed to defer them to contract execution without more. Contracting authorities should also not be allowed to use technical specifications as qualitative selection criteria due to the artificial narrowing of competition that involves (as clearly stressed, but not thoroughly analysed, by AG Campos in his Opinion).

Therefore, I would argue for the CJEU not to follow AG Campos on this occasion and rather clarify that (i) technical compliance cannot be deferred beyond the award of the contract, regardless of the use of references to branded ‘or equivalent’ products, and (ii) it is for the national court to determine whether the rules on technical specifications and qualitative selection were infringed in the design of the procedure in the case at hand. Otherwise, if the CJEU decided to follow the VAR Opinion, its case law would continue to add internal inconsistencies and unnecessary complexity in this already difficult area of procurement regulation.

Competition lawyers, please, please, please be aware of public procurement rules: A comment on Bornico & Walden (2011)

I have just read L Bornico & I Walden, 'Ensuring Competition in the Clouds: The Role of Competition Law?' (2011) 12(2) ERA Forum 265-85 (part of the largest QMUL Cloud Legal Project) and have been, once more, surprised at the complete oversight of the public procurement rules that would have been relevant to the competition law analysis.

The paper engages in an exploratory analysis of the role of EU competition law could have in keeping the cloud computing industry competitive and, if possible at all, free from (potential) abuses of dominance by its main players. The paper has the good intuition to suggest that public procurement decisions by governments may play a key role in either the promotion of undistorted competition (if they opt for transparent standards based on interoperability) or, on the contrary, the creation of a very concentrated and potentially monopolistic market structure (if they unduly impose specific technological solutions). This is a very important point, and one that public procurement economists and commentators have been stressing for a long time.

However, when the paper moves on to suggest how to legally prevent and control those issues, it is completely oblivious to the existence of EU public procurement rules. Indeed, Bornico & Walden indicate that, where the contracting authority imposes a given (propietary) technological solution

... harmed competitors may challenge the choice of the public administration alleging that their specifications fit best the requirements ... or may challenge the behaviour of the firm whose specifications were chosen, but only if the firm can be considered dominant. More importantly competitors may challenge the choice of the public administration under Article 107 TFEU if the outcome of public procurement distorts competition.  The choice of formal specifications may soon be a source of disputes in the EU market, along the lines of the Google dispute in the US [by reference to  Google Inc. and Onix Networking Corporation v. The United States and Softchoice Corporation (United States Court of Federal Claims 2011)]; although it is too early to tell how technological choices made by public administrations will be dealt with by competition authorities in the EU. (p. 27, emphasis added).

There are three important points to stress here. Firstly, this is nothing new, but State aid litigation based on public procurement decisions is very limited, generally unsuccessful, and likely to be 'phagocytised' by 'pure' procurement litigation [for an extended discussion, see A Sanchez Graells, 'Enforcement of State Aid Rules for Services of General Economic Interest before Public Procurement Review Bodies and Courts' (2014) 10(1) Competition Law Review 3-34]. 

Secondly, aggrieved competitors would have a much better shot under the applicable rules on the design of technical specifications. Indeed, it has long been the position of the ECJ, now consolidated in the applicable Directives 2004/18 (and/or 2014/24, where transposed), that '[u]nless justified by the subject-matter of the contract, technical specifications shall not refer to a specific make or source, or a particular process, or to trade marks, patents, types or a specific origin or production with the effect of favouring or eliminating certain undertakings or certain products. Such reference shall be permitted on an exceptional basis, where a sufficiently precise and intelligible description of the subject-matter of the contract ... is not possible; such reference shall be accompanied by the words "or equivalent".' (emphasis added) [art 23(8) dir 2004/18, and now art 42(4) dir 2014/24; for discussion, see S Arrowsmith, The Law of Public and Utilities Procurement. Regulation in the EU and UK, 3rd edn, vol. 1 (London, Sweet & Maxwell, 2014) 254-55 and 1068 ; and A Sanchez Graells, Public procurement and the EU competition rules (Oxford, Hart Publishing, 2011) 271-72]. Consequently, specific technological choices that excluded equivalent solutions would immediately be in breach of EU public procurement rules.

Thirdly, a breach of those rules gives aggrieved bidders and other interested economic operators a ground to challenge the procurement procedure before domestic courts or procurement complaints boards, under the provisions of Directives 89/665 and 92/13 (as amended by dir 2007/66). This is a much clearer litigation path and one that would yield much better results to disappointed bidders and competing (technological) firms.

Consequently, in this specific area, competition law is not the best tool to achieve pro-competitive results in the public procurement setting. Public procurement law is. So, competition lawyers, please familiarise yourselves with public procurement rules. In the end, they are two sides of the same coin [C Munro, ‘Competition Law and Public Procurement: Two Sides of the Same Coin?’ (2006) 15 Public Procurement Law Review 352; and A Sanchez Graells, 'Competition Law Against Public Restraints in the Public Procurement Field: Importing Competition Considerations into the EU Public Procurement Directives' (2010)].

CJEU on renegotiation of mandatory technical conditions in negotiated procedures: A good case? (C-561/12)

In its Judgment of 5 December 2013 in case C-561/12 Nordecon and Ramboll Eesti, the CJEU has ruled on the interpretation of Article 30(2) of Directive 2004/18 as regards the negotiation of technical elements between a contracting authority and the tenderers participating in a negotiated procedure.

 

The case is complicated by the fact that a more general issue concerning the (potential) obligation to exclude technically non-compliant tenders in a negotiated procedure is entangled with the limits of the negotiation authorisation provided for in Article 30(2) Directive 2004/18. In my view, by not clearly distinguishing both issues, the CJEU may have provided unnecessarily limiting guidance on the proper interpretation of Article 30(2) Directive 2004/18.

 

In the case at hand, the contracting authority launched a negotiated procedure for the construction of a new road. The road had to have certain technical characteristics (including, amongst others, specific width in different parts of the road) and the technical specifications did not allow for the submission of variants, which (implicitly) means that  all technical requirements were mandatory (art 24 dir 2004/18) and, consequently, tenders that failed to meet the technical specifications (in full) should had to be rejected by the contracting authority.

 

However, the contracting authority engaged in negotiations with all tenderers, including one that had submitted a tender that did not meet the technical description of the road (it was narrower in some points). Even if, eventually, that tenderer was not awarded the contract, there were several challenges against the award decision and the case ended up before the CJEU on grounds of a potential infringement of Art 30(2) Directive 2004/18. The Court addressed it as follows:

33 [...] the referring court asks whether Article 30(2) of Directive 2004/18 allows the contracting authority to negotiate with tenderers tenders that do not comply with the mandatory requirements laid down in the technical specifications of the contract.

34 In that regard, it must be recalled that, in certain cases, Article 30(2) of Directive 2004/18 allows the negotiated procedure to be used in order to adapt the tenders submitted by the tenderers to the requirements set in the contract notice, the specifications and additional documents, if any, and to seek out the best tender.

35 According to Article 2 of Directive 2004/18, contracting authorities are to treat economic operators equally and in a non-discriminatory manner and are to act in a transparent way.

36 The Court has stated that the obligation of transparency is essentially intended to preclude any risk of favouritism or arbitrariness on the part of the contracting authority (Case C‑599/10 SAG ELV Slovensko and Others [2012] ECR I‑0000, paragraph 25).

37 Accordingly, even though the contracting authority has the power to negotiate in the context of a negotiated procedure, it is still bound to see to it that those requirements of the contract that it has made mandatory are complied with. Were that not the case, the principle that contracting authorities are to act transparently would be breached and the aim mentioned in paragraph 36 above could not be attained.

38 Moreover, allowing a tender that does not comply with the mandatory requirements to be admissible with a view to negotiations would entail the fixing of mandatory conditions in the call for tenders being deprived of useful effect and would not allow the contracting authority to negotiate with the tenderers on a basis, made up of those conditions, common to those tenderers and would not, therefore, allow it to treat them equally.

39 In the light of the foregoing considerations, the answer to the first question is that Article 30(2) of Directive 2004/18 does not allow the contracting authority to negotiate with tenderers tenders that do not comply with the mandatory requirements laid down in the technical specifications of the contract (C-561/12 at paras 33-39, emphasis added).

In my view, this is a problematic interpretation, as Article 30(2) Directive 2004/18 covers a range of cases and, at least in some of them, the interpretation provided by the CJEU nullifies Art 30(1) Directive. To be more specific, under Art 30(1)(a) Directive 2004/18, contracting authorities are allowed to resort to negotiated procedures "in the event of irregular tenders or the submission of tenders which are unacceptable [...] in response to an open or restricted procedure or a competitive dialogue insofar as the original terms of the contract are not substantially altered".

 

The interpretation provided by the CJEU would imply that the lack of compliance or the reason that made the tenders unacceptable could not have been of a technical nature (or, at least, could not affect a mandatory technical specification) because, in that case, even if the procedure would be formally available under Art 30(1)(a), the contracting authority could not engage in any meaningful negotiation oriented towards adapting the tenders to the requirements set in the (technical)  specifications--which is precisely the purpose of Art 30(2) dir 2004/18, or one of them at least. Moreover, risks of excessive deviation from the original conditions are controllable by the last caveat in Art 30(1)(a), where it is expressly required that the original (technical?) terms of the contract are not substantially altered.

 

The interpretation provided by the CJEU could work when Article 30(2) is triggered by other grounds for resorting to the negotiated procedure under Art 30(1), but not for Art 30(1)(a). In my view, this derives from an excessive reliance on the principle of non-discrimination and a too rigid understanding of the need and purpose for a negotiated procedure triggered by a fundamental flaw of the initial competitive procedure (be it due to a fundamental technical flaw, excessive requirements, or any other reasons).

 

In my view, the CJEU could have found two alternative routes to sort out the case. Well, possibly three.

 

The first one, by accepting the criticisms raised as to the inadequacy of Art 30(2) Dir 2004/18 to solve this specific case--which should have led it to declare the question inadmissible and leave it at that.

 

The second one, to consider that the case was actually concerned with an illicit acceptance of technical variants and, consequently, a breach of Art 24 Directive 2004/18--hence sending out the clear message that, in negotiated procedures, contracting authorities still need to indicate that variants are acceptable if they want to engage in technical dialogue [except in the case of art 30(1)(a) where the tenders are inadmissible or unacceptable on technical grounds].

 

There would be a potential third option, ie to set out a differential interpretation of Art 30(2) depending on the ground in Art 30(1) which triggers the availability of the negotiated procedure--something that we can only do speculatively now by stressing the factual conditions that surrounded the cases [although it is not explained why the contracting authority resorted to a negotiated procedure and why it was acceptable under art 30(1) dir 2004/18, which seems duboius in the circumstances].

 

As a conclusion, I think that the Nordecon Judgment would actually create a very significant problem if technical negotiations were completely excluded in all cases and under all circumstances in negotiated procedures--and, particularly, where negotiations are triggered by the technical unsuitability of all the tenders received. However, this is something that may be avoided under the new Directives if an uncritical reading of Art 30(2) as interpreted in Nordecon is not carried forward to future Art 27 of the new Directive on the (rebranded) competitive procedure with negotiation.

Technical neutrality in procurement, life cycle costs and environmental considerations: the acceptability of supplying reused or repared goods (in Spain)

In times of crisis, the opportunity to achieve (short-term) savings by procuring reused or repared goods (such as refilled ink and tonner cartridges for printers and photocopiers, for instance) may have a particular appeal to public buyers facing significant budgetary constraints.

At first look, such a procurement strategy may also seem to support environmental goals (as there could be some environmental savings implied in 'reusing'), but such a claim may require further scrutiny from a life cycle costing perspective (since refilling could be conducted in more polluting conditions than the manufacturing of new products, or 'refillers' may not recycle the used cartridges once they have been used up, whereas 'original producers' may have implemented an environmental quality control system that guaranteed full collection and recycling of used cartridges). The impact of the reused products on the maintenance cost or durability of equipment (if any) should also be taken into consideration.

Also, from the perspective of drafting the technical specifications, public buyers should be careful to respect the mandate of 'technical neutrality' in the current EU rules, which would prevent them to restrict the supply to either only new or only reused supplies (cartridges, in our example) on the exclusive basis of product performance (as long as there is no clearly identifiable performance-related difference between the two types of products).

Therefore, desigining a strategy to buy reused or repared goods deserves some careful consideration on the part of the responsible procurer. The same care should be exercised if, for some reason (hopefully not only lobby efforts by 'original producers'), the public buyer decides to resort to the supply of 'original' or 'new' products only.

In that regard, I find interesting (and worrying) the Spanish Central Administrative Tribunal of Contractual Appeals (Tribunal Administrativo Central de Recursos Contractuales, ‘SCATCA’) Resolution No. 83/2012 of 30 March 2012 in case Caro Informática, S.A. v FREMAP (Supply of IT consumables). In that case, the contracting authority had excluded in the tender specifications the possibility to be supplied reused or repared IT consumables (more specifically, refilled tonner cartridges). Caro Informática (a 'refiller') challenged the tender documents on the basis that they violated the mandate of technical neutrality and ran contrary to the requirements of competition laws (for which it found support in the Spanish National Competition Commission's 'Guide on Competition and Procurement'), and that they were at odds with stated public austerity goals.

Following a very formalistic reasoning (and expressly disregarding the recommendations of the NCC's Guide as 'irrelevant to decide on the merits of the case'), SCATCA found that the contracting entity had not abused its administrative discretion in determining that only 'original' or 'new' supplies (or equivalent, sic) could be offered. It did not scrutinise the reasons behind the decision, or whether technical, life cycle or environmental considerations supported it--but rather adopted an economic reasoning that sounds protectionist of 'original manufacturers' and, actually, restrictive of competition.

In this regard, it is worth emphasising the counterintuitive logic followed by SCATCA (which seems to put itself in the position of a court faced with unfair competition rather than public procurement claims):

[... accepting the supply of reused or repared goods where the tender documents do not expressly allow for them] "would be a contradiction to the basic principles of public procurement under free competition and non-discrimination, and would place some bidders at a disadvantage, since the use of used parts for the production of goods clearly influences the cost structure thereof, which allows [reusers] to submit lower offers. Accordingly, the acceptance of tenders for goods incorporating used parts must be expressly stated in the contract documents. (SCATCA Res. No. 83/2012 at para. 6).

In my opinion, this is a bad decision in an hot area where contracting authorities must adopt difficult decisions that may have a significant impact in the market and in the environment. Therefore, it would be desirable to depart from this type of formalistic (and protectionist) analysis and to encourage public buyers to make more in-depth impact assessments of the opportunity to acquire reused or repared supplies, since that would in many cases be appropriate, and could make an important contribution to reducing the impact of the economic crisis on the actual levels of public services and administrative activity--as well as contributing to the implementation of effective green procurement goals.