This guest post by Dr Deividas Soloveičik provides interesting background and critical remarks on a Lithuanian reference to the European Court of Justice (ECJ) for a preliminary ruling on issues concerning the interaction of public procurement and competition law--see case Specializuotas transportas, C-531/16. It will be interesting to keep an eye on the case, as it brings an opportunity for the ECJ to expand its limited case law in this area.
Unravelling conflicts of interest
The Supreme Court of Lithuania has been extremely active during recent years in developing the case-law related to both the concept and a genuine practice of the conflicts of interest in public procurement law. It’s interesting to note that the ideas the national judges are bringing “on the table” are much more than the inside legal practice of a Member State. The questions regarding the subject have been referred to the Court of Justice of the European Union (CJEU) and, therefore, became of cross-border interest.
It started from eVigilo case [1] where the Supreme Court sought and received the answers from the CJEU based on which it farther ruled inter alia on how the members of the evaluation committee of the contracting authority must behave during the procedures. First, the national court explained that the concept of the conflict of interest is to be understood broadly and in case of even a minor doubt that any member, employee or whomever might be biased in favor of a particular supplier during the public procurement procedures, the public buyers must take all the measures and actions to eliminate this doubt. Thus, the failure to prove that the relevant actions have been taken might suffice to repeal the subsequent decisions made by the contracting authority.
Secondly, the court explained that the burden of proof always rests on the shoulders of the contracting authority. In other words, namely the latter must prove that it has taken all required measures to inspect and eliminate any alleged or real conflict of interest (by suspending the concrete member of the evaluation committee, etc.) and not the other way around.
Finally, the Supreme Court held that the declarations of honesty or other documents alike do not have a priori legal power and thus do not automatically mean that the contracting authority has passed the conflicts of interest test. As mentioned before, the burden of proof that the transparency prevails belongs to the buyer, not the seller.
It is interesting to note that in the text of the decision in eVigilo the Supreme Court referred to the above-mentioned situations as the “outside conflicts of interest”. However, in later practice, as it will be shown, the Supreme Court named them as the “vertical conflicts of interest”.
The development of the concept did not stop there. Very recently, the national Court has confirmed the second part of the doctrine by referring to it as the “horizontal conflicts of interest”. This was done by two main cases both heard in 2016. Before providing their overview, it has to be mentioned that by “horizontal conflicts of interest” the Lithuanian case-law means situations of bid rigging and any kind of agreements which in whatsoever way distort the competition in a particular public procurement procedure, including the ones that are being caught by the competition law rules on the forbidden arrangements and the ones, that were entered into or agreed upon by the suppliers, the tenderers. The contracting authority is not involved in these cases. Hence, from a very rough point of view there is no conflict of interest, as in such cases the tenderers have not the conflict but, on the contrary, the one same goal – to deceive the contracting authority. However, in the eyes of the law, at least how the Supreme Court views it, this is the horizontal conflict of interest.
Thus, the first case was Maniga.[2] This company participated in a public tender arranged by the Klaipėda city municipality. It lost to another company – Sankryža. There was one more participant in a public tender – Biseris. Maniga, a claimant, argued that Sankryža‘s bid must have been rejected because it was directly connected and interdepended with Biseris’. The claimant contended that Sankryža and Biseris breached the principle of transparency, non-discrimination and fair competition, since the former company was 100% owned by the latter, they shared the same managing employees, their bids were resembling in a way of the same writing style, etc., and, therefore this meant that these companies exchanged information while participating in the same tender. Thus, Maniga argued that both of their bids had to be rejected and the claimant had to be awarded a public contract.
The Supreme Court started by the endorsement of the fair and transparent competition in every single public procurement procedure that takes place. The Court mainly referred to the national and EU competition law rules (including Art 101 TFEU) and ruled that the principle of fair competition is an inseparable part of a public procurement process. Hence, each participant must obey and follow that principle. The Court maintained the idea that in order to establish the legal connection between the tenderers, the competition law rules on related economic operators must also be applied.
Farther, the Supreme Court went on with the analysis of the concerted practices in public procurement procedures. The Court ruled that it was unfair to require from the interested party to prove the illegal arrangements between the other suppliers as the information the former tenderer has is always very limited. Thus, by making a reference to the eVigilo findings, the Court concluded that in order to prove the concerted practices in public procurement, it is enough to prove the irrational actions or bizarre business behavior of the relevant suppliers. To enforce this line of reasoning the Supreme Court backed it up with the case-law of the CJEU, namely Ahlström Osakeyhtiö v. Commission [3]. Hence, the Court found in favor of the claimant.
The Maniga case entrenched the foundations for the prohibition of the horizontal conflicts of interest. For the sake of clearness, it is important to mention that neither the case-law nor the law itself hinder the participation of the related companies in the same public procurement process. However, this case highlighted the importance of the principle of fair competition and made it as a ground for the rejection of the bids in public procurement in case the principle is breached. Besides, the ratio of the Maniga decision enabled the contracting authorities to reject the bids of all suppliers in case the signs of the concerted practices are detected. However, needless to say, from the point of the wording of the EU public procurement directives, especially the package of 2004, including the Lithuanian legislation, this ground for rejection is not directly regulated. Therefore, even if the idea of the Court is to promote and extremely safeguard the genuine competition among suppliers is very rational, however, legal technique to implement it remained undeveloped.
And exactly the latter point shall be resolved not only by the Supreme Court of Lithuania but also by the CJEU, which has been referred to by the former Court for a preliminary ruling in a VSA Vilnius case [4].
This case is similar with its facts to the Maniga case. There was a public tender regarding waste management and utility. There were four tenderers. The first two were interrelated and shared the same shareholder and management board directors. Hence, the third-place bidder started legal proceedings against the contracting authority as well as the two related bidders and claimed that their bids had to be rejected on the legal grounds that were provided in the Maniga case, and that the public contract had to be awarded to the claimant.
The Supreme Court started by defining the scope of the case. The Court outlined that the relevant legal questions were the following: (i) the ex ante obligation of the suppliers and the tenderers to inform the contracting authority of their interdependence; (ii) the obligation of the contracting authority to be pro-active in search of the legally related tenderers and the formal outcome of a failure to act so; (iii) the rules on burden of proof in cases of the concerted practices or unfair competition; (iv) the applicable legal norms in cases of concerted practices or unfair competition which is present during the public procurement procedure. These are not only the questions the Supreme Court raised but also the dilemmas both national Court and the CJEU have to solve. As it might be understood most of the mentioned questions were referred to the Court of Luxembourg for the clarification from the standpoint of the EU public procurement law.
Dilemma #1. Hence, the first important question the Supreme Court faced in VSA Vilnius case is the following: do mutually legally related tenderers (e.g. two subsidiaries of one holding company, etc.) have the obligation to inform the contracting authority of their interdependence and possibly common economic ties? Contrary to the Maniga case, where the Court started with the promotion of the principle of fair competition as a guiding light in these kind of situations, the reasoning in VSA Vilnius started from the analysis of the EU and national legal regulation and coming to the conclusion that neither set of laws provides expressis verbis such requirement for the tenderers. However, the Court reasoned that even in the absence of such regulation this kind of legal obligation should arise from the general public procurement principles – equality, non-discrimination and transparency. On the other hand, namely the principles of equality and transparency require the contracting authority to strictly stick to its own procurement documents in accordance to which the purchase procedure is being organised. Thus, how could the public buyer require that tenderers ex ante inform it on their own initiative about the common economic ties if such obligation has not been explicitly envisaged in the tender documentation?
Dilemma #2. On the same note, the Supreme Court addressed the second question, related to the contracting authorities’ obligation to be pro-active and engage in the investigation on whether the particular tenderers are economically connected. On the one hand, the Court referred to eVigilo case and the conclusions made by itself and the CJEU, namely regarding the very active role of the contracting authority in cases of even alleged (not yet proved!) conflicts of interest. However, on the other hand, it remained unclear to the Court if the passive role of the public buyer should be qualified as a breach of the principle of transparency, keeping in mind that overall the related parties are not forbidden from participation in the same tender. Hence, the question is the following: does the fact that the related tenderers de jure are competing per se mean the presence of the reliable information which, as it has been decided in the eVigilo by the CJEU, first, would be sufficient to hold the procurement in breach of the principle of transparency and the whole procedure illicit and, second, would it require the contracting authority to start the investigation on the merits of this kind of information?
Dilemma #3. The third enquiry must have been the least sophisticated to the Court, since it addressed the purely procedural issue of how to prove the horizontal conflicts of interest in the form of concerted practices, bid rigging, etc. The Supreme Court relied on the standards and jurisprudence in the field of competition law, which allows indirect evidence as admissible in these kinds of situations. In its reasoning, the Court cited the CJEU Eturas case [5] and the conclusions made by the European Court regarding the investigation and the evidence in such cases. Thus, the clearest rule that was made in the VSA Vilnius by the Supreme Court is the one that the indirect evidence while detecting and proving the horizontal conflicts of interest is very welcome.
Dilemma #4. The latter one is the most serious issue at hand. The Maniga and VSA Vilnius cases proved that the crux of the concept of the horizontal conflicts of interest is based on the distorted competition made by the suppliers that are mutually related. In other words, horizontal conflicts of interest appear when two or more tenderers pretend to engage in artificial competition while having a disguised intent to deceive the contracting authority and to gain a non-market price for the supply of goods, execution of works or provision of services. The economic relationship among the tenderers in not a legal problem. However, if such relationship leads to the concerted practices, this is a breach of principle of transparency. It is obvious that the law on public procurement heavily relies on the rules of competition law, especially regarding the notion and forms of bid rigging, concerted practices, etc.
However, the paradox is that from the perspective of the competition law it is not illicit for the two or more inter-related parties to participate in a public procurement procedures, exchange of information, co-ordinate practices, etc. since these economic operators are held as one unit under the doctrine of single economic unit. Hence, by making references to the CJEU Corinne Bodson [6], Viho [7], Akzo Nobel [8] and other cases the Supreme Court expressed the following doubts. First, the Court held that on the one hand, horizontal conflicts of interest imply the breach of both the principle of transparency provided by the public procurement law and the competition law rules on concerted practices. However, on the other hand, the doctrine of single economic unit allows the latter practices (in cases of participation of related parties). This leads to a situation where public procurement law relies on competition law to deem the behavior of the tenderers as illegal, meanwhile, in the light of the competition law such actions are fully available (as mentioned, in case of related economic operators).
Moreover, even if the latter situations were allowed, the Supreme Court expressed doubts on whether it did not mean that the tenderers would be allowed to submit the alternative bids when such bids would be forbidden. In other words, if it is held under the rules of competition law that two related economic operators comprise a single economic unit, doesn’t that mean that if such unit participates in a public tender it submits alternative bids (in the meaning of Art. 45 of Directive 2014/24) and not the two separate bids? Again, the latter situation is hindered by the public procurement regulation and usually by the tender documents.
Based on the doubts raised, the Supreme Court referred the following questions to the CJEU for a preliminary ruling:
1. Do the principles of equality and transparency, envisaged in Art. 2 of the Directive 2004/18 due to the freedom of movement, provided in TFEU Art. 45 and 56, including the principles of free and fair competition (construed together or separately) must be understood and interpreted as:
In case mutually related suppliers, whose economic, management, financial and other relations may objectively cause doubts regarding the independence and the protection of the confidential information and (or) may cause (potentially) the advantage against the other suppliers, if they decide to submit separate (their own) bids in the same public tender, do they have in any case an obligation, notwithstanding whether such obligation of theirs is provided in the national legislation, to disclose to the contracting authority this kind of relationship, even if the contracting authority does not require so on its behalf?
2. If the answer to the first question is:
a) Positive (i.e. the suppliers in any case must disclose to the contracting authority their relationship), does it mean that the fact of the failure to execute this obligation fully or partially is sufficient for the contracting authority and for the judicial review body to deem that the related tenderers, who have submitted the separate bids in the same public tender are participating without the competition (fraud)?
b) Negative (i.e. there is no obligation for the suppliers – neither provided by the legislation nor by the purchase documents – to disclose their relationship), does the contracting authority bear the risk of the participation of such related suppliers, including the outcomes that arise thereof, in case the contracting authority does not include this kind of obligation for the tenderers in a purchase documents?
3. Despite the answer to the first question and taking into consideration the decision of the CJEU in eVigilo case, do the legal norms indicated in the first question as well as the third section of the first paragraph of Art. 1(1) of the Directive 89/665 and the Art. 2 (1) (b) of the same Directive (separately or together, without a limitation to these legal norms), must be understood and interpreted that:
a) In case the important relationships (connections) among some of the tenderers become clear in any form during the public procurement procedures to the contracting authority, does the latter, despite its own evaluation of this or other facts (e.g. dissimilarity of the bids of the suppliers, including their content, the public oath of the supplier to compete with the other tenderers in a fair manner, etc.), have an obligation to address separately the related tenderers of a public tender and to seek from them the explanation on if and how their personal condition is in line with the free and fair competition of the suppliers?
b) The contracting authority, having this kind of obligation, however, failing to execute it, is it a sufficient ground for the court to consider its actions, which have not guaranteed the transparency and the objectivity of the procedures, as illegal by not requiring from the claimant or without deciding on its own initiative regarding the influence of the state of the related parties to the outcome of a public tender?
4. Do the legal norms, indicated in the third question as well as the provisions of Art. 101 (1) of the TFEU (together or separately, but not limiting thereof) and taking into consideration the decisions of the CJEU in eVigilo, Eturas and VM Remonts, must be understood and interpreted that:
a) In case the claimant having found about the rejection of the bid of one of the related tenderers, meanwhile, awarding the contract to the other one as well as taking into consideration the other circumstances related to their (related companies) participation in a public tender, such as the same management of the companies, the sole holding company, which has not taken part at the public tender, the fact that the related suppliers have not disclosed their inter-relationship and have not provided any explanation regarding this, inter alia, because there was no request, etc., and when in the light of the afore-mentioned the contracting authority has not taken any action, is this information at its least is sufficient to claim the actions of the contracting authority as illegal and the ones that have not ensured the transparency and objectivity of the public tender, without the separate requirement from the interested party to prove the unfair activities of the related tenderers?
b) The related tenderers do not prove the actual and fair competition in a public tender only because one of the tenderers voluntarily provided the declaration of honesty as well as it has quality management systems implemented and the content of the bids is not similar?
5. Do the actions of the tenderers, who participate separately, taking into consideration the submission of the declaration of honesty voluntarily by one of the bidders, maybe be in principle evaluated from the perspective of the Art. 101 TFEU and the related case-law of the CJEU?
A couple of closing remarks regarding the aforementioned.
Firstly, the questions of the Supreme Court of Lithuania have cross-border interest. The answers are important for the notion, understanding and implementation of the concept of conflicts of interest in a public procurement practice. Moreover, this will have the impact on the understanding the content of Art. 24 of the Directive 2014/24.
Secondly, the CJEU most likely will have to provide the wide interpretation of the concept at issue, because the public procurement regulation must tackle the practices that distort competition.
Finally, in situations which are covered by the doctrine of the single economic unit (in cases of the same business group companies, etc.) it is very possible that the public procurement law would prevail over the general rules of the competition law, as in any case the public procurement procedure may not allow the situations where the companies of the same economic group would agree on the commercial conditions that would be profitable to them but expensive in terms of the financial funds, quality, even the prestige to the contracting authority and the public in general.
