Interesting case on the boundaries of the in-house exemption from the EU public procurement rules (C-567/15)

In his Opinion of 27 April 2017 in LitSpecMet, C-567/15, EU:C:2017:319, Advocate General Campos Sánchez-Bordona has addressed a complicated issue concerning the boundaries of the in-house exemption from compliance with the EU public procurement rules. AG Campos' Opinion is based on the 2004 Directives, but his views and the ECJ's ruling in LitSpecMet will be relevant for the interpretation of the 2014 Public Procurement Package (in particular, in relation to procurement derived from transactions covered by Art 12 Dir 2014/24, Arts 28-30 Dir 2014/25, and Arts 13-14 & 17 Dir 2014/23).

Differently from other cases, where the in-house exception was assessed in relation to contracts awarded within the 'public house', LitSpecMet concerns a question on the obligation to comply with procurement rules by 'in-house entities' themselves. And, in particular, the extent of the obligation in situations of relative complexity of control and functional relationships between contracting authorities and their controlled entities, where the controlled entities indirectly contribute to the contracting authorities' role in meeting a need in the general interest that does not have either an industrial or a commercial character. In other words, the LitSpecMet case concerns the boundaries of public procurement obligations for entities pertaining to a corporate conglomerate ultimately controlled by a contracting authority, and which award contracts outside the 'public house'.

In the case at had, the Lithuanian railway company (LG, itself a contracting authority with a public sector mission) fully owned an entity dedicated to the manufacture and maintenance of locomotives and railway carriages (VLRD). At the relevant time, orders from LG accounted for almost 90% of VLRD’s turnover. Therefore, LG and VLRD entered into direct contractual relationships on the basis of the in-house exception to the otherwise applicable obligation to comply with EU public procurement law. In turn, VLRD entered into contracts with third parties in accordance with its own Interim Procurement Regulations, rather than in compliance with Lithuania's Law on Public Procurement (LPP). This legal structure was challenged by LitSpecMet, on the basis that VLRD's procurement should be fully covered by the LPP (as a result of the scope of coverage of the EU rules), regardless of the in-house exemption from which contracts between LG and VLRD benefitted.

The main arguments put forward by LitSpecMet are summarised by AG Campos as follows:

 the ... activity carried out by VLRD falls under general interest, in that it enables LG to ensure provision of the public service for which it is responsible, namely the management of railway infrastructure and the provision of passenger transport. In its view, this activity is not of an industrial or commercial nature, since LG is the only undertaking in Lithuania engaged in it, which means that it can easily operate according to considerations which are not purely economic. To accept that public procurement rules do not apply to VLRD would mean that a contracting authority (LG) would be able to avoid those rules simply by setting up a subsidiary (VLRD) for in-house transactions (para 24, emphasis added).

VLRD and the Lithuanian government oppose this argument on different points, mainly related to the non-transferability of LG's duties to VLRD (paras 26-27). The arguments put forward by intervening Member States are also interesting, with Germany supporting the subjection of VLRD's procurement to the EU rules, while Portugal (and, surprisingly, the European Commission) advocate for the exclusion of VLRD's procurement activities from the EU rules (paras 28-32).

In conceptual terms, the legal dispute can be represented as follows, with the left graph depicting the legal structure adopted by the Lithuanian State, and the right graph depicting the alternative coverage put forward by LitSpecMet:

Ultimately, the issue of whether VLRD (as the in-house entity) is subject to the EU procurement rules depends on the answer to two questions: (a) is VLRD in principle directly covered by the EU rules and (b) is the in-house situation relevant and capable of having the effect of either (i) excluding coverage if VLRD is in principle covered or, conversely, (ii) extending coverage to VLRD despite not being covered in principle? Given that VLRD is not a contracting authority, these questions revolve around the interpretation of the concept of 'body governed by public law'.

At this point, it may be worth recalling that, for the purposes of both the 2004 and the 2014 EU public procurement rules, a 'body governed by public law' is that which meets the three cumulative conditions of: (a) being established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character; (b) having legal personality; and (c) being financed, for the most part, by the State, regional or local authorities, or by other bodies governed by public law; or being subject to management supervision by those authorities or bodies; or having an administrative, managerial or supervisory board, more than half of whose members are appointed by the State, regional or local authorities, or by other bodies governed by public law.

AG Campos stresses that it is commonly accepted that "VLRD satisfies the second and third: it has legal personality and it cannot be disputed that another body governed by public law (LG) has a role in its financing, the supervision of its management or the composition of its administrative, managerial or supervisory board" (para 38). Therefore, he proceeds to the analysis of the first condition in two parts, by first assessing the boundaries of the requirement of directly (or indirectly) meeting needs in the general interest, not having an industrial or commercial character (paras 37-59); and then proceeding to a more specific assessment of these conditions where the meeting of needs in the general interest, not having an industrial or commercial character, takes place in the context of in-house transactions (paras 60-84).

directly (or indirectly) meeting needs in the general interest, not having an industrial or commercial character

Concerning the first aspect, of whether an indirect contribution to meeting needs in the general interest not of an industrial or commercial nature, I find AG Campos' analysis interesting in that he stresses that the

... the key factor in answering the question is not so much the public nature of the need to be met but the conditions in which this is done. When interpreting the expression ‘needs in the general interest, not having an industrial or commercial character’ it is essential to ascertain on what terms these are to be met.
... according to the spirit of the procurement directives, what is important is to safeguard competition in the market and to prevent it being altered or distorted by participants who do not operate according to free trade principles. Consequently, the determining factor is not whether, by supplying goods and services to LG, VLRD is itself meeting a need in the general interest, or whether it does so indirectly, but whether, in either case, [VLRD] is operating under the same conditions as any private competitors, that is to say, without incentives to offer unfair advantages to national producers.
... for these purposes it is necessary to take into account multiple legal and factual circumstances, amongst which the Court of Justice has mentioned, by way of example, the circumstances prevailing when the body concerned was formed and matters such as ‘the fact that it does not aim primarily at making a profit, the fact that it does not bear the risks associated with [its] activity, and any public financing of the activity in question’. (paras 54-56, emphasis added and reference omitted).

This is largely in line with the clarification that recital (10) of Directive 2014/24/EU sought to introduce by establishing that "a body which operates in normal market conditions, aims to make a profit, and bears the losses resulting from the exercise of its activity should not be considered as being a ‘body governed by public law’ since the needs in the general interest, that it has been set up to meet or been given the task of meeting, can be deemed to have an industrial or commercial character." It is also substantively aligned with the exemption from the utilities procurement rules for entities exposed to competition (Art 35 Dir 2014/25, and previously Art Dir 2004/17). Therefore, this logic seems to carry significant weight and to match adequately the tests applicable in other parts of the EU public procurement system.

The only difficulty with this test is that it has elements that may conflate two of the conditions in the definition of a body governed by public law, in particular where the third condition is met due to the entity being 'financed, for the most part, by the State, regional or local authorities, or by other bodies governed by public law'. Therefore, in applying this test, it would be particularly relevant to take into account that it will be almost impossible to establish that the in-house entity is not a body governed by public law because, by the fact of having to derive at least 80% of its turnover from its activities with its controlling entity or entities, it will hardly be in the situation of operating in normal market conditions.

In my view, the sole fact that the controlling entities are directly awarding contracts to the in-house entity without having to comply with the procurement rules suffices to exclude a consideration that those entities are actually exposed to the vagaries of the market (to use the expression from the field of concessions contracts) because they have a captive demand from the controlling entities--which significantly insulates them from market risk where such demand is enough to absorb 80% of the entities' turnover. Ultimately, then, either there is an exemption at the level of the relationship between the contracting authority and the in-house entity, or there is an obligation to tender at that level (which then frees the otherwise in-house entity from public procurement duties). But, either way, the logic of exposition to competition in the market does not allow for both exclusions.

meeting needs in the general interest in the in-house context

From a different but not unrelated perspective, AG Campos also engages in an assessment of the relationship between these VLRD and LG to determine "whether the former is a proxy entity of the latter (or its own resource) which can use the ‘in-house exemption’ ... [by] analysing the substantive issue from an organic perspective as opposed to the perspective of the activity" (para 60). In that regard, he considers that it is necessary to make a

... distinction between ‘marginal’ activities and the ‘essential’ activities of proxy entities which justify the application of the in-house exemption. ... in relation to [marginal] activities the undertaking is operating within the market and can compete on an equal footing with rival economic operators.
... the same is not true of the ‘essential’ tasks which have been entrusted or assigned to the subordinate undertaking by the contracting authority under the in-house system. Where in order to carry out those tasks the undertaking (VLRD in this case) needs to obtain goods, services or supplies from third parties to a value which exceeds the level for harmonised procurement, then the public procurement directives apply.
Any other interpretation would give rise not only to inconsistency but to a potential circumvention of the law; the former because it would be inconsistent with the single effective identity of the two bodies, which was acknowledged for the purposes of exempting them from procurement procedures when dealing with each other, and the latter because it would make it easy to escape the application of the EU public procurement rules (paras 75 to 77, reference omitted).

I am not sure I fully understand the distinction between 'marginal' and 'essential' activities that AG Campos is proposing and, for the reasons above, I do not think it arguable that the in-house entity carries any activities in the market under normal conditions. However, this does not seem to be determinative of his analysis, as AG Campos more clearly states that

In other words, the contracting authority can make use of proxy entities, within the limits already mentioned, by entrusting them with particular tasks which should, in principle, be subject to public procurement procedures but which are exempted. This exception is not, of itself, open to question, legally speaking, in the light of the case-law of the Court of Justice (and, now, Article 12(1) of Directive 2014/24). However, where such proxy entities do not have the resources needed to themselves carry out the tasks assigned by the contracting authority and are obliged to have recourse to third parties in order to do so, the reasons for relying on the in-house exemption disappear and what emerges is actually a hidden public (sub-)procurement where the contracting authority, through an intermediary (the proxy entity) obtains goods and services from third parties without being subject to the directives which should govern the award.
... if the connection between LG and VLRD is such as to justify the application of the in-house exemption to transactions between them, then the external transactions that are essential to the performance of the tasks entrusted to VLRD by LG cannot avoid being caught by the procurement directives (provided they are in excess of the relevant value threshold). Otherwise, simply by reorganising the activities of LG through the establishment of VLRD, LG would be able to avoid the consequences that flow from its status as a contracting authority (paras 79 and 81, emphasis added).

This seems the appropriate functional approach and is completely aligned with the considerations made above in relation with the exposition of the activities of the in-house entity to the vagaries of the market. Therefore, I think that the two prongs of the substantive assessment proposed by AG Campos lead to the same conclusion: that the in-house exemption can only be used once, or that it is exhausted at the first step of avoiding access to the market (except in cases where the in-house entity has, in a complex public house infrastructure, the possibility of entrusting works or services to another, second-tier in-house entity).

Therefore, I hope that the ECJ will follow the approach outlined by AG Campos and confirm that, in simple terms, nobody can have two bites of the in-house cherry.

ECJ stresses flexibility for subcontracting and teaming in the 2014 EU Public Procurement Package (C-298/15)

In its Judgment of 5 April 2017 in Borta, C-298/15, EU:C:2017:266, the European Court of Justice (ECJ) largely followed the Opinion of AG Sharpston (commented here) and ruled on the incompatibility with EU law of a national rule that partially prohibited subcontracting by establishing that, where subcontractors are relied on for the performance of a public works contract, the tenderer is required to perform itself the main works, as defined by the contracting entity.

The ECJ also established that, even if there can be good reasons to ensure a correspondence between the parts of the works to be carried out by the members of a joint bid and their individual professional, technical and economic standing, EU procurement law is not compatible with a rule that imposes an arithmetic correspondence between the contribution of each of the tenderers and the share of the works that that tenderer undertakes to perform if the contract is awarded.

This is an interesting Judgment because it assesses issues around subcontracting and reliance on third party capacities in the area of utilities procurement and by reference to general free movement provisions in the TFEU. In my view, the line of reasoning followed by the ECJ in Borta offers good indications of the way in which subcontracting and teaming provisions in the 2014 EU Public Procurement Package will be interpreted.

The following is a summary of the reasons provided by the ECJ to determine the incompatibility with EU law of rules prohibiting subcontracting the main works involved in any project (a), as well as those requiring arithmetic correspondence between share of professional, technical (and economic) capacity and share of works to be carried out by members of a joint tender (b). A few common trends and future challenges are identified by way of conclusion (c).

It is worth noting that the ECJ also assessed issues concerning the modification of the tender documents after their publication in the light of the fundamental rules and general principles of the TFEU, among which are the principles of non-discrimination and equal treatment and the obligation of transparency which derive, in particular, from Articles 49 and 56 TFEU (see paras 62-77). However, those issues are not discussed in this post.

(a) Flexibility for subcontracting

The ECJ assessed the compatibility with Arts 49 and 56 TFEU of a national procurement rule prohibiting the subcontracting of the 'main works' in a project, as defined by the contracting authority. The ECJ determined that such a measure " is liable to prohibit, impede or render less attractive the participation of economic operators established in other Member States in the award procedure or the performance of a public contract..., since it prevents them either from subcontracting to third parties all or part of the works identified as the ‘main works’ by the contracting entity, or from proposing their services as subcontractors for that part of the works" (para 49).

Once the restriction on free movement was established, the ECJ proceeded to assess its possible justification. To that end, the ECJ considered the reasons given for the adoption of this rule, which mainly intended to "ensure that the works are properly executed" and was, more specifically, aimed at "preventing a current practice which consists in a tenderer claiming to have professional capacities solely in order to win the contract concerned, not with the intention of performing the works itself, but of entrusting all or most of those works to subcontractors, a practice which affects the quality of the works and their proper performance. Second, by limiting the reliance on subcontractors to works identified as ‘subsidiary’, [the rule aimed] to encourage the participation of small and medium-sized undertakings in public contracts as joint-tenderers in a group of economic operators rather than as subcontractors" (para 52). The ECJ dealt with these are three grounds for justification.

  1. The ECJ accepted that aiming to ensure the proper execution of the works is a legitimate goal, but considered the measure disproportionate. Both because it "applies whatever the economic sector concerned by the contract at issue, the nature of the works and the qualifications of the subcontractors. Furthermore, such a general prohibition does not allow for any assessment on a case-by-case basis by that entity" (para 55); and because it prohibits subcontracting "in situations in which the contracting entity is able to verify the capacities of the subcontractors concerned and to take the view, after that verification, that such a prohibition is unnecessary for the proper execution of the works having regard, in particular, to the nature of the tasks that the tenderer plans to delegate to those subcontractors" (para 56). The existence of less restrictive measures also contributed to this finding of disproportion (para 57).
  2. The ECJ did not make an explicit finding on the legitimacy of aiming to prevent 'front tendering' and subsequent subcontracting of most of the contract (which can be assumed to be a legitimate goal), but established that the measure is not suited and/or disproportionate to that goal because "it prohibits the tenderer from delegating the performance of all the works identified as the ‘main’ works by the contracting entity, including the tasks which represent, proportionally, only a small part of those works. Therefore, that provision goes beyond what is necessary to prevent the abovementioned practice" (para 58).

  3. The ECJ finally accepted that, as a matter of principle, it is conceivable that "the encouragement of small and medium-sized undertakings to participate in a contract as tenderers rather than subcontractors" can, "in certain circumstances and under certain conditions, constitute a legitimate objective" (para 59). However, it found no evidence that this was the case in the specific situation.

Therefore, having rejected all possible justifications, the ECJ determined that "Articles 49 and 56 TFEU must be interpreted as precluding a provision of national law ... which provides that, where subcontractors are relied on for the performance of a public works contract, the tenderer is required to carry out the main works itself, as defined by the contracting entity" (para 61).

(b) Flexibility for (asymmetrical) joint tendering

The ECJ assessed a second substantive issue concerning joint tendering and, in particular, the imposition of the requirement that "in circumstances in which a common tender is submitted by several tenderers, ... the contribution of each of them in order to satisfy the requirements applicable with regard to professional capacities corresponds proportionally to the share of the works they will actually carry out if the relevant contract is awarded to them" (para 78).

It is interesting to note that, despite the inapplicability of the 2004 Utilities Directive to the award of the contract (which was below thresholds), the ECJ assessed the compatibility of such requirements with the Directive because the domestic law had made "those provisions have ... applicable ... in a direct and unconditional way" and did that "in order to ensure that internal situations and situations governed by EU law are treated in the same way" (see paras 33-34). Therefore, the ECJ's analysis was carried out "in the light of Article 54(6) of Directive 2004/17" (para 84) and is thus relevant for the future interpretation of Art 78 of Directive 2014/25--as well as, I would argue, Art 58(4) of Directive 2014/24.

I also find it interesting to note that the ECJ sets out the general framework for assessment by reference to the recent Judgment in PARTNER Apelski Dariusz, C-324/14, EU:C:2016:214 (for discussion, see here) and in the following terms (paras 85-86): 

  • EU public procurement law "recognises the right of every economic operator, where the contracting entity lays down a qualitative selection criterion consisting of requirements relating to technical or professional abilities, to rely for a particular contract upon the capacities of other entities, regardless of the nature of the links which it has with them, provided that it proves to the contracting authority that it will have at its disposal the resources necessary for the performance of the contract"
  • "that right extends to groups of economic operators submitting a common tender, which may, under the same conditions, rely on the capacities of their participants or of other entities."
  • EU public procurement law "does not preclude the exercise of the right ... from being limited in exceptional circumstances".

The ECJ recognises that restrictions on the possibility to rely on third party capacities could be justified on the need to "avoid the situation in which, in order to win the contract, a tenderer relies on capacities that he does not intend to use or, conversely, that a tenderer may be awarded a contract and perform part of the works without having the capacities and resources necessary for the proper performance of those works" (para 90).

However, , the ECJ ends up concluding that (paras 92-94):

  • the clause that requires "an arithmetic correspondence between the contribution of each of the tenderers concerned to satisfy the requirements applicable with regard to professional capacity and the share of the works that that tenderer undertakes to perform and that it will in fact perform if the contract is awarded", however, "does not take account of the nature of the tasks to be carried out or to the technical capacities specific to each of them" and, consequently, "does not prevent one of the tenderers concerned from carrying out specific tasks for which it does not in fact have the experience or capacities required".
  • Furthermore, if subcontracting of some ('subsidiary') works is possible and the professional capacities of the subcontractors are not verified (which is for the referring court to ascertain), then the requirement "does not guarantee that the tenderers will actually use the capacities that they have declared in the procurement procedure and which were taken into consideration" by the contracting authority; and "it does not prevent works defined as ‘subsidiary’ from being carried out by subcontractors without the professional capacities required".
  • Ultimately, then, the requirement is not appropriate to ensure the attainment of the objectives pursued.

(c) Common trends and future challenges

Taken together with previous case law in the area of exclusion, qualitative selection and subcontracting--such as Ostas celtnieks, Partner Apelski Dariusz and Wrocław — Miasto na prawach powiatu, the Borta Judgment seems to reaffirm an approach whereby the ECJ is pushing against general rules excluding or restricting teaming and subcontracting, as well as aiming to ensure that, where the contracting authority engages in a case-by-case analysis of the economic operators' capabilities, this is guided by a (strict?) proportionality assessment. In general, this should be a welcome (pro-competitive) direction of development of the case law.

However, the evil is in the detail and there are emerging issues that will require further fine tuning, such as:

  • the extent to which the contracting authority can engage in a substantive assessment of the economic operators' teaming or subcontracting arrangements prior to the award of the contract (cf Partner Apelski Dariusz and Ostas celtnieks), as well as the consequences of disputes concerning post-award structuring of their legal or functional relationships; or
  • the technical reasons that can justify a prohibition to subcontract specific parts of the work or service (see Wrocław and Borta, but also Hörmann Reisen), in particular where the economic operators have assumed joint and several liability and/or have furnished extensive insurance to the contracting authority; or 
  • the extent (and practicalities) of the integration of competition law considerations in the assessment of teaming and subcontracting arrangements by the contracting authorities (eg to avoid situations such as those raised by MT Højgaard and Züblin.

Overall, it seems fair to say that the case law and new rules on exclusion, qualitative selection and subcontracting raise significant practical challenges and that contracting authorities will need to treat lightly (and document extensively) the reasons why they create restrictions on teaming or subcontracting, as well as be ready to provide reasons for these decisions with a view of their administrative or judicial review (specially after the Marina del Mediterráneo Judgment).

ECJ extends justiciability of procurement infringements: No need to review the Remedies Directive? (C-391/15)

In its Judgment of 5 April 2017 in Marina del Mediterráneo and Others, C-391/15, EU:C:2017:268, the European Court of Justice (ECJ) issued another preliminary ruling on the scope of the Remedies Directive. The case required clarification on the concrete type of decisions that interested tenderers can challenge under the Remedies Directive.

In particular, the case sought clarification on whether the review procedures mandated by Art 2(1), and applicable to "decisions taken by the contracting authorities" (as per Art 1(1) Remedies Directive), had to allow a tenderer to challenge a decision by which the contracting authority allowed another economic operator to submit a tender in a public procurement procedure. That is, whether the Remedies Directive created standing to challenge exclusion and selection decisions that concerned other tenderers.

This issue can be seen as controversial because there are two ways in which the analysis can be framed. Firstly, it can be considered that a decision not to exclude (or to select) a competing tenderer does not necessarily produce adverse legal effects for other tenderers--and, consequently, there are no subjective rights to be protected at this stage. Secondly, and to the contrary, it can be considered that a decision that determines the number of competing tenderers among which the contracting authority needs to choose the awardee of the contract produces legal effects on all tenderers involved--and, consequently, there can be (soft?) subjective rights meriting protection both in decisions to exclude (vis-a-vis the excluded tenderer) and not to exclude (vis-a-vis all other tenderers).

The first approach to this issue would be closer to a strict interpretation of the procedural rights implicit in the participation in a procurement process--ie that unless a decision makes it impossible for a tenderer to continue its participation in the tender, there is no decision for which revision it has a legitimate interest / legal standing. The second approach is probably closer to a substantive interpretation of those same procedural rights, as well as supportive of a system of private oversight of compliance with (EU) public procurement law through private actions, where challenges on the basis of the illegality of exclusion and selection decisions are easier to accommodate.

In Marina del Mediterráneo, the relevant Spanish rules followed the first approach, and determined that: "the following acts may be the subject of the application [for judicial review]: (a) Contract notices, specifications and contractual documents laying down the conditions which will govern the procurement procedure; (b) Preparatory acts adopted in the tendering procedure, provided that they decide, directly or indirectly, the award of the contract, make it impossible to continue the procedure or to put up a defence, or cause irreparable harm to legitimate rights or interests. Acts of the procurement board which decide to exclude tenderers will be considered preparatory acts which make it impossible to continue the procedure; (c) Award decisions adopted by the contracting authorities" (C-391/15, para 11, emphasis added).

Thus, under Spanish law, a decision to exclude a tenderer can be challenged 'there and then' by the excluded tenderer, but a decision not to exclude (or to select) that tenderer can only be challenged by other tenderers at the end of the procedure (ie during standstill) and only on the basis of the illegality of the decision to award the contract to that particular tenderer and/or any of the preparatory acts for that decision. 

Therefore, by challenging the Spanish rule, the preliminary reference fundamentally--but rather implicitly--concerned the extent to which Arts 1(1) and 2(1) of the Remedies Directive can be transposed/interpreted in a way that limits the procurement decisions open to (separate, immediate) review to those that negatively affect the subjective rights of a tenderer (in a narrow construction), or whether those provisions create a catch-all category that makes (virtually) all decisions taken by the contracting authority along the procurement processes susceptible of (separate and particularised) review.

That not absolutely all decisions need to be subjected to the review procedures of the Remedies Directive was suggested on the basis of Commission v Spain (C‑214/00, EU:C:2003:276, para 80), where the Commission challenged the same Spanish rule for failing to ‘allow review to be sought of all decisions adopted by the contracting authorities, including all procedural measures, during the procedure for the award of public contracts’, and the ECJ rejected that maximalist approach on the basis that ‘the Commission has not established that that legislation does not provide adequate judicial protection for individuals harmed by infringements of the relevant rules of [Union] law or of the national rules transposing that law’. This could be seen as a decision purely on the (lack of) evidence adduced by the Commission. However, even if a wider reading of the ECJ decision is adopted to the effect that there may be procurement decisions that do not harm individual rights in a manner that merits (separate, immediate) review, the boundaries of the categories of decisions covered by the Remedies Directive remained all but fuzzy, and the extent to which Arts 1(1) and 2(1) of the Remedies Directive had to be interpreted in a restrictive or an expansive way required clarification.

It is worth stressing that AG Bobek (Opinion of 8 September 2016, C-391/15, EU:C:2016:651) was convinced by the first approach outlined above (ie a restrictive interpretation of the Remedies Directive) because constructing the remedies system "in such a broad and rather limitless way would mean that every single decision, however marginal and ancillary, could be immediately attacked, and the award procedure effectively halted. Yet, ... a reasonable balance must be struck between the different interests at stake in public procurement procedures, namely, the right of access to court and judicial review to challenge aspects of the procedure, on the one hand, and effectiveness of the overall procedure and judicial expediency, on the other" (para 34, footnote ommitted). 

Therefore, in an Opinion that seemingly tried to avoid declaring the necessary justiciability of (every) exclusion and selection decision, invited the ECJ to declare that national procedural rules could avoid subjecting those decision to direct (and specific) review provided that: "(a) the national legislation does not hinder immediate review of preparatory acts that produce adverse legal effects on undertakings; and (b) a plea of illegality of preparatory acts that do not produce adverse legal effects on undertakings, such as a decision to admit a candidate to a tendering procedure, can be made in support of an action against the final decision awarding the contract taken on the basis of those preparatory acts" (para 67) . 

In short, the ECJ disagreed with AG Bobek and found that, where there are allegations that a decision allowing a tenderer to participate in a procurement procedure was adopted in breach of EU public procurement law or the national legislation transposing it, national rules must class such decision among the preparatory acts of a contracting authority which may be subject to an independent judicial review--or, in simpler terms, that exclusion and selection decisions concerning other tenderers are open to the review procedures of the Remedies Directive. the reasons given by the ECJ are primarily that:

[the] broad construction of the concept of a ‘decision’ taken by a contracting authority is confirmed by the fact that Article 1(1) of [the Remedies Directive] does not lay down any restriction with regard to the nature or content of the decisions it refers to. Moreover, a restrictive interpretation of that concept would be incompatible with the terms of Article 2(1)(a) of that directive which requires Member States to make provision for interim relief procedures in relation to any decision taken by the contracting authorities (para 27).

And that:

... although [the Remedies Directive] has not formally laid down the time from which the possibility of review, as provided for in Article 1(1), must be open, the objective of that directive, as referred to in the preceding paragraph, does not authorise Member States to make the exercise of the right to apply for review conditional on the fact that the public procurement procedure in question has formally reached a particular stage ...  the fact that the national legislation at issue ... requires, in all cases, a tenderer to wait for a decision awarding the contract in question before it may apply for a review of a decision allowing another tenderer to participate in that procurement procedure infringes the provisions of [the Remedies Directive] (paras 31 and 34).

In my view, even if there are issues of consistency with previous case law that may require some additional fine tuning, there is no question that the ECJ has taken a very expansive approach to the interpretation of the Remedies Directive on this occasion, and that the thrust of the Marina del Mediterráneo Judgment reflects a wide approach to the provision of procurement remedies.

This puts significant pressure on domestic review procedures to ensure that virtually all decisions taken by a contracting authority can be challenged, and that the challenge is available as soon as possible -- and definitely before the award of the contract because as expressed in the "first and second recitals, [the Remedies Directive] is intended to strengthen the existing mechanisms, both at national and EU levels, to ensure the effective application of the directives relating to public procurement, in particular at a stage when infringements can still be corrected" (para 30). This is particularly relevant in view of the (unnecessary) declaration by the ECJ that "Articles 1(1) and 2(1)(a) and (b) of [the Remedies Directive have direct effect" (para 41), which will provide robust legal foundation to challenges against existing domestic rules on access to review procedures.

This approach is bound to further judicialise public procurement oversight through expanded justiciability of (exclusion, but not only) decisions, and puts renewed pressure on the development of more robust procurement review procedures by the Member States--possibly requiring a reform of the Remedies Directives themselves, as I discuss at length in "'If It Ain't Broke, Don't Fix It'? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts",  in S Torricelli & F Folliot Lalliot (eds), Administrative oversight and judicial protection for public contracts (forthcoming). In my view, this is not necessarily a blueprint for desirable regulatory reform and more thought needs to go into the balance between public compliance oversight and private enforcement of the EU public procurement rules. However, it seems out of the question that legal reform will be necessary (in Spain and elsewhere) and, in my view, that the European Commission abandoned the revision of the Remedies Directives too quickly.

Are the EU Institutions (about to start) breaching Art 50 TEU & EU public procurement law in the context of Brexit?

The Financial Times has reported that "Brussels starts to freeze Britain out of EU contracts ~ Commission memo tells staff to prepare to ‘disconnect’ UK". According to the FT, an internal European Commission memorandum urges its senior officials to start introducing Brexit considerations in their decision-making, seemingly to avoid “unnecessary additional complications”. As public procurement is concerned, the FT indicates that 

Where legally possible, the [C]ommission and its agencies will be expected in all activities to “take account” of the fact that Britain may be “a third country” within two years, including in appointing staff and in awarding billions of euros of direct contracts for research projects or services.

“Apart from the legal requirement for a contracting party to be established in the EU, there may be political or practical reasons that speak in favour of contracting parties established in a specific member state, not only at the conclusion of the contract, but also throughout the duration of the contract,” the note states.

The FT piece lacks the necessary detail for a full legal assessment and the caveat that this strategy should be undertaken "where legally possible" may well deactivate it [in legal terms]. However, at least in its thrust, this is a rather clear breach of Article 50(3) TEU.

Inasmuch as it states that "The Treaties shall cease to apply to [a withdrawing Member] State ... from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification" (given by the UK on 29 March 2017), unless this period is extended unanimously by the European Council; Art 50(3) TEU does not allow for any anticipatory effects of a decision to withdraw. Until withdrawal and its terms are actually agreed and legally effective, both the withdrawing Member State and the EU Institutions remain bound by EU law in its supremacy, direct effect and the mandate to respect the rule of law (Art 2 TEU). This is an appropriate measure aimed at the preservation of the rule of law in the form of compliance with EU law during the withdrawal negotiations, not least because nobody knows if withdrawal is legally irreversible and unavoidable -- and, quite frankly, every day that goes by without the EU Institutions (as well as the UK) seeking clarification from the Court of Justice of the European Union is a missed opportunity and another blow to the foundations of the rule of law in the EU.

Such prohibition of anticipatory effect goes both in the direction of preventing the 'freeing up' of the withdrawing Member State from compliance with EU law (which is obvious from Art 50(3) TEU itself), as well as in the opposite direction of preventing the EU Institutions from discriminating against the withdrawing Member State. It is clear to me that EU law will always bind the EU Institutions vis-a-vis a withdrawing Member State all the way up to the point of legal withdrawal - and from then onward, the legal regime setting up mutual duties will be that of any transitory arrangements created by the withdrawal agreement, and/or the legal regime governing the "the framework for [the withdrawing Member States'] future relationship with the Union". Violating the absolute mandate of subjection to EU law up to the point of withdrawal would be an infringement of Art 50(3) TEU by the EU Institutions -- if not by itself, certainly in combination with the duty of non-discrimination and equal treatment between Member States of Art 4(2) TEU, as well as the duty of sincere cooperation of Art 4(3) TEU.

In the specific area of public procurement, just as it was illegal for the UK's Department for International Trade to tender contracts screening contractors on the basis of their commitment to support the delivery of Brexit as a cultural fitness criterion (see here), it is also illegal for the EU Institutions to tender contracts on the basis of "political or practical reasons that speak in favour of contracting parties established in a specific member state, not only at the conclusion of the contract, but also throughout the duration of the contract". Article 102 of the Financial Regulation governing the award of contracts by EU Institutions clearly establishes that "All public contracts financed in whole or in part by the [EU] budget shall respect the principles of transparency, proportionality, equal treatment and non-discrimination". Imposing requirements around the Member State of incorporation, registration or sit of a public contractor runs against these general principles.

There may be some specific circumstances or projects (the FT piece mentions the Galileo project) where it would not be possible for public contractors to be based outside the EU, but these are clearly exceptional and need to be subjected to a very strict proportionality analysis. In most cases, particularly for services and research contracts, there is no need for any physical presence in the EU (or elsewhere). This is clearly demonstrated by the coverage of a good number of Brexit-sensitive services markets in the EU's market access concessions under the World Trade Organisation's Government Procurement Agreement (albeit on a reciprocal basis, for obvious trade policy reasons).

Moreover, the extent to which it would be impossible for UK-based contractors to complete the execution of public contracts post-Brexit depends on the existence or not of transitory arrangements, as well as the framework for the future EU-UK relationship (which may well imply mutual coverage of services procurement in WTO GPA terms). Therefore, a decision made now that determined such impossibility and thus served as the basis for the exclusion of UK tenderers from procedures carried out by the EU Institutions would be legally defective.

Beyond these technical issues, it is shocking and worrying to see the EU Institutions engage in what can be seen as trade war by erecting non-tariff barriers against a withdrawing Member State, just as it was worrying and unacceptable to see the UK do that. If both parties to the withdrawing negotiations "prepare" for a disorderly Brexit in this manner, this will be a self-fulfilling prophecy. And the only stopper to such noxious developments is to be found in the rule of law and the EU's and the withdrawing Member States' obligations under the Treaties to comply with EU law until the withdrawal is effective in terms of Art 50(3) TEU. If the European Commission is itself not able to abide in this manner, then my pessimism about the irreversible effects of Brexit on EU law can only plummet even further....

Things for your procurement radar before the Easter break

Dear reader, 

This has been a busy start of the year and I look forward to unwinding for a while during Easter break. I hope you will also have a good break and to find you again here after the holiday. In the meantime, I thought I would put some things on your procurement radar:

The ECJ decided two important cases on 5 April 2017, which I will comment in detail in forthcoming posts after the break: 

  • Borta, C-298/15, EU:C:2017:266, on the incompatibility with EU procurement law of a national rule partially prohibiting subcontracting by establishing that, where subcontractors are relied on for the performance of a public works contract, the tenderer is required to perform itself the main works, as defined by the contracting entity. In this case, the ECJ has largely followed the Opinion of AG Sharpston (commented here).
  • Marina del Mediterráneo and Others, C-391/15, EU:C:2017:268, on the scope of the Remedies Directives. In short, the ECJ found that, where there are allegations that a decision allowing a tenderer to participate in a procurement procedure was adopted in breach of EU public procurement law or the national legislation transposing it, national rules must subject such decision to an independent judicial review. This is bound to further judicialise exclusion decisions and puts renewed pressure on the development of more robust procurement review procedures--possibly requiring a reform of the Remedies Directives themselves, as I discuss at length in "'If It Ain't Broke, Don't Fix It'? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts",  in S Torricelli & F Folliot Lalliot (eds), Administrative oversight and judicial protection for public contracts (forthcoming).  

I have just finished two papers:

If you decide to read any of these cases or papers during the Easter break, happy reading!

 

Public procurement in the CJEU's 2016 Annual Report - What a Busy Year and How Much New Case Law To Keep Up With

The Court of Justice of the European Union (CJEU) has published its 2016 Annual Report, including a detailed assessment of its judicial activity. Even at first read, it is clear that public procurement features more prominently in this year's edition, where the CJEU offers some comments on key ECJ cases, such as Falk Pharma, Partner Apelski Dariusz and Wrocław — Miasto na prawach powiatu, and PFE (see Judicial Activity Report, pp 64-65); as well as some comments on key GC cases on public procurement by the EU Institutions and on Commission's Decisions on Utilities Procurement, such as Österreichische Post v Commission, or European Dynamics Luxembourg and Others v EUIPO on the concept of conflict of interest (currently under appeal) (pp. 182-183).

The 2016 Annual Report also allows for an expansion of previous statistical analysis of the ECJ's and GC's case load in the area of public procurement (see also analyses for 2015, 2014 and 2012).

Interestingly, 2016 data shows a reduction in the accumulation of procurement-related backlog, which is now reduced to its 2010 level if the institution is taken as a whole. As the graphs below show, this reduction in backlog is mainly due to increased decision-making at ECJ level and to a significant reduction of new cases at GC level. It is worth taking a closer look at both issues.

Sharp reduction in number of new cases before the GC

The number of new procurement cases before the GC dropped from 23 in 2015 to only 9 in 2016, which marks the all time lowest level since 2006, when the statistical series started. This sharp reduction in new cases allowed the GC to catch up with some of its backlog from previous periods and to reduce it by one third (from 35 to 24 pending cases in the 2015-2016 comparison). However, the low number of cases at GC level, which mostly concerns challenges to procurement decisions by the EU Institutions, continues to indicate that the creation of more effective remedies mechanisms applicable to EU institutional procurement remains a priority for regulatory reform (as stressed by the Court of Auditors). 

Increased Decision-Making at ECJ Level

It is particularly remarkable that the ECJ managed to significantly increase its decision-making in the area of public procurement, moving from an average of 10 decided cases in the 2010-2015 period (with a highest output of 14 decisions in 2015) to 31 decisions in 2016. Coupled with a reduction in the number of new cases from 26 to 19 in the 2015-2016 comparison, this increased level of decision-making activity has cut the backlog of pending cases by one third, thus bringing it back to its 2014 level and stopping (at least for now) the worrying trend observed throughout this decade.

It is interesting to dig a bit deeper in the analysis of this remarkable surge in decision-making activity by the ECJ. The graph below shows the evolution of the public procurement decisions adopted by the ECJ, breaking down annual totals between those closed by Judgment or Opinion (ie substantive decision-making) and those closed by Order (ie procedural decision-making).

As the graph shows, the increased volume of decision-making has resulted in an increased total volume of both substantive and procedural decisions. The impact of this evolution on the different type of decisions may be easier to grasp through a simple ratio. As the table below shows, the increase in decision-making has in part been the result of the adoption of a larger proportion of procedure-based decisions. This may point towards the need for further case-by-case analysis in order to understand if this reflects any new trends concerning the ECJ's management of procurement cases, or if it is simply the result of the larger overall case load in this area. In any case, what is clear is that 2016 was a year of unprecedented substantive decision-making by the ECJ in the area of public procurement. No wonder it felt like such a busy year and that it was hard to keep up with all developments!

Critical Assessment of the BBG-SKI study on the feasibility of joint cross-border public procurement

Following last week's initial reaction to the publication by the European Commission of the "Feasibility study concerning the actual implementation of a joint cross-border procurement procedure by public buyers from different Member States" prepared by BBG and SKI, I have now written a response paper: "Is Joint Cross-Border Public Procurement Legally Feasible or Simply Commercially Tolerated? ~ A Critical Assessment of the BBG-SKI JCBPP Feasibility Study" (2017) European Procurement & Public Private Partnership Law Review (forthc), available at: https://ssrn.com/abstract=2944008.

The paper provides a critical assessment of the BBG-SKI study and submits that, while the study provides some interesting data and details about relevant case studies, it does not shed significant light on the doubts created by the rules on joint cross-border public procurement (JCBPP) in the 2014 Public Procurement Package [which I had previously sketched out here], and that the main weakness of the study is its lack of a general legal analytical framework.

In order to go beyond the shallow legal analysis of the BBG-SKI study and try to gain additional legal insights on the basis of the same empirical data, the paper proposes an analytical framework under which to assess the legal compliance of JCBPP structures. It then summarises each of the case studies included in the BBG-SKI study and offers a critical (re)assessment of the issues that would have required more information and/or which are insufficiently analysed in the BBG-SKI study. Based on this reorganised empirical evidence, the paper proceeds to a critical assessment of some of the outstanding legal barriers and challenges to JCBPP. It concludes by stressing some of the remaining uncertainties concerning legal development at Member State level, and calls on the European Commission to facilitate more detailed research leading to the adoption of future guidance on JCBPP under the 2014 EU Public Procurement Directives.