ECJ deviates from AG Sharpston’s Opinion and accepts use of “sure-refund” good conduct guarantees in public procurement litigation (C-439/14 and C-488/14)

In its Judgment of 15 September 2016 in Star Storage, joined cases C-439/14 and C-488/14, EU:C:2016:688, the European Court of Justice (ECJ) has deviated from the Opinion of AG Sharpston (see here) and ruled that, read in the light of Article 47 of the Charter of Fundamental Rights of the European Union, the Remedies Directives must be interpreted as not precluding national legislation that makes the admissibility of any action against an act of the contracting authority subject to the obligation for the applicant to constitute a good conduct guarantee if that guarantee must be refunded to the applicant whatever the outcome of the action.

I find this Judgment seriously troubling for two reasons: (a) it goes against basic intuitions of the effect of financial requirements on access to justice and (b) I do not grasp the purpose of “sure-refund” good conduct guarantees, which seem to be useless procedural hurdles. I develop these points below.

The main legal issue in Star Storage

The legal issue raised by the joined cases decided in Star Storage has been a rather moving target because the underlying Romanian rules have been altered in the period between the referral of the question to the ECJ and its Judgment. The initial question concerned the compatibility with EU law of requirements to furnish a good conduct guarantee in order to challenge procurement decisions under the risk that the guarantee would be executed in case of negative results for the litigant.

The forfeiture of the guarantee was later declared unconstitutional by the Romanian Constitutional Court and, as a result, the only question left for the ECJ to consider revolved around the compatibility of such good conduct guarantees in the scenario where they would be refunded to the challenger of the procurement decision, whatever the outcome of the review process.

So, in short, the ECJ had to consider whether the Remedies Directives and Art 47 CFR excluded the possibility to require the provision of a “sure-refund” good conduct guarantee in order to challenge public procurement decisions under Romanian law (C-439/14, para 38).

After rehearsing its standard case law concerning the Remedies Directives’ objective of ensuring the effectiveness of the substantive EU public procurement rules (paras 41-44) and stressing that the 2007 review of those rules aimed at ensuring ‘full respect for the right to an effective remedy and to a fair hearing, in accordance with the first and second paragraphs of Article 47 of the Charter’ (para 45), the ECJ focuses on the specific assessment of the “sure-refund” good conduct guarantee and follows the analytical framework proposed by AG Sharpston in her Opinion, which started from the position that

the good conduct guarantee … constitutes, as a pre-condition for getting any challenge examined, a limitation on the right to an effective remedy before a tribunal within the meaning of Article 47 of the Charter which, in accordance with Article 52(1) of the Charter can therefore be justified only if it is provided for by law, if it respects the essence of that right and, subject to the principle of proportionality, if it is necessary and genuinely meets objectives of general interest recognised by the EU or the need to protect the rights and freedoms of others (see judgment of 4 May 2016, Pillbox 38, C-477/14, EU:C:2016:324, paragraph 160) (C-439/14, para 49, emphasis added).

In assessing this test, the ECJ considers that the first requirement of explicit legal basis is met (para 50). This does not seem controversial. However, and this is where the ECJ starts to deviate from the analysis of AG Sharpston, the Court also considers that ‘the fact that the good conduct guarantee may reach the substantial amount of EUR 25 000 or EUR 100 000 cannot lead to the conclusion that the obligation to give such a guarantee undermines the fundamental content of the right to an effective remedy since, in any event, that guarantee, cannot be kept by the contracting authority, whatever the outcome of the action’ (C-439/14, para 50, emphasis added).

The ECJ further considers the measure adequate because the aim of the good conduct guarantee is justified by the legislative aim of avoiding the abuse of the remedies system so as to ensure the administrability of the procurement process (paras 52 and 53), and that ‘A financial condition such as the good conduct guarantee … is a measure liable to discourage frivolous challenges and ensure that all individuals have their actions dealt with as rapidly as possible, in the interest of the proper administration of justice, in accordance with Article 47, first and second paragraphs, of the Charter’ and that this is so even if ‘the obligation to provide a good conduct guarantee is a less dissuasive measure in its current version than in its initial version, since it can no longer be automatically and unconditionally kept by the contracting authority in the case that the appeal is rejected or withdrawn, [because] that obligation is still able to achieve the objective of combating frivolous actions pursued by the Romanian legislation’ (C-439/14, paras 54 and 56, emphasis added).

It finally considers the measure proportionate, mainly because ‘The good conduct guarantee of 1% of the value of the public contract, limited in accordance with the type of contract remains modest (see judgment of 6 October 2015, Orizzonte Salute, C-61/14, EU:C:2015:655, paragraph 58), in particular for tenderers which must normally demonstrate a certain financial capacity. That guarantee may, next, and in any event, be constituted in the form of a bank guarantee. Finally, it has to be constituted only for the period between the filing of the application and final judgment’ (C-439/14, para 61, emphasis added).

Issues around access to (administrative) justice

The first aspect in which I find the Star Storage Judgment criticisable concerns the analysis of proportionality. I think that the imposition of financial requirements and costs in order to challenge procurement decisions—including the payment of (non-negligible) courts fees—should be considered more clearly contrary to Art 47 CFR and the Remedies Directives. These rules require the recognition of standing to challenge procurement decisions ‘at least to any person having or having had an interest in obtaining a particular contract and who has been or risks being harmed by an alleged infringement’, and not only to those that can foot the bill of a (bank-issued) financial guarantee or absorb the opportunity cost of having a significant amount of money idle for the duration of the review procedures. Moreover, the assessment of proportionality in the terms carried out by the ECJ in the Star Storage Judgment can be particularly burdensome for SMEs, for whom the effects of a financial requirement proportional to the value of a contract they were not awarded can be clearly disproportionate, or at least imply an excessive risk.

Also, an assessment of proportionality should include a consideration of whether less restrictive measures are available. In the specific setting of aiming to discourage frivolous litigation, it would seem that the creation of a system of court-administered fines would be superior and reduce the ex ante restriction of access to review procedures. Moreover, that system could include provisions allowing the review body or court to ask for financial guarantees as interim measures only where they are necessary to ensure the possibility of the fine having to be paid at the end of the procedure (although I am not sure that this mechanism to avoid bankruptcy proofness is necessary).

It would also be possible to create a domestic discretionary exclusion ground for spurious litigants on the basis that this conduct makes ‘the economic operator … guilty of grave professional misconduct, which renders its integrity questionable’ [Art 57(4)(c) Dir 2014/24]. In my view, the existence of these potential alternatives should have been taken into account and this could have led to a finding that the upfront requirement of good conduct guarantees is in itself disproportionate.

However, this is not the weakest point of the Judgment.

Uselessness of “sure-refund” good conduct guarantees

Rather, in my view, the weakest and most criticisable aspect of the Star Storage Judgment is that it fails to recognise the futility of “sure-refund” good conduct guarantees. As simply and clearly put by AG Sharpston in her Opinion,

such a procedural requirement does not protect contracting authorities adequately from frivolous challenges … the contracting authority has to return the good conduct guarantee to the applicant within five days following the date on which the decision ... or the judgment has become final, even where the applicant manifestly abused his right to access review procedures. The costs which the … regime involves may therefore not be such as to discourage an economic operator from lodging a challenge that pursues an objective other than those for which the review procedures are established — for example, harming a competitor. They may nevertheless prove an obstacle to an economic operator with an arguable claim but limited means (Opinion of AG Sharpston, para 56, emphasis added).

It is surprising that the ECJ diverges from this assessment. In general terms, the ECJ implicitly dismisses it by stressing that ‘although the obligation to provide a good conduct guarantee is a less dissuasive measure in its current version than in its initial version, since it can no longer be automatically and unconditionally kept by the contracting authority in the case that the appeal is rejected or withdrawn, that obligation is still able to achieve the objective of combating frivolous actions pursued by the Romanian legislation’ (C-439/14, para 56). The rationale for this assessment is developed in the following terms:

Mobilising a sum of that amount by bank transfer, like the requirement to take the steps necessary to constitute a bank guarantee and pay the fees relating to it are such as to encourage applicants to carefully consider bringing an action. Furthermore, in so far as it undermines the applicant’s resources or, at least, its ability to obtain credit until that guarantee is refunded, the good conduct guarantee is of such a nature that it encourages applicants to act prudently in the proceedings they bring, consistent with the requirement … that the review procedures … are conducted as rapidly as possible. … it is conceivable that such a financial condition will encourage potential litigants to seriously evaluate their interest in bringing legal proceedings and their chance of winning and thereby dissuade them from bringing claims which are manifestly unfounded or which only seek to delay the award of a contract (C-439/14, para 59).

In my view, the ECJ fails to address AG Sharpston’s concerns. There is indication of the cost of such a financial guarantee, but it is certainly easy to foresee that (especially for large contracts), it may well be a minor amount for resourceful litigants willing to incur that cost in order to obtain some competitive advantage.

On the contrary, it is surprising that the ECJ does not use the exact same reasons detailed in para 59 of the Star Storage Judgment to acknowledge the barrier that the guarantee represents, which it ‘saves’ by indicating that the absolute value of the guarantees remains ‘modest’ (para 61). In my view, it is not possible to have it both ways. Either the requirement is modest and, therefore, unable to provide sufficient deterrence for resourceful litigants, or it is a serious barrier to the exercise of legal actions (whether legitimate, which should overcome the barrier, or illegitimate, which should not) and, consequently, it cannot overcome an analysis of strict proportionality in the terms discussed above.

Overall, once more, I find the judgement of the ECJ lacking commercial and financial realism and I start to wonder whether we will see a reversal of this trend any time soon—which seems unlikely, particularly when the ECJ deviates from the well thought-through proposals of some of its Advocates General, such as Sharpston’s in the Star Storage case.

What does Brexit mean for public procurement? Short remarks on Arrowsmith's White Paper

Prof Arrowsmith has published a White paper on the implications of Brexit for the law on public and utilities procurement, where she briefly considers the alternative models for the future regulation of public procurement in the UK after an exit from the EU. A fuller academic version of the paper is bound to appear in a Brexit special issue of the Public Procurement Law Review. In her White Paper, Arrowsmith provides the skeletal implications that different UK-EU relationships would have in terms of public procurement regulation, most of which point towards a clear need for (broad) continuity of the existing EU-based model.

Along the same lines already drawn by previous commentators (see here), her White Paper stresses the limited scope (and incentive) for a change of regulatory model if the UK is to have full access to the EU single market (under either the 'Norwegian'/EEA model, or the slightly more flexible 'Swiss' approach). She indicates that there is a (theoretical) possibility for the UK to reach a bespoke agreement with the EU that softens the requirements under the current EU Directives, but she also stresses that the stronger indication is that the EU would rather push for a consolidation of existing rules, both because that is the obvious 'off-the-shelf' solution, and due to the different negotiation dynamics between previously unrelated parties (the EU and Switzerland, for these purposes) and between the UK and the EU, which render arguments based on the need to 'learn' about the EU procedures or to reform internal rules to ensure approximation and consistency moot.

She then also assesses two scenarios that, in my view, are only interesting from a theoretical perspective. First, the strict application of the WTO GPA, which leads her to suggest that this option would allow the UK to develop a more flexible procurement regime but, realistically, only in the long run because access to the WTO GPA (of which the UK is not a Member in its own right, but only as part of the EU) would be significantly facilitated by keeping the existing EU-based regulations in place. She also mentions that this option would require the UK to agree on coverage with the EU and all other GPA members, and that 'there ... seems to be no reason why the other GPA parties would want to reopen the existing detailed coverage arrangements with the UK, or vice versa'. She is right to stress that business as usual would be the best way of ensuring quick accession to the GPA by the UK, but the question then arises of what is the advantage of such loose relationship with the EU compared to full access to the single market?--and the simple answer is that, in procurement terms, there is none in the short run and that any long run advantage seriously depends on the way the GPA itself evolves, which is not something we can include in our analysis with any meaningful level of predictability.

Second, and maybe in the only controversial or provocative point of her White Paper, Arrowsmith entertains the idea "that Brexit [c]ould see the UK throw off the shackles of EU procurement law, leaving it free to design its own system", in what she labels "the freedom option", which would derive in case the UK was not able to commit to any trade agreements covering public procurement. Arrowsmith rightly considers this situation unlikely and, as far as I can assess her qualitative comments on its implications, probably undesirable. I think that Arrowsmith's assessment of this situation is however partial because it fails to stress the losses in terms of trade that would derive from such "freedom solution", that I would rather label "the self-destructive, isolationist option".

Beyond the possibility of creating a superior public procurement system, which is by no means guaranteed (as Arrowsmith stresses herself), this solution of "absolute regulatory freedom" would not be viable unless the UK had no intention of keeping a meaningful level of international trade in public procurement markets. This scenario would come together with the possibility for any third country to discriminate against UK producers and exporters in their own procurement, as well as reduced incentives for international suppliers to participate in tenders where their ability to enforce individual rights was more reduced than in other jurisdictions. In general, it does not seem far fetched to consider that there would be less overall competition for contracts tendered by the UK government and, in the end, this would harm the UK taxpayer via higher prices and/or reduced quality of supplies, services and works needed to run public services.

I guess that my broader point is that, in this area of economic regulation, as in any other, arguments based on the possibility to develop a (theoretically) better system from a legal / technical perspective need to be considered together with their economic implications. And, from this perspective, any option that implied limited access to the EU single market and, even more, to the international markets, would impose a very heavy burden on UK's public expenditure. That is why it is important not to isolate technical legal analysis from its broader context in this important debate.

Moreover, and this is not a perspective generally included in Brexit assessments, multilateral investment banks also have a stake in the domestic regulation of public procurement. In case the UK wanted to have any chance of securing international funds for large infrastructure projects (which it may well want to preserve, in order to retain some possibilities of, for instance, EBRD investment in the country), it would still need to have a domestic regulation that complied with standards very close to those of the current EU-based regulatory mechanisms. Otherwise, it could not be out of the question that internationally-funded projects would need to be tendered under special rules in the future, thus not leaving the "freedom option" completely unconstrained.

Similarly, these issues of reduced international competition (with its negative economic effects) and difficulties in continuing to attract procurement-related international investment would arise in case Arrowsmith's proposal for a transition period between Brexit (ie, 2 years after the trigger of Art 50 TEU, which now seems likely to happen in early 2017) and the moment trade agreements were reached, in which she considers that a "sensible and likely interim solution would be to retain the award procedures of the regulations in place, but without provision for enforcement by non-domestic suppliers, pending eventual confirmation, modification/replacement, or total repeal of the regulations, depending on the outcome of trade negotiations and other decisions on how procurement will be regulated after Brexit". In my view, this is a bad idea and the UK would be better off by completely keeping the status quo ante Brexit (including remedies for international tenderers and investors) if it wants to preserve its (diplomatic) options of a swift conclusion of procurement-related trade agreements, as well as preventing disruption in investment and infrastructure projects.

Once again, from a broader perspective and like in most other areas of Brexit-related renegotiation, strategies that not only do not consolidate or grandfather rights, but also seek to (temporarily) restrict rights and guarantees, seem not to be conducive to productive future relationships and there is no reason to believe that such moves would not severely damage the UK's chances of reaching satisfactory agreements for the future. Thus, in my view, Arrowsmith's proposal for a transition period of reduced enforcement rights for non-UK bidders should not be followed.

CJEU ignores commercial reality and sets unjustified contractual boilerplate requirements for contractual modifications (C-549/14)

In its Judgment of 7 September 2016 in Finn Frogne, C-549/14, EU:C:2016:634, the European Court of Justice (ECJ) issued guidance on the requirements (and constraints) derived from the principle of equal treatment in situations where the difficulties in the performance of a contract are such that the contracting authority decides to settle its early termination in a way that implies a material amendment to the initial contract. This case is relevant in the early stages of the new rules on contract modification and termination in Articles 72 and 73 of Directive 2014/24. However, the compatibility between the Finn Frogne Judgment and these new rules raises several questions.

In Finn Frogne, and according to the rather limited facts given in the Judgment, the dispute concerned the contract for the supply of a global communications system common to all emergency response services and for the maintenance of that system for several years, which was awarded after a competitive dialogue. The execution of the contract was subsequently delayed due to difficulties for which neither the contracting authority nor the supplier accepted responsibility (in the terms of the ECJ, both parties disagreed "as to which party was responsible for making it impossible to perform the contract as stipulated", para 10), which eventually led them to enter into a settlement involving the reduction of the contract and each party waiving all other rights arising from the original contract (para 11).

The main point of contention was that the settlement not only included the supply of equipment initially covered by the original contract (a radio communications system), but also the sale of two central server farms which the contractor had itself acquired with a view to leasing them to the contracting authority in performance of the original contract (paras 11 and 19). The settlement was the object of a voluntary ex ante transparency notice and subsequently challenged by a third party.

The legal issue in front of the ECJ was "in essence, whether Article 2 of Directive 2004/18 must be interpreted as meaning that, following the award of a public contract, a material amendment cannot be made to it without a new tendering procedure being initiated, even in the case where the amendment is, objectively, a type of settlement agreement, with both parties agreeing to mutual waivers, designed to bring an end to a dispute with an uncertain outcome, which arose from the difficulties encountered in the performance of that contract" (para 27). Or, in simple terms, whether settling the disputes that had made the commercial relationship between the supplier and the contracting authority non-viable in a way that implied a substantive amendment of the initial contract breached the principle of equal treatment and the obligation of transparency.

In Finn Frogne, the ECJ first took the opportunity to clarify its case law in pressetext (C‑454/06, EU:C:2008:351) and in Wall (C‑91/08, EU:C:2010:182) in the sense of emphasising that a material reduction of the scope of a public contract is equally caught by the restrictions on contract modification as a material extension of the scope of that contract. The reasons for this are as follows:

an amendment of the elements of a contract consisting in a reduction in the scope of that contract’s subject matter may result in it being brought within reach of a greater number of economic operators. Provided that the original scope of the contract meant that only certain undertakings were capable of presenting an application or submitting a tender, any reduction in the scope of that contract may result in that contract being of interest also to smaller economic operators. Moreover, since the minimum levels of ability required for a specific contract must ... be related and proportionate to the subject matter of the contract, a reduction in that contract’s scope is capable of resulting in a proportional reduction of the level of the abilities required of the candidates or tenderers (C-549/14, para 29).

This makes logical sense and is generally linked with the discussion of the division of contracts into lots and how to manage volume-related restrictions of competition for public contracts. However, in the context of a contractual settlement aimed at terminating the commercial relationship between the original (larger) provider and the contracting authority, this would lead to the conclusion that, in a case of breakdown of the commercial relationship implicit in all public contracts, "the principle of equal treatment and the obligation of transparency imply that a contracting authority cannot consider entering into a settlement to resolve the difficulties arising from the performance of a public contract without this automatically giving rise to the obligation to organise a new tendering procedure relating to the terms of that settlement" (para 24), which the referring court considered problematic.

Indeed, in my opinion, taking this position would create situations where the contracting authority is simply in a catch 22 by having to either remain committed to a non-functioning contractual relationship that is not allowing it to perform its public functions to which the contract is instrumental, or having to spend significant funds in the creation of an alternative commercial relationship that may not be the best solution for its needs--particularly if there are economies to be had from preserving part of the original contract or the preparatory actions which the parties had already undertaken in view of its performance.

Regardless of this clear practical difficulty, the ECJ considered that

neither (i) the fact that a material amendment of the terms of a contract results not from the deliberate intention of the contracting authority and the successful tenderer to renegotiate the terms of that contract, but from their intention to reach a settlement in order to resolve objective difficulties encountered in the performance of the contract nor (ii) the objectively unpredictable nature of the performance of certain aspects of the contract can provide justification for the decision to carry out that amendment without respecting the principle of equal treatment from which all operators potentially interested in a public contract must benefit (C-549/14, para 29).

Consequently, it stuck to its previous line of case law in Succhi di Frutta (C‑496/99 P, EU:C:2004:236) whereby any material modification of a public contract requires a new tender (para 38), but placed significant emphasis on the fact that

Although the principle of equal treatment and the obligation of transparency must be guaranteed even in regard to specific public contracts, this does not mean that the particular aspects of those contracts cannot be taken into account. That legal imperative and that practical necessity are reconciled, first, through strict compliance with the conditions of a contract as they were laid down in the contract documents up to the end of the implementation phase of that contract, but also, second, through the possibility of making express provision, in those documents, for the option for the contracting authority to adjust certain conditions, even material ones, of that contract after it has been awarded. By expressly providing for that option and setting the rules for the application thereof in those documents, the contracting authority ensures that all economic operators interested in participating in the procurement procedure are aware of that possibility from the outset and are therefore on an equal footing when formulating their respective tenders (C-549/14, para 37, emphasis added).

Ultimately, the ECJ ruled that

Article 2 of Directive 2004/18 must be interpreted as meaning that, following the award of a public contract, a material amendment cannot be made to that contract without a new tendering procedure being initiated even in the case where that amendment is, objectively, a type of settlement agreement, with both parties agreeing to mutual waivers, designed to bring an end to a dispute the outcome of which is uncertain, which arose from the difficulties encountered in the performance of that contract. The position would be different only if the contract documents provided for the possibility of adjusting certain conditions, even material ones, after the contract had been awarded and fixed the detailed rules for the application of that possibility (C-549/14, para 40, emphasis added).

In my view, the Finn Frogne Judgment must be criticised, at least for two reasons.

First, because it is very difficult to coordinate with the functional approach of Art 72 (and to some extent, 73) of Directive 2014/24 and gives excessive deference to the creation of contractual modification mechanisms. Strictly on the coordination aspect, it is worth stressing that Art 72 seems to be concerned with extensions of the contractual object, but not with its reduction (Art 72(4)(c)), and with qualitative or technical changes that would have allowed other tenderers to participate (Art 72(4)(a)). In the Finn Frogne case, there would have seemed to be more reason to challenge the content of the settlement on the basis that it changed one of those conditions (sale rather than lease of the central server farms) rather than on the change of overall value of the contract. 

Moreover, it is worth stressing that Art 72 also provides significant leeway for the modification of contracts up to 50% of their value (per modification, without a maximum cap) where a diligent contracting authority could not have foreseen the circumstances leading to the need for the contractual modification. Implicitly, the ECJ seems to indicate that every diligent contracting authority needs to foresee the possibility of the commercial relationship breaking down (which may be fair enough), but it also goes on to require a full contractual regulation of how such termination of the contractual relationship needs to unfold.

In that regard, it must be stressed that the requirements for the inclusion of "general" contractual review clauses foreseen in Art 72(1)(a) demands them to be "clear, precise and unequivocal", which may or not be coincidental with the ECJ's requirement for the contractual arrangements to fix "the detailed rules for the application [of] the possibility of adjusting certain conditions"--and which may not be (feasibly) applicable to "termination through settlement" clauses, whereby the parties must necessarily engage in negotiations.

In my view, the ECJ has fallen in the same problematic assumption of the possibility to design "perfect contracts" explicitly and exhaustively regulating all consequences of their (un)foreseeable non-viability or imperfection that also affects the provision in Art 72(1)(a) of Dir 2014/24 [for criticism, see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 428], but with the aggravating factor of not acknowledging that they may also be totally ineffective in scenarios where the commercial relationship is broken and, consequently, the parties need to settle, mediate, arbitrate or litigate those consequences regardless of the prior inclusion of such contractual clause.

The second reason why the Finn Frogne Judgment needs to be criticised is because it does not make any effort to attempt to distinguish between settlement conditions that remain strictly within the scope of the original contract and, consequently, only entail its partial enforcement (in its own terms) from settlements which include substantive changes in either their scope or the conditions for (partial) performance. While the first imply a consolidation of the effects already (de facto) created by the original contract, the latter seem to indicate the appearance of different needs of the contracting authority and/or different ways of satisfying them by the supplier. And, in my opinion, while the latter may justify the imposition of strict restrictions and (depending on the circumstances and the proportionality of the requirement) a new tender, the former do not seem to warrant such an approach.

These are issues that will necessarily arise again in litigation concerning the termination of contracts under the combined effect of Arts 72 and 73 of Directive 2014/24 and I would hope that the ECJ will adopt a more analytically rigorous approach when that happens because following the path started in Finn Frogne does not make commercial sense.

Some remarks on the House of Commons' Brexit Research Briefing--Procurement Section

The Library of the House of Commons (HoCL) has issued a Research Briefing on the impact of Brexit across policy areas. It is obviously an effort in the right direction of providing research-based input to the ongoing Brexit debate. As such, it should be welcome.

However, a 184-page document cannot deal with the complexities and detail needed to properly assess policy impacts in a substantial way. Having insufficiently detailed information runs the risk of oversimplifying reality and presenting the likely impact of Brexit in a distorted fashion.

In my view, this is clearly the case concerning the HoCL research briefing's focus on public procurement, on which it simply sets out the following:

3.5 Public procurement
Much UK public procurement is regulated by EU rules, which are set out in the core EU Treaties, in EU directives and in UK regulations that implement the directives. These rules are controversial because they are often seen as overly bureaucratic and because they limit the ability of public bodies to ‘buy British’. They do, however, offer UK firms the opportunities to supply the public sectors of other countries, as well as making it easier for the UK public sector to reach a wider range of potential suppliers, potentially increasing value for money in its purchases.
In practice, the extent of direct cross-border public procurement is limited. An estimated 1.3% of the value of larger UK public sector contracts was awarded directly abroad in 2009-2011. Some 0.8% of the value of larger public contracts secured by UK companies was directly from abroad.
Alternatives and withdrawal
At present, the EU rules that apply to public procurement in the UK also apply to other EEA countries, under the EEA agreement. Switzerland is subject to a separate arrangement.
If the UK were to leave the EU and the EEA, it would ultimately need to decide whether it wanted agreements with other countries to mutually open up their public procurement markets. This could be done through individual trade agreements, or the UK could participate as an individual country in the WTO’s General Procurement Agreement (GPA) for certain goods and services. However, this would mean that the UK would have to allow suppliers in other countries to bid for some UK public procurement opportunities, and the WTO route would mean that the UK had to follow certain procedures in its procurement processes – potentially doing away with some of the reduction of burden that could follow from no longer having to apply the EU rules. (p. 39, references omitted)

My trouble with the procurement section of the HoCL research briefing concerns two main points:

1. That it misrepresents the economic importance of cross-border public procurement between the UK and the rest of the EU by suggesting that it only affects between 0.8% and 1.3% of large value procurement contracts.

The HoCL research briefing uses statistics that focus exclusively on direct cross-border award of contracts to SMEs (which is indeed very low), but does not mention indirect cross border effects derived from the establishment of EU suppliers in the UK, and UK suppliers in other EU Member States, who then sell from their respective "domestic" subsidiaries (for instance, Siemens UK would qualify as a domestic supplier for the purposes of direct cross border tenders, while most people would agree that the Siemens group is German for industrial policy purposes).

The data also omits sales through wholesalers/intermediaries, which are also very important, particularly in goods (UK manufacturers, particularly larger ones, may be selling a good part of their exports to foreign public sector buyers through intermediaries established in those countries, which could decide to stop sourcing the goods from UK manufacturers if this created issues in terms of rules of origin/tariffs, etc after Brexit).

The Commission issued data in 2011 that estimated indirect cross-border procurement much closer to 25% in value at EU level (see p. 36 here). There is no segregated data for the UK of which I am aware, but in my view there is the potential for a much deeper economic impact than the HoCL policy brief suggests by only presenting figures in the 0.8-1.3% range. This is misleading, in my opinion.

2. That it misrepresents accession to the WTO government procurement agreement (GPA) as a future alternative, instead of acknowledging that it is the present reality in the UK.

Indeed, the HoCL research briefing presents the WTO GPA as an alternative to the status quo without mentioning that the EU rules already ensure reciprocal treatment under the GPA--or, in other words, that the UK already gives access to its procurement markets to undertakings from GPA signatories and already has access to their markets by virtue of EU membership.

The key point is that a withdrawal from the EU would immediately imply a loss of access to GPA signatories' markets for UK businesses and, thus, a negotiation of single GPA membership by the UK would not provide any advantage to UK businesses but, at best (that is, assuming the UK did not need to make concessions beyond the current EU concessions), it would be a quest to keep the status quo. Dr Clair Gammage discusses this important issue here (although regarding general WTO membership).

Even if there are new talks about its failure, it would also be important to stress that the TTIP contains a very important chapter on extended access to US-EU procurement markets, which would likely not be replicable outside of the EU.

*   *   *

Overall, in my view, this shows that more detailed research and analysis is required than that with which the HoCL has been able to engage to date, and should serve as an indication of the difficulties in meaningfully compiling concise documents that can usefully support policy decisions. Assessing the implications of Brexit in discrete policy areas is, by itself, a daunting task. And assessing the impact of Brexit across the economy and the legal system may just be an impossible goal. MPs would be well advised to keep that in mind and to seek more detailed input on specific areas of concern.
 

Musings about the constraints to a reimagination of public procurement regulation

I have been thinking for a while on a research project I would call "Reimagining Public Procurement". It may well be too ambitious (even as an abstract endeavour), but I would like to start shaping it so that I can dedicate my future research efforts to its completion. The purpose of this post is to structure some of my own thoughts, as well as to spur some discussion and seek feedback from you, dear reader. 

The broad idea would be to structure the project along three phases or layers of interconnected issues. Briefly, they would be as follows:

First, to identify the main reasons why public procurement rules are criticised and possibly fail to create a practical and administrable system that ensures that the public sector can acquire the goods, services and works it needs in order to carry out its public interest missions in the best possible conditions, while ensuring the probity and efficiency of the expenditure of public funds. 

Second, to identify the main constraints that regulatory reform and policy implementation face in this area, and which imply that, despite significant efforts to enhance public procurement regulation and practice, the resulting improvements are at best marginally incremental and the underlying problems remain fundamentally unaddressed.

Third, to formulate an alternative view for public procurement regulation and practice that has a good chance of overcoming the defects of current rules and avoiding the constraints of past reform processes, so as to achieve a superior system. Needless to say, this alternative view will have to integrate its technological dimension to a much more essential level than previous efforts.

Of the three layers of issues (and while acknowledging that all of them are deeply intertwined), I have been concentrating mostly on the second, and giving some thought to what constraints have affected the reform of public procurement rules in recent years. The regulatory reform experience that I know best is that of the 2011-2014 review of the EU public procurement rules [on which I have co-edited the book Reformation or Deformation of the EU Public Procurement Rules (Edward Elgar, 2016, forthc), with Grith S Ølykke], and this directly informs my thinking. However, I would hope that some of these ideas will resonate beyond the EU.

In a brief (and incomplete) account, I would suggest that the following are some of the main constraints that limit (or prevent) a fundamental reimagination of public procurement regulation and practice:

  1. The assumption that changing the procurement rules changes the underlying practice--or viewing procurement law as a deus ex machina. With this, I mainly refer to the starting position or assumption that good procurement outcomes can be mandated and that they necessarily derive from process-based regulation. Most of the efforts to improve procurement (as an activity) have been focusing on a revision of the regulatory framework in which it takes place, hoping that legal reform would carry better results. This strategy may also have been affected by tendencies of insanity because the same strategy has been adopted over and over despite the fact that it has never actually been proven to deliver the expected results. Professor Schooner has been saying for a long time that procurement (regulation and practice) needs to move its focus from process to outcomes and I could not agree more. Any useful reimagination of procurement regulation needs to respect the premiss that the rules need to be adaptive to the desired outcomes, rather than the opposite assumption that proper outcomes will result from tightly/neatly regulated procedures.
     
  2. Excessive legocentrism and marginalisation of other types of expertise/input. In short, lawyers have been (almost) exclusively leading public procurement reform and the insights from other groups of professionals/experts tend to be marginalised--or, worst, left to 'public consultations' that rarely inform reform decisions in a meaningful way. A reimagination of public procurement needs to incorporate the insights from a wider range of fields of expertise, clearly including economics, management, political science, as well as healthcare and engineering--for, ultimately, big infrastructure and healthcare systems are two of the largest expenditure items in non-defence markets. I have come to realise that lawyers talk about issues such as technical specifications or award criteria as if they were solid realities. However, they are not; and the feeling of achievement derived from the creation of concepts such as 'functional specifications' or 'technologically-neutral award criteria' (both of which I have used enthusiastically in my research to date) falls apart once they are confronted with the (technical) difficulties of their implementation in practice. Ultimately, then, maybe the constraint is that regulation is based on concepts while practice is based on functions, and a reimagination of public procurement regulation will then have to be function-oriented rather than built around highly abstract concepts or categories.
     
  3. The assumption that regulatory perfection or completeness is achievable--particularly in a context of multi-layered regulation, multi-layered policy and multi-layered enforcement. This may be an EU-centric constraint, but I would expect these issues to apply in other settings too. The constraint to which I refer here consists in the difficulty of applying a set of complex rules in a way that allows for no margin of tolerance. This constraint has two sources. First, the complexity of procurement rules that are EU-hybrids and, consequently, have two built-in layers: an EU harmonised layer and a domestic layer--which not always interact smoothly, particularly where the EU layer has encapsulated legal irritants (think about self-cleaning, which is a very foreign concept if a number of jurisdictions) or where the domestic layer is somehow insulated from EU pressure by virtue of the split of competences between the EU and Member States. This has over time created pressure on the EU rules to expand, so as to minimise the diversity of approaches in different Member States, while at the same time exacerbated difficulties in the coordination of the enforcement of these EU-hybrids in the broader context of the given Member State public law system. The second source of the constraint derives from the rigidity of the remedies system, which does not have much of a margin of tolerance for substantive but not formal compliance with the EU rules, as well as not much of a margin of tolerance for substantial but not perfect compliance. Overall, the mix of over-prescriptive but incomplete EU-hybrid rules and a strict (and too rigid) remedies system still falls short of regulatory perfection or completeness--which is simply unachievable. This creates several issues, such as the unspoken (or rather unspeakable) high level of non-(absolute) compliance with the EU rules, or the existence of instances where potentially good procurement outcomes are killed in the cross-fire of ensuring regulatory (EU) compliance. Ultimately, then, a reimagination of public procurement regulation should aim to create more room for substantial substantive compliance, and lessen the focus on prescriptiveness and strict enforcement of formality.
     
  4. Inertia against technological substitution and disruptive technologies and processes. So far, public procurement reform has simply side-stepped a true assessment of how technology can change the procurement function and its oversight. Electronic procurement still remains an ideal based on doing by electronic means things we used to do on paper. However, this probably falls rather short from exploiting all the possibilities created by technology. There are unexplored issues, such as the automation of the procurement of some types of standard goods, or the use of electronic marketplaces similar to the ones readily available in the private sector. And certainly much more provocative and potentially revolutionary options must be out there. However, once more, it can well be that lawyers are not the best placed to assess this potential and adapt procurement regulation in a way that enables technological substitution and the incorporation of disruptive technologies and processes. A reimagination of public procurement should at least complete the assessment of what current technology can do to reduce the burden of procuring goods, services and works and, to the extent that it is possible (law has always lagged behind reality), be open to further technological changes.
     
  5. Wilful ignorance of the investment required to deliver an effective and efficient procurement system. Procurement regulation has so far developed with no consideration for the costs that the system creates, particularly in terms of the need to invest heavily in human capital. Complex and sophisticated rules are useless without a body of public sector professionals able to apply them and maximise their possibilities. Regulatory reform has not taken into account the difficulties of training large bodies of professionals and task forces that struggle to cope with the speed at which reforms are introduced. A reimagination of public procurement needs to take this constraint into account. It is not sufficient to incorporate claims for more professionalisation or for the State to dedicate more resources to the procurement function. It seems necessary to find ways to really simplify procurement regulation and make it user friendly, particularly for less complex procurement activities. Technology can support this.
     
  6. Renunciation of the idea that public oversight and public enforcement can protect the public interest--or the reverse assumption that procurement is for the masses. A final constraint derives from the fact that enforcement of public procurement, at least in the EU, has become the primary field of private challenges to procurement decisions. Public enforcement through audit and oversight bodies has significantly deteriorated, to the point that procurement litigation is the only meaningful check on the system in many a jurisdiction. This has impacted the development of procurement regulation in various ways, but it has certainly put pressure on the move from a regulatory framework based on diffuse oversight in the public interest, towards one based on individually judiciable rights and increasing incentives to private litigation. This has also led to the assumption that exposing the entirety of the procurement process to society will bring additional (private) oversight, on the assumption that private citizens have an actual interest in sifting through great volumes of information (but not necessarily big data) in order to keep the public sector in check. The major defeat of the proposal for the creation of national public oversight bodies in the recent reform of the EU rules is a testament to this trend and a worrying warning shot. A reimagination of public procurement needs to relocate procurement oversight squarely in the public sector and create mechanisms that enable oversight bodies to carry out their functions in the public interest and in real time. It also needs to aim to de-judicialise procurement disputes to a large extent, particularly when they are from a technical nature, for which the courts are not the best situated decision-makers.

If these constraints are real, then, a shortlist of some of the main characteristics of a reimagined formulation of public procurement regulation and practice would include for it to be:

  1. Focused on outcomes and their facilitation rather than on procedures.
  2. Built upon functions rather than abstract concepts.
  3. Aimed at ensuring substantial substantive compliance with incomplete rules (or principles) rather than strict and formal adherence to overly prescriptive requirements.
  4. Adapted to existing technologies and adaptive to further technological change.
  5. Simplified and with the objective of minimising professionalisation and training costs.
  6. Overseen and enforced by the public sector itself, while including dispute resolution mechanisms of a technical nature that reduce the pressure on judicial bodies.

I would be very interested to discuss these ideas with you, either in this blog, or at a.sanchez-graells@bristol.ac.uk.

A second look at the CJEU's public procurement activity--and a reflection on its implications in terms of remedies and the effectiveness of eu judicial activity

The Court of Justice of the European Union (CJEU) has now published the final version of its Judicial Activity 2015 Annual Report. The release of these final statistics on the CJEU activity for the past year provides a chance to take a second look at the evolution of procurement cases over a long(ish) time period--statistics are now available for a full decade regarding the General Court (GC) and for the period since 2010 for the Court of Justice (ECJ). A quick look at the the statistics shows a continuation of the trend of increasing backlog in this area (see here), and a closer look reveals how the backlog at the ECJ level has been deteriorating rather quickly in recent years.

There are some limitations of the statistical information that need to be stressed from the outset. First, as with previous editions of the judicial activity report (see previous comments of the 2012 and 2014 reports), having had more information on the status of pending cases would have helped gain a better understanding of the situation, particularly at ECJ level. It is still hard to understand why the GC explicitly reports on pending cases, while the ECJ does not. Second, not all cases are exactly comparable. While the activity at GC level is limited to challenges to procurement procedures carried out by the EU Institutions, the activity of the ECJ includes a mix of preliminary references (the vast majority of new cases) and appeals against GC decisions. In 2015, of the 26 new cases before the ECJ, 22 were preliminary references and 4 were appeals. This makes the assessment of the overall evolution of public procurement activity not very meaningful. Thus, I will rather discuss the evolution at the GC and ECJ level separately.

Evolution of procurement cases at GC level--what are the implications in terms of the effectiveness of remedies for eu institutions' procurement?

The GC has been managing to slightly reduce its backlog of pending cases in the last 5 years and the trend seemed to roughly remain stationary in 2015, when it opened 23 new cases and completed another 22. Provided that no cases are "left at the bottom of the pile", it would thus seem that the GC is in a position to manage and cope with its public procurement docket.

However, this should not be too surprising, given the low pressure that being the review court for all the procurement activities developed by the EU Institutions creates. According to the recent Special Report No 17/2016 of the European Court of Auditors (ECA) on EU institutional procurement (see here), the EU Institutions carried out procurement for a value of €4.2 bn in 2014. According to ECA: "In the 6‑year period from 2009 to 2014 the General Court completed 3,419 cases of which 106 dealt with public procurement by the EU institutions (3.1 %), or on average 17.6 cases per year. The 106 cases relating to public procurement gave rise to a total of 123 decisions: 66 judgments and 57 orders" (p. 44).

The Commission generally estimates that it awards more than 9,000 contracts per year. However, on average, there are less than 20 challenges of those procurement decisions per year. This would roughly indicate that less than 0.25% of procurement decisions of the EU Institutions get challenged before the GC. This is a very low caseload for a court in charge of reviewing procurement activity of a value of €4.2 bn. Searching for valid comparators is difficult because each jurisdiction organises procurement remedies in different ways and there are important cultural and practical factors that can determine very different litigation rates (going from the possible extreme of high litigation in Italy, where around 40% of the cases in the administrative courts are public procurement cases, to the UK, where there is only a handful of public procurement cases every year).

However, one gets the sense that 20 cases per year is a very low litigation rate by taking into consideration that EU Member States with similar or lower estimated procurement expenditure show more intense litigation. For example, based on the Commission's data, Bulgaria has over 1,000 cases per year (estimated procurement covered by the EU rules of €2.83 bn), Latvia has over 200 cases (€3.55 bn), Luxembourg has over 50 cases (€0.56 bn), and the Slovak Republic has over 1,000 cases (€3.98 bn). If we calculate the incidence of litigation by volume of (estimated) expenditure (covered by the EU rules), we would get the (very, very) rough measure of cases by billion Euro of expenditure. Using the information available (which is far from ideal), we can construct the table on the left-handside column.

This information should be taken with immense caution, and none of the specific figures for any of the countries of the list should be used as an indication of the actual intensity of litigation in that jurisdiction. However, I think that his serves to make the broader point that the level of litigation of procurement decisions adopted by the EU Institutions is indeed very low, at least by an order of magnitude.

The implication of this insight in terms of a potential review of the remedies mechanisms available to challenge procurement decisions by the EU Institutions--which has been advocated by ECA and should be strongly supported (see here)--is that the GC (in its current configuration and without a significant expansion of resources) is probably incapable of digesting any relevant increase of procurement litigation to a level in line with the jurisdictions of the Member States, except those with a lower intensity of procurement litigation. 

In my view, thus, it would seem advisable to explore suitable alternatives, such as the creation of a procurement review agency in charge of the oversight of the procurement carried out by the EU Institutions, the submission of the procurement of the EU Institutions to the procurement remedies system of the relevant Member State, or some other similar option--including the possibility of creating a specialised chamber within the General Court, in case the provision of additional resources to this entity was considered preferable than a more substantial reform of the remedies system.

Evolution of procurement cases at ECJ level--will a new wave of preliminary references flood the court and dampen the papers?

The ECJ has been accumulating a significant backlog of procurement cases over the last 5 years (no earlier statistics are available). What seems worrying is that, for the last 3 years, the backlog has been increasing at a pace of approximately 10 cases per year, and the total backlog at the end of 2015 trebled the level in 2010.

In view of the expiry of deadline for the transposition of the 2014 Public Procurement Package in 2016 (and even if a significant number of Member States are delayed), it seems reasonable to expect a new wave of preliminary references for the interpretation of the ever so complex new rules and their coordination with the previous case law in this area of EU economic law. Thus, it would seem reasonable to expect the ECJ to consider strategies to cope not only with the existing backlog, but also with the likely increase in referrals in the period between now and, say, 2020.

Of course, it is difficult to develop a strategy that prioritises public procurement over other areas of judicial activity, and there may be good reasons to consider other types of cases (including within EU economic law, such as tax avoidance cases) equally or more relevant or urgent. However, the advantage of procurement is that, it being a very specialistic and relatively self-contained area, it would not be too difficult to create a task force to deal with procurement cases in a swift manner. This would require an investment in human capital for a temporary period.

The European Commission did this in the wake of the financial crisis in order to deal with the increased volume of State aid cases [for discussion, see A Sanchez-Graells, “Digging itself out of the hole? A critical assessment of the Commission’s attempt to revitalise State aid enforcement after the crisis” (2016) Journal of Antitrust Enforcement, forthcoming]. The possibility of introducing similar flexibility at ECJ level could help boost the effectiveness of EU law (and public procurement law in particular) through a swifter process for the clarification of new rules that, otherwise, may remain in legal limbo for quite some time.

In terms of looking for resource to do so, of course, the elephant in the room is the issue of the cost of language management (as in translation and interpretation) at the CJEU. This is probably heretical, but I think that a reduction of the resource dedicated to language management would be the easiest and quickest way of boosting the ability of the CJEU to deal with a larger docket of legal issues. The Management Report in the 2015 Annual Report makes this overwhelmingly clear. To my mind, the fact that 37.4% of the posts at the CJEU are judicial (including Cabinets, Registries, Research and Documentation, Library, Protocol, Communication and Publications), while 51.0% of the posts are languages positions (including Translation and Interpretation), is troubling. Basically, because this heaviness of language management has the combined effect of: a) draining resource that could be put to a different use and, b) delaying the functioning of the CJEU.

Overall conclusion

It is probably not surprising that a look at the statistical information on judicial activity shows that the CJEU is not prepared for the likely developments in litigation in the area of public procurement law. It may well be overwhelmed by developments at the EU level that triggered a higher intensity of procurement litigation--should the remedies system for EU Institutional procurement be developed along the lines proposed by the European Court of Auditors; and it is most certainly in a bad position to absorb any significant increase in the number of questions referred for a preliminary ruling that results from the Member States application of the 2014 Public Procurement Package in a systematic manner.

In my opinion, the CJEU (and the EU Institutions more generally) should look for creative ways of preparing for these changes. Otherwise, the effectiveness of the EU public procurement rules may be jeopardised and/or significantly delayed, particularly concerning the interpretation of the 2014 Public Procurement Package, which is certainly not without legal controversy.

Does (outsorcing) procurement contribute to public sector productivity? (Dunleavy, 2015)

I have recently read P Dunleavy. "Public Sector Productivity: Puzzles, Conundrums, Dilemmas and Their Solutions", in J Wanna, H-A Lee & S Yates (eds), Managing Under Austerity, Delivering Under Pressure: Performance and Productivity in Public Service (ANU Press, 2015) 25-42. I found Prof Dunleavy's piece highly thought-provoking and would recommend it to anyone interested in the working of the public sector and current outsourcing tendencies, including mutualisation of (spin-off) public services.

Dunleavy offers a very straightforward proposal to start cracking the problem of measuring public sector productivity and reports the findings of a larger study based on relatively simple indicators. Focusing on public procurement, Dunleavy offers some insights that are worth pondering. His paper reports findings concerning the outsourcing of services and the hiring of IT consultants and stresses the following:

So, why does outsourcing not work? It is because government service offices are highly imperfect and they are not going to stop being highly imperfect if two or three contractors are brought in. The markets created are oligopolistic. In Britain we have large problems with our IT sector—62 per cent of the market is dominated by the top contractor, and the top five contractors have 95 per cent of the market. There are usually only two or three tenders for any given contract, and the tenders are very expensive. The idea that more firms can bid is not feasible, because a firm needs to have a large governmental relations unit and a contracting unit just to understand the e-procurement system; this will always be the case. Contract specification works directly against productivity because an organisation needs to specify what it wants the contractor to do. It has to fix a whole service specification and then as needs change, and demand changes, and society changes, it has to go back to the contractor and renegotiate (p. 37).
Public servants also tend to use outsourcing in a very rational way—if we have better business to be attending to and there is something that we really hate doing, we tend to outsource it. This means that nothing changes in that area. The contractor will not want to change—as soon as we outsource it to them, they will want to freeze the technology and keep things exactly the same. This may seem irrational, because at the end of the contract they will have to re-tender, but it is actually cheaper for contractors to work that way (p. 38).
One final note—contestability is a great word, and it may do some good when trying to introduce product diversity, or when attempting to engage different kinds of contractors. The arrival of mutuals might make a difference, but keep in mind that mutuals only have 1/70th of the outsourcing market in the UK, so they are not a serious threat to the big outsourcers yet. On the whole, outsourcing contestability will not grow government productivity (p. 39). 

These are challenges and structural difficulties that do not only concern the UK. And they support a serious strategy to rethink the most productive way of structuring the public sector and deciding which activities to retain in house and which activities to outsource. Dunleavy's general recommendation for the future in that regard is to think about the following:

The question is, can we have genuine demand transfers across suppliers? Can we get genuine supplier succession, genuine competition or contestability? I think we could if we had public sector suppliers who could scale up their services; who could move from one area to another and enlarge. More mixed public/private competition could also improve the situation, and mutuals may help in a small way here (p. 41).

These are all very suggestive ideas, but all of them are based on structural changes in the supply side of the market. I would stress the need for demand side reforms, aimed at improving the way the procurement rules are used, so as to tender shorter-term, adaptive and flexible contracts that avoid lock-in and promote effective supplier competition in more dynamic procurement markets. It would also be worth reconsidering to what extent the creation of markets for some services is too expensive and inefficient, so as not to compensate the transaction costs implied--to that extent, a "rediscovery" of OE Williamson's work on markets and hierarchies (notably, in The Economic Institutions of Capitalism. Firms, Markets, Relational Contracting, NY: Free Press, 1985) and its application to the public sector would certainly be beneficial. Plenty food for thought.

CJEU clarifies scope of application of concessions directive and services directive, and confirms their mutual exclusivity (C-458/14)

In its Judgment of 14 July 2016 in Promoimpresa, C-458/14, EU:C:2016:558, the Court of Justice of the European Union (CJEU) issued a ruling concerned with the interaction between the EU public procurement rules and the Services Directive (Dir 2006/123/EC) In particular, Promoimpresa is concerned with the potential interaction between the EU public procurement and the rules of the Services Directive (Art 12) for the allocation of authorisations to carry out a given economic activity when only a limited number of authorisations is available due to the scarcity of available natural resources or technical capacity.

The case touches upon similar issues as the ongoing litigation on whether the EU procurement rules area applicable to the granting of betting licences (see Politano’, C-225/15, here), which are however excluded from the scope of the Services Directive (Art 2).

Thus, the Promoimpresa Judgment is relevant in the area of services concessions, broadly and loosely understood [on this, for background, see GS Ølykke, 'Is the granting of special and exclusive rights subject to the principles applicable to the award of concessions? Recent developments in case law and their implications for one of the last sanctuaries of protectionism' (2014) 23(1) Public Procurement Law Review 1; and CJ Wolswinkel, 'From public contracts to limited authorisations and vice versa: Exploring the EU Court’s corollary approach on award procedures, Public Procurement Law Review' (2015) 24(5) Public Procurement Law Review 137].

In Promoimpresa, the legal dispute arose from Italian decisions not to renew a pre-existing "concession" (rectius, exclusive right or authorisation) for the occupancy and management of State-owned land, and to subject the award of lakeside "concessions" (idem) to a comparative selection procedure (C-458/14, para 2). Thus, the case concerns 'concessions granted by public authorities of State-owned maritime and lakeside property relating to the exploitation of State land for tourist and leisure-oriented business activities' (para 40). The use of the term "concession" to refer to this type of authorisations could be problematic in theory, as it could give rise to doubts as to the applicability of the Services Directive, the Concessions Directive (Dir 2014/23/EU), or both to their award. Luckily, though, this is an issue of coordination of the scope of application of these legal instruments that both address explicitly.

Recital 57 of the Services Directive states that ‘The provisions of this Directive relating to authorisation schemes should concern cases where the access to or exercise of a service activity by operators requires a decision by a competent authority. This concerns neither decisions by competent authorities to set up a public or private entity for the provision of a particular service nor the conclusion of contracts by competent authorities for the provision of a particular service which is governed by rules on public procurement, since this Directive does not deal with rules on public procurement’ (emphasis added).

From a complementary perspective, Recital 15 of Concessions Directive is also clear in stating that ‘… Certain agreements having as their object the right of an economic operator to exploit certain public domains or resources under private or public law, such as land or any public property, in particular in the maritime, inland ports or airports sector, whereby the State or contracting authority or contracting entity establishes only general conditions for their use without procuring specific works or services, should not qualify as concessions within the meaning of this Directive. This is normally the case with public domain or land lease contracts which generally contain terms concerning entry into possession by the tenant, the use to which the property is to be put, the obligations of the landlord and tenant regarding the maintenance of the property, the duration of the lease and the giving up of possession to the landlord, the rent and the incidental charges to be paid by the tenant’ (emphasis added).

In the Promoimpresa Judgment, in a ruling that should come as no surprise, the CJEU confirmed the mutual exclusivity of the Services Directive and the Concessions Directive in the following terms:

45 ... the provisions of [the Services Directive] relating to authorisation schemes cannot apply to concessions of public services capable, inter alia, of falling within the scope of [the Concessions Directive].
46      ... a services concession is characterised, inter alia, by a situation in which the right to operate a particular service is transferred by the contracting authority to the concessionaire and that the latter enjoys, in the framework of the contract which has been concluded, a certain economic freedom to determine the conditions under which that right is exercised and, in addition, is, to a large extent, exposed to the risks of operating the service (see, to that effect, judgment of 11 June 2009 in Hans & Christophorus Oymanns, C‑300/07, EU:C:2009:358, paragraph 71).
47      However, in the cases in the main proceedings ... the concessions do not concern the provision of a particular service by the contracting entity, but an authorisation to exercise an economic activity on State-owned land. It follows that the concessions at issue in the main proceedings do not fall within the category of service concessions (see, by analogy, judgment of 14 November 2013 in Belgacom, C‑221/12, EU:C:2013:736, paragraphs 26 to 28) (C-458/14, paras 45-47).

To be sure, the wording of some parts of the Promoimpresa Judgment could be clearer--e.g., paragraph [47], where it seems to imply that contracting authorities provide services under a services concession, while the whole point of those concessions is for the concessionaire to provide and manage those services on behalf of, or upon the entrustment of the contracting authority [see definition of services concession in Art 5(1)(b) of the Concessions Directive]. However, the functional criterion of mutual exclusivity of the Services Directive and the Concessions Directive seems now clear enough and it can be welcome that this is now the explicit interpretation of the CJEU, rather than merely indicative considerations in the recitals of both directives.

New paper on the need to review the Remedies Directive

I have uploaded a new paper on SSRN: ‘If it Ain't Broke, Don't Fix It’? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts, to be published in S Torricelli & F Folliot Lalliot (eds), Administrative oversight and judicial protection for public contracts (Larcier, 2017) forthcoming.

As detailed in the abstract: 

EU public procurement law relies on the specific enforcement mechanisms of the Remedies Directive, which sets out EU requirements of administrative oversight and judicial protection for public contracts. Recent developments in the case law of the CJEU and the substantive reform resulting from the 2014 Public Procurement Package may have created gaps in the Remedies Directive, which led the European Commission to publicly consult on its revision in 2015. One year after, the outcome of the consultation has not been published, but such revision now seems to have been shelved. This chapter takes issue with the shelving of the revision process and critically assesses whether the Remedies Directive is still fit for purpose. 

The chapter focuses on selected issues, such as the interplay between the Remedies Directive and the Charter of Fundamental Rights, and with the general administrative law of the Member States. It also assesses the difficulties of applying the Remedies Directive ‘as is’ to some of the new rules of the 2014 Public Procurement Package, which creates uncertainty as to its scope of application, and gives rise to particular challenges for the review of exclusion decisions involving the exercise of discretion. The chapter also raises some issues concerning the difficulties derived from the lack of coordination of different remedies available under the Remedies Directive and briefly considers the need to take the development of ADR mechanisms into account. Overall, the chapter concludes that there are important areas where the Remedies Directive requires a revision, and submits that the European Commission should relaunch the review process as a matter of high priority.

The paper is freely downloadable at http://ssrn.com/abstract=2821828. As always, comments welcome.

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

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

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

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

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

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

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

29 ... an evaluation committee must be able to have some leeway in carrying out its task and, thus, it may, without amending the contract award criteria set out in the tender specifications or the contract notice, structure its own work of examining and analysing the submitted tenders (see judgment of 21 July 2011 in Evropaïki Dynamiki v EMSA, C‑252/10 P, not published, EU:C:2011:512, paragraph 35).
30 That leeway is also justified by practical considerations. The contracting authority must be able to adapt the method of evaluation that it will apply in order to assess and rank the tenders in accordance with the circumstances of the case.
31 In accordance with the principles governing the award of contracts provided for in Article 2 of Directive 2004/18 and in order to avoid any risk of favouritism, the method of evaluation applied by the contracting authority in order to specifically evaluate and rank the tenders cannot, in principle, be determined after the opening of the tenders by the contracting authority. However, in the event that the determination of that method is not possible for demonstrable reasons before the opening of the tenders, as noted by the Belgian Government, the contracting authority cannot be criticised for having established it only after that authority, or its evaluation committee, reviewed the content of the tenders.
32 In any event, pursuant to the principles governing the award of contracts ... the determination by the contracting authority of the method of evaluation after the publication of the contract notice or the tender specifications cannot have the effect of altering the award criteria or their relative weighting (C-6/15, paras 29-32, emphasis added). 

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

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

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

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

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

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

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

35 It appears that that procedure did not make it possible to reflect, when ranking the tenderers in order to identify the most economically advantageous tender, differences in the quality of their tenders relative to their price, while taking account of the relative weighting of the award criteria resulting from the indication ‘(50/100)’. In particular, it appears that that procedure was capable of affecting the price criterion by giving it decisive weight relative to the tenders ranked in the [‘high — satisfactory — low’] scale of quality ... It is for the referring court to ascertain whether the relative weighting of each of the award criteria published in the contract notice was in fact complied with by the contracting authority during the evaluation of the tenders.
36 While the contracting authority may use a scale for the evaluation of one of the award criteria without it being published in the call for tenders or the tender specifications, that scale may not, however ... have the effect of altering the relative weighting of the award criteria published in those documents (C-6/15, paras 35-36, emphasis added). 

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

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

Restrictions Derived from the Inclusion of Non-Quantifiable or Subjective Award Criteria, and the Ensuing Need to Objectify Treatment of Qualitative Criteria. Another way in which the selection and weighting of award criteria could give rise to distortions of competition—and, probably, to discrimination amongst tenderers—would be through the introduction of non-quantifiable criteria, or essentially qualitative or subjective criteria that significantly diminished the possibilities of an overall objective appraisal of the tenders or conferred on contracting authorities unrestricted freedom of choice amongst tenderers. In this regard, even if article 67(2)(a) of Directive 2014/24 allows for the taking into consideration of this type of criterion—referring, in general terms, to criteria such as ‘technical merit’ or ‘aesthetic characteristics’—the requirements of relevance and enabling character of the award criteria (see above, this section), as well as the need to avoid conferring on contracting authorities unrestricted freedom of choice and to ensure that the award criteria make provision for an objective assessment of tenderers, should be taken into particular consideration and constrain the decisions adopted by the public buyer.[1]
As regards the requirement of relevance of such qualitative award criteria, it should be stressed that the circumstances under which considerations such as aesthetic characteristics or technical merit will be relevant and material to the subject-matter of the contract are relatively limited (at least if they are unrelated to performance or functional requirements, which are quantifiable and, hence, do not generate significant difficulties). Moreover, it is submitted that they will generally be associated with tenders that should be ruled by the requirements applicable to design contests—which are specifically regulated and set special rules in this respect (see arts 78 to 82 of dir 2014/24),[2] particularly aimed at ensuring the objectivity and independence of the members of the committee entrusted with the evaluation of qualitative or subjective elements of the proposals. Consequently, aesthetic characteristics or technical merit might be assigned very limited relevance in other types of tendering procedures. The substantial irrelevance of such qualitative or non-quantifiable aspects will, then, require only limited consideration in the majority of the cases, if at all.
Moreover, in order to ensure transparency and impartiality, contracting authorities should (as far as possible) set objective or quantifiable proxies to measure primarily subjective or qualitative characteristics of the tenders; or, at least, set up mechanisms (possibly based on the rules regarding design contests) to ensure an impartial appraisal of subjective or qualitative dimensions of the tenders. If such quantification, or ‘proximisation’ or approximation, is possible, the possibilities for discrimination or distortion of competition will be smaller. Consequently, the adoption of this requirement seems desirable whenever its implementation is feasible.
Therefore, a restrictive approach towards the permissibility of the use of these criteria as the basis for the award of contracts—again, in cases other than design contests—seems appropriate. Consequently, this type of consideration should remain as a secondary criterion, or as a rather marginal complement, to objective and easily quantifiable criteria used to determine the award of the contract to the most economically advantageous tender. Along these lines, and attending to the subject-matter of the contract, contracting authorities should give proper weighting to qualitative or subjective criteria (even if ‘quantified’)—which, in our opinion, should be rather limited and marginal in most instances.
To sum up, it is submitted that contracting authorities are bound to ensure the objective and transparent assessment of tenders, particularly by i) avoiding undue recourse to qualitative or non-quantifiable (subjective) award criteria in procedures other than design contests, and ii) assigning them a proper (limited) weighting; and, in general, they are under a duty to exercise self-restraint in their decisions regarding such criteria, particularly when failure to do so could result in their exercise of unrestricted freedom of choice amongst tenderers and/or generate distortions of competition or discrimination of tenderers.
[1] See: S Arrowsmith, The Law of Public and Utilities Procurement. Regulation in the EU and the UK, Vol. 1, 3rd edn (London, Sweet & Maxwell, 2014) 766–71.
[2] See S Arrowsmith, The Law of Public and Utilities Procurement, 2nd edn (London, Sweet & Maxwell, 2005) 829–39;  PA Trepte, Public Procurement in the EU: A Practitioner’s Guide, 2nd edn (Oxford, Oxford University Press, 2007) 232–4; and C Bovis, EC Public Procurement: Case Law and Regulation (Oxford, Oxford University Press, 2006) 248–51.

CJEU rejected AG Wathelet's proposal for vicarious liability for agent's behaviour in competition law: a more stringent test, but how stringent? (C-542/14)

In its Judgment of 21 July 2016 in VM Remonts and Others, C-542/14, EU:C:2016:578, the Court of Justice of the European Union (CJEU) issued an important clarification of the rules applicable to the attribution of (vicarious) liability for infringements of EU competition law, thus expanding its case law on the subjective elements (ie mens rea-like requirements) of the prohibition of anticompetitive behaviour in Art 101(1) TFEU.

In doing so, the CJEU rejected the proposal for stringent vicarious liability formulated by AG Wathelet (see my criticism here) and formulated a more stringent test for the attribution of anticompetitive behaviour of an independent agent. The test formulated by the CJEU raises some interpretative issues, though, and it deserves some comment.

It is worth reminding that the case addressed issues concerning the imputability of anticompetitive practices in which a third party services provider is engaged to the 'client' undertaking that hired those services (ie how to make the 'client' undertaking liable for the anticompetitive behaviour of one of its services providers). 

The case was quite convoluted because it concerned the imputability of a bid rigging offence to a supplying company that engaged a consultant to help it formulate a bid in a tender for a public contract. After the fact, it became apparent that the consultant engaged in collusion with other tenderers in the same bid. The question was, thus, to what extent the bidder should be liable for the collusion that resulted from the allegedly independent activity of the consultant (third party services supplier) and, in any case, what level of proof of anticompetitive intent would be necessary to impose liability on the 'client' undertaking.

In addressing this issue, the CJEU rejected a parallelism between the rules applicable to an undertaking's employees to its agents, and determined that 'where a service provider offers, in return for payment, services on a given market on an independent basis, that provider must be regarded, for the purpose of applying rules aimed at penalising anti-competitive conduct, as a separate undertaking from those to which it provides services and the acts of such a provider cannot automatically be attributed to one of those undertakings' (C-542/14, para 25, emphasis added).

However, the CJEU stressed that this different treatment is based on the independence of market activity of the service provider and, consequently, it would not be justified where the client undertaking exerted significant control over the apparently independent service provider. To that effect, the CJEU determined that

Article 101(1) TFEU must be interpreted as meaning that an undertaking may, in principle, be held liable for a concerted practice on account of the acts of an independent service provider supplying it with services only if one of the following conditions is met:
–  the service provider was in fact acting under the direction or control of the undertaking concerned, or
– that undertaking was aware of the anti-competitive objectives pursued by its competitors and the service provider and intended to contribute to them by its own conduct, or
–  that undertaking could reasonably have foreseen the anti-competitive acts of its competitors and the service provider and was prepared to accept the risk which they entailed
(C-542/14, para 33, emphasis added).

Of particular relevance in the field of public procurement, the CJEU also provided some clarification regarding the unauthorised disclosure of commercially sensitive information by the agent, by stressing that

Whilst it is true that [an undertaking is liable for a competition infringement] when that undertaking intended, through the intermediary of its service provider, to disclose commercially sensitive information to its competitors, or when it expressly or tacitly consented to the provider sharing that commercially sensitive information with them ... the condition is not met when that service provider has, without informing the undertaking using its services, used the undertaking’s commercially sensitive information to complete those competitors’ tenders (C-542/14, para 32, emphasis added).

In my view, the VM Remonts Judgment should be welcome for what it does not do. That is, for its rejection of AG Wathelet's proposal for a reversal of the burden of proof, to the effect that the 'client' undertaking would have been considered liable unless it could adduce sufficiently convincing evidence (i) relating to the fact that the agent (services provider) had acted outside the scope of the functions that had been entrusted to it, (ii) regarding the precautionary measures taken by the ‘client’ undertaking at the time of designation of the agent and during the monitoring of the implementation of the functions in question, and (iii) regarding the ‘client’ undertaking's conduct upon becoming aware of prohibited behaviour--so as to demand a public distancing and positive reporting, under the analogous rules of Dansk Rørindustri and Others v Commission, C-189/02 P, C-202/02 P, C-205/02 P to C-208/02 P and C-213/02 P, EU:C:2005:408.

However, regarding the positive test that it sets for the assessment of whether anti-competitive activity by an agent can be imputed to the client undertaking, the VM Remonts Judgment seems less satisfactory, in particular due to the last condition of the test in its paragraph [33], whereby 'an undertaking may, in principle, be held liable for a concerted practice on account of the acts of an independent service provider supplying it with services ... if  ... that undertaking could reasonably have foreseen the anti-competitive acts of its competitors and the service provider and was prepared to accept the risk which they entailed' (emphasis added).

This seems to be an adaptation of the test developed in Commission v Anic Partecipazioni, C-49/92 P, EU:C:1999:356, paragraph [87], to which the CJEU refers in VM Remonts to stress that 'an undertaking may be held liable for agreements or concerted practices having an anti-competitive object when it intended to contribute by its own conduct to the common objectives pursued by all the participants and was aware of the actual conduct planned or put into effect by other undertakings in pursuit of the same objectives or that it could reasonably have foreseen it and was prepared to accept the risk' (C-542/14, para 29, emphasis added).

The adaptation of this test to cases of anticompetitive behaviour by an agent seems problematic because it stretches its last part concerning the acceptance of a risk of occurrence of anticompetitive behaviour by third parties (in that case, co-conspirators). In Anic, the undertaking concerned had been attending meetings with other undertakings that formed part of a cartel. Therefore, the assessment of whether the undertaking could reasonably foresee specific types of anti-competitive conduct by its co-conspirators (formally, third parties) derives from its own participation in meetings--that is, derives from its own observation of the behaviour of other entities that participate in the anti-competitive practice.

This cannot be the case in a scenario such as that presented by VM Remonts, where the client undertaking does not participate in any meetings and where it has no (proven) knowledge of the activity of the agent. In these cases, it would seem that the first two prongs of the VM Remonts test would suffice: ie the client undertaking is liable for the anticompetitive behaviour of the agent if (a) it controls the agent or (b) is aware of the anti-competitive behaviour between the agent and third parties, and aims to contribute to it. Introducing the third condition, according to which the client undertaking can also be liable if (c) it could have reasonably foreseen anticompetitive behaviour between its agent and third parties and was prepared to accept the risk which they entailed, seems to far fetched. 

Whereas in an Anic-like scenario the reasonable prediction of anticompetitive behaviour by co-conspirators derives from information directly acquired in the meetings in which the undertaking participates--that is, can be presumed under logical rules--in a VM Remonts-like scenario, any claim as to the undertaking's duty to foresee anticompetitive behaviour would be pure speculation.

If the client undertaking has no positive knowledge of the anticompetitive behaviour in which the agent [otherwise, the prong (b) of the test would apply], how is it ever going to be possible to determine that it ought to have foreseen it? If this is on the basis of its relationship with the agent, this dangerously reopens the door to a test like the one developed by AG Wathelet or, worse, creates a sort of culpa in eligendo of its agent that is equally troublesome.

If (factual) speculation is to be avoided and the imposition of vicarious liability is rejected by the CJEU in VM Remonts (para 26, although see para 27, which makes it less clear-cut), the only reasonable interpretation of the prong (c) of the test developed in paragraph [33] of VM Remonts is that it can simply never be applied. In which case, one can be forgiven for wondering if the CJEU did not pay sufficient consideration to the adaptation of the Anic test to a situation involving an independent service provider.

ECA's Special Report on access to EU Institutions' procurement: will it give a push to further reform?

On 13 July 2016, the European Court of Auditors published its Special Report No 17/2016 "The EU institutions can do more to facilitate access to their public procurement", where it examines how accessible the EU Institutions make their public contracts. I had the honour and pleasure of being invited to act as an academic expert during the preparation of this report, as well as to participate in a stakeholder meeting where the report was discussed with its main addressees, including the business community and the EU Institutions themselves. However, please note that the following only reflects my personal opinions about the report and any future developments.

To put the relevance of the report and the activities under investigation in perspective, it is worth stressing that the European Court of Auditors estimated the procurement carried out by the EU Institutions in 2014 in €4.2 bn. In particular, it is worth stressing that the European Commission manages just over €3 bn, while the Parliament and the European Central Bank manage €500 mn each, and the Council follows with more limited procurement activities of €171 mn.

These figures are important, particularly because they stress how the European Commission's procurement value exceeded that of some of the smaller Member States in 2014, such as Malta (€0.8 bn), Cyprus (€1.3 bn), Estonia (€2.5 bn) or Latvia (€2.7 bn); and the combined procurement of the EU Institutions also exceeded that carried out by Lithuania (€3.6 bn), and was very close to Bulgaria (€4.8 bn) and Slovenia (€4.9 bn). In my view, this indicates that the effects (positive or negative) of the regulation and development of public procurement by the EU Institutions should attract more attention than it usually does.

The report is generally positive on compliance issues, and it is clear that the European Court of Auditors takes no issue with the way in which the EU Institutions manage their procurement activities from a legal compliance perspective, since it found that 'the management and control arrangements were robust and reduced the risk of errors which could deter businesses from participating and prevent fair treatment'. However, the European Court of Auditors considered that the approach to procurement could be more strategic or market-oriented and, in particular, that EU Institutions could do more to facilitate SME access. 

In order to promote a more commercial approach to procurement, in particular, the European Court of Auditors included the following recommendations:

  1. In order to facilitate the monitoring of the accessibility of their procurement activities, all EU institutions should collect and analyse data both on the initial number of requests to participate and offers received and the number of offers which were taken into account for the final award decision.
  2. For the upcoming 2016 revision of the EU Financial Regulation the Commission should consolidate all relevant provisions into a single rulebook for public procurement. Participation of small and medium‑sized enterprises should be explicitly encouraged.
  3. The EU institutions should proactively use preliminary market consultations wherever appropriate with a view to preparing the procurement and informing economic operators of their procurement plans.
  4. The EU institutions should divide contracts into lots wherever possible to increase participation in their procurement procedures.
  5. The EU institutions should create a common electronic one‑stop shop for their procurement activities allowing economic operators to find all relevant information in a single online location and to interact with the EU institutions through this website.
  6. The Commission should propose a mechanism for a rapid review of complaints from economic operators who consider that they have been unfairly treated. Such a review should take place before economic operators may turn to the EU Ombudsman or to the EU Courts.
  7. To allow effective ex post monitoring of their procurement activities the EU institutions should set up a single public repository of information related to their procurement contracts which could be developed as part of TED eTendering.
  8. The European Anti‑Fraud Office OLAF should produce reports and statistics on the different types of allegations under investigation and the outcome of these investigations.
  9. The EU institutions should use peer reviews for mutual learning and exchange of best practice.

Most of these recommendations are welcome and the European Court of Auditors should be encouraged to put some pressure on the EU Institutions, so that they materialise. There are, however, two recommendations that deserve some additional comments: recommendation 6 on remedies and recommendation 7 on the creation of a single public repository.

Recommendation #6 & EU Institution's resistance to facilitate review and flexible remedies

Given the reduced effectiveness of the informal resolution mechanisms provided by the European Ombudsman, which are significantly curtailed by the strictness of the procurement rules, and the cost and delay of challenging procurement decisions of the EU Institutions before the General Court (to these effects, see paras 76-88 of the report), it should come as no surprise that the European Court of Auditors recommended the creation of 'a mechanism for a rapid review of complaints from economic operators who consider that they have been unfairly treated', and that 'such a review should take place before economic operators may turn to the EU Ombudsman or to the EU Courts'.

What is more surprising, or maybe not, is that both the Council and the Parliament decided to omit this recommendation from their replies to the report, and that the Commission expressly opposed it. Indeed, in its reply to the report, the Commission indicated that

As far as the EU institutions are concerned, the Commission considers that the setting-up of a non-judicial review body, in addition to the already existing review mechanism provided for in the Financial Regulation, is neither needed nor appropriate as it would generate disproportionate costs for the benefits sought.
The Financial Regulation already provides that the unsuccessful tenderers are notified of the grounds and details reasons for their rejection and they may request additional information ... Such requests are subject to a strict deadline: the contracting authority must provide this information as soon as possible and in any case within 15 days of receiving the request.
In addition, whenever an act adversely affecting the rights of the candidates or tenderers is notified to the economic operators in the course of a procurement procedure (e.g. rejection), such notification will refer to the available means of redress (Ombudsman complaint and judicial review).
The Commission considers that the limited number of actions before the General court which dealt with procurement by the Union institutions (17) and the fact that compensation for alleged damages is rarely granted by the Court are strong indicators that the system in place is efficient and fit for purpose. Hence, the setting up of the suggested rapid review is not only not needed but it would also represent a disproportionate measure, not in line with cost-efficiency and not a good use of administrative resources (reply to point 78 of the report, emphasis added).

This is surprising because the European Commission does not seem willing to apply to its own procurement activities the standards of independent review that it promotes for Member States. In my opinion, a domestic system could not avoid a serious investigation on the effectiveness of its procurement remedies system with the argument that there are very few cases and those are unsuccessful, not least because the general principle of EU law that requires effectiveness of remedies ultimately requires that the available remedies do not make it practically impossible to claim the corresponding EU rights, which could be the case here.

When the procurement cases in front of the General Court last on average 35 months (see para 82 of the report) and the cost of litigation at the highest EU level is taken into consideration, one should not be too ready to accept the Commission's submission that the reduced number of such cases indicates the lack of need for more accessible, speedier and more effective review mechanisms. Moreover, the creation of such an alternative mechanism could also contribute to reduce the pressures on the General Court's procurement docket and, in general, facilitate specialisation and more flexibility in the resolution of conflicts.

Thus, the blanket rejection of the recommendation by the Commission seems to require some rethinking, and it would seem advisable to explore suitable alternatives, such as the creation of a procurement review agency, the submission of the procurement of the EU Institutions to the procurement remedies system of the relevant Member State, or some other similar option--including the possibility of creating a specialised chamber within the General Court, although this is an unlikely option for reasons that would take us too far from the discussion.

It is also important to stress that the creation of robust remedies mechanisms in public procurement (and in other areas of EU economic law) is not solely for the benefit of undertakings that partake in those procedures, but in the ultimate benefit of the taxpayer and society at large. In the case of procurement, if potential suppliers do not consider that they have a fair chance of protecting their interests, they will refrain from making investments in the submission of tenders. Such reduction of competition for public contracts carries an important implicit cost. Thus, aiming to save on direct administrative costs may well be self-defeating if this results in much larger shadow or indirect costs. This is not to mean that remedies should be promoted beyond the point necessary to ensure the integrity and probity of the procurement process, or that (generous or disproportionate) damages claims are the best way to ensure those remedies. What seems clear to me is that the issue of public procurement remedies under EU law requires further research and thought, and most certainly legal reform to adapt the existing system to the reforms of the 2014 Public Procurement Package. In that regard, it seems desirable for the Commission to carry on with the (seemingly abandoned) review of the Remedies Directive--and that such would be the ideal occasion to include the issue of remedies in the setting of EU Institutions' procurement in the proper considerations.

Recommendation #7 & risk of excessive procurement transparency

The second recommendation that deserves some comments is number 7, whereby the European Court of Auditors recommended that, in order to 'allow effective ex post monitoring of their procurement activities the EU institutions should set up a single public repository of information related to their procurement contracts'.

This raises, once more, the very tricky issue of the appropriate level of transparency of public procurement procedures and their outcomes, and the undesirable (unforeseen) effects that it can create. There is no doubt that the European Court of Auditors, like any audit body at national or international level, requires this information in order to discharge its functions. However, it is far from clear that there is a positive value in publishing all this information. While making this information public could contribute to some aspects of public governance (such as NGO and press scrutiny of these activities), it is by no means less clear that creating excessive transparency would contribute to anti-competitive strategies and potentially result in the cartelisation of public procurement markets.

In that regard, I would reiterate once more the need for a more nuanced approach to the compilation and publication of this type of information. 
As a functional criterion, only the information that is necessary to ensure proper oversight and the effectiveness of anti-corruption measures should be disclosed, whereas the information that can be most damaging for competition should be withheld. 

Generally, what is needed is more granularity in the levels of information that are made accessible to different stakeholders. The full transparency approach implicit in recommendation 7 of the European Court of Auditors' report, whereby all information is made available to everyone via a public registry or repository, falls very short from the desired balance between transparency and competition goals of public procurement. A system based on enabling or targeted transparency, whereby each stakeholder gets access to the information it needs for a specific purpose, is clearly preferable.

In more specific terms, the following normative recommendations should be subjected to further discussion in the roll-out of recommendation #7. They are by no means exhaustive and simply aim to specify the sort of nuanced approach to disclosure of public procurement information that is hereby advocated.

  • Public contract registers should not be fully available to the public. Access to the full registry should be restricted to public sector officials under a strong duty of confidentiality protected by appropriate sanctions in cases of illegitimate disclosure.
  • Even within the public sector, access to the full register should be made available on a need to know basis. Oversight entities, such as the audit court or the competition authority, should have full access. However, other entities or specific civil servants should only access the information they require to carry out their functions.
  • Limited versions of the public contract registry that are made accessible to the public should aggregate information by contracting authority and avoid disclosing any particulars that could be traced back to specific tenders or specific undertakings.
  • Representative institutions, such as third sector organisations, or academics should have the opportunity of seeking access to the full registry on a case by case basis where they can justify a legitimate or research-related interest. In case of access, ethical approval shall be obtained, anonymization of data attempted, and specific confidentiality requirements duly imposed.
  • Delayed access to the full public registry could also be allowed for, provided there are sufficient safeguards to ensure that historic information does not remain relevant for the purposes of protecting market competition, business secrets and commercial interests.
  • Tenderers should have access to their own records, even if they are not publicly-available, so as to enable them to check their accuracy. This is particularly relevant if public contract registries are used for the purposes of assessing past performance under the new rules.
  • Big data should be published on an anonymised basis, so that general trends can be analysed without enabling ‘reverse engineering’ of information that can be traced to specific bidders.
  • The entity in charge of the public contracts registry should regularly publish aggregated statistics by type of procurement procedure, object of contract, or any other items deemed relevant for the purposes of public accountability of public buyers (such as percentages of expenditure in green procurement, etc).
  • The entity in charge of the public contracts registry should develop a system of red flag indicators and monitor them with a view to reporting instances of potential collusion to the relevant competition authority.

CJEU confirms incompatibility between automatic judicial inhibition rules and references for a preliminary ruling: need for reform? (C-614/14)

In its Judgment of 5 July 2016 in Ognyanov, C-614/14, EU:C:2016:514, the Court of Justice of the European Union (CJEU) has taken a final decision on whether domestic (criminal) procedural rules concerned with safeguards against judicial bias need to be set aside if their application is such as to jeopardise the functioning of the system of referrals for a preliminary ruling in the interpretation of EU law established by Article 267 TFEU.

It is worth stressing that the case at hand concerned criminal law enforcement in Bulgaria, where a domestic rule concerning breaches of judicial impartiality could be interpreted so as to require a referring national court that had laid out the factual background and the law applicable to the case for the purposes of the reference to the CJEU, to inhibit itself from any further decisions in a criminal case (and face disciplinary action).

In short, the CJEU has followed the Opinion of AG Bot (see here) and has decided that such a rule is incompatible with EU law and that the domestic courts not only cannot be obliged to refrain from taking any further decisions in a given criminal case on the basis that they referred a preliminary question to the CJEU where they laid out the facts of the case and the law applicable to them, but they are also prevented from voluntarily stepping down of the case on the basis that they consider themselves biased after having referred the question to the CJEU.

I do not have much of an issue with the first part of the Judgment, where the CJEU considers contrary to EU law a rule implying that any referral of a case for a preliminary ruling is a ground for automatic judicial recusal or inhibition; but I find the second part of the CJEU's decision worrying because the opposite position, whereby a judge cannot recuse herself on the basis of a bias created or identified at the point of sending the request for a preliminary ruling, or whereby she would be breaching EU law if she decided to inhibit herself from any further decision in the case, cannot be right.

In my view, the main issue with the Ognyanov Judgment derives from the (logical) formality of the CJEU's reasoning. After having determined that 'a national rule which is interpreted in such a way as to oblige a referring court to disqualify itself from a pending case, on the ground that it set out, in its request for a preliminary ruling, the factual and legal context of that case' is contrary to EU law, the CJEU engaged in the analysis of whether that rule could be applied voluntarily by the court concerned on the basis that 'that rule ensures a higher degree of protection of the parties’ fundamental rights'. The CJEU analysis was as follows:

32 ...  the fact that a national court sets out, in the request for a preliminary ruling ... the factual and legal context of the main proceedings is not, in itself, a breach of [the right to a fair trial]. Consequently, the obligation to disqualify itself, imposed by that rule on a referring court which has, in a reference for a preliminary ruling, acted in that way cannot be considered as serving to enhance the protection of that right.
36 ... in this case, the referring court is obliged to ensure that Article 267 TFEU is given full effect, and if necessary to disapply, of its own motion [the domestic rule requiring its inhibition] where that interpretation is not compatible with EU law (see, to that effect, judgment of 19 April 2016, DI, C‑441/14, EU:C:2016:278, paragraph 34).
37      In the light of the foregoing, ... EU law must be interpreted as precluding a referring court from applying a national rule, such as that at issue in the main proceedings, which is deemed to be contrary to EU law (C-614/14, paras 32 and 36-37, emphasis added).

In my view, the biggest issue with the Ognyanov Judgment is that the CJEU seems to only take into account one of two possibilities. It is certainly true that, as the CJEU emphasises, setting out the factual and legal context of the main proceedings to which the request for a preliminary refers 'is not, in itself [always or necessarily], a breach of that fundamental right', but it is not less true that the way in which a court lays out such factual and legal context can be sufficient to establish the existence of judicial bias because the referring court may demonstrate that it has pre-judged the issues at stake and thus expressed a legal position that prevents it from remaining involved in the criminal investigation without jeopardising the fundamental rights of the accused. Therefore, a more nuanced approach is needed.

I would suggest that a careful holistic interpretation of the Ognyanov Judgment could result in such nuanced approach, particularly if it was understood that the CJEU only considers contrary to EU law for a domestic court to inhibit itself from any further decisions in an on-going (criminal) case exclusively on the basis that it had laid down the factual and legal context of that case for the purposes of the request for a preliminary ruling--that is, exclusively in view of its having met the requirements of Art 267 TFEU and Art 94 of the rules on procedure--but it does not consider the same incompatibility with EU law if the domestic court identifies any (additional) substantive (and substantial?) indication of (its own) bias in the way that factual and legal background is laid out.

It certainly seems wrong to me to adopt a broader reading of the Ognyanov Judgment whereby any judicial inhibition (or recusal) on the basis of bias shown within the context of a request for a preliminary ruling is barred as a matter of (non)compliance with EU law.

Ultimately, and beyond these considerations, in my view, the difficulties derived from the reconciliation of domestic rules on judicial impartiality (in criminal law matters) and the EU preliminary reference mechanism seem to be more than a good reason to revisit the assumption that the same rules can apply without causing significant problems for civil/administrative and criminal references for a preliminary ruling to the CJEU.

GC opens dangerous door to post-challenge / after-the-fact 'rationalisation' of public procurement evaluations (T-349/13)

In its Judgment of 4 July 2016 in case Orange Business Belgium SA v Commission, T-349/13, EU:T:2016:385, the General Court (GC) dealt with a highly technical challenge of a procurement decision concerning IT services. The GC Judgment is interesting in a broader context, though, as it deals with the very tricky question of the level of precision that evaluation teams need to employ when they draft evaluation documents and the possibility to take into account post-challenge (after-the-fact) 'rationalisations' of the original tender evaluations.

In the case at hand, the relevant dispute concerned the misapplication of an award sub-criterion for the assessment of IT network performance (service level agreement, or SLA). In my view, the relevant points to note are that:

  1. According to the tender documentation, as clarified by a "Questions and Answers" document published by the contracting authority following a request for clarification of the applicable award criteria and sub-criteria, the specific sub-criterion 6b was to be assessed as follows: "Points will be granted for the [RTD] and the [MF] separately, comparing the results of all bidders. To obtain the overall evaluation both points will be multiplied. To obtain the overall points, the evaluation result will be multiplied by a factor and rounded in order to obtain 10 points for the best bidder" (T-349/13, para 62; NB: what RTD and MF means is not relevant for our discussion).
  2. As regards award sub-criterion 6b, the applicant’s tender was evaluated as follows: ‘The provided [MF] [confidential] for the calculation of network performance [SLA] liquidated damages was considered EXCELLENT’ (T-349/13, para 64).
  3. According to the extract from the evaluation report concerning the successful tender, ‘the provided [MF] (redacted data) for the calculation of network performance SLA liquidated damages was welcomed and therefore the evaluation committee quoted the quality of the network performance SLA as VERY GOOD’ (T-349/13, para 65).

Thus, in basic terms, the main ground underlying the applicant's challenge is that the contracting authority deviated from its disclosed award criteria. Specifically, '[t]he main point of disagreement between the parties relates to whether the Commission [as contracting authority] had taken into account not only the information concerning the MF, but also the information concerning the RTD for the evaluation of the tenders in the light of award sub-criterion 6b' (T-349/13, para 69).

Remarkably, the GC establishes that '[i]t is apparent from reading the extract of the evaluation report which referred directly to award sub-criterion 6b that the information concerned indeed only the MF ... The Commission [as contracting authority] indeed accepts this moreover'. In my view, this would (and should) be sufficient to end the legal analysis and move on to whether the deviation from the disclosed award criteria is material and, if so, whether sticking to the disclosed criteria would have altered the award decision. However, this is not the analytical route followed by the GC.

Controversially, in order to assess this claim, the GC relies on the additional examination report (a further evaluation document) prepared by the contracting authority after the initial challenge of the evaluation by the disappointed bidder. Indeed, the GC takes into account that

it is expressly apparent from the additional examination report that the RTD was taken into consideration in order to evaluate the tenders in the light of award sub-criterion 6b. The fact that that report is subsequent to the award decision cannot affect either the validity or reliability of the comments set out therein (sic). It must be noted that Article 171(1) of the Rules of Application provides for the possibility of carrying out an additional examination if expressly requested by the unsuccessful tenderers. That provision would be rendered inoperative if every additional examination of that type were automatically deemed biased or subject to caution (T-349/13, para 75, emphasis added, emphasis added).

The GC also relies in a table produced by the contracting authority only in its defence document, which the contracting authority confirmed 'had been drawn up during the administrative procedure and before the present action was brought' (T-349/13, para 75, paras 76-78).

Overall, then, the GC's dismissal of this specific ground for challenge rests (at least partially) on reliance on a post-challenge additional examination report and an undated evaluation table self-certified to pre-date the challenge by the defending contracting authority. There are more issues concerning both the facts of the evaluation process and the debriefing meetings, but I do not think it is necessary to focus on them to discuss the GC approach from a general standpoint.

In my view, it is very dangerous to open the door to post-challenge (after-the-fact) rationalisations of evaluation documents. It is also evidentiary very weak to accept a document produced by one of the parties and take it at face value to have been prepared at an indetermined time 'during the administrative procedure and before the present action was brought'. The same way that significant restrictions have been developed in the case law to ensure that tenderers do not alter their tenders under the excuse that they are actually only 'clarifying' them (which has admittedly resulted in a grey zone that still requires further guidance), one would expect the same level of scrutiny for evaluation documents.

I am not advocating for absolute strictness in the interpretation of the evaluation reports, as the information they convey is oftentimes complex and open to (re)interpretation, but I think that the GC has moved way too far in granting such a degree of deference to the contracting authority in this case.

At the end of the day, if the evaluation audit trail cannot be guaranteed and challengers of procurement decisions can be undermined by the production of additional 'rationalisations' of defective evaluation reports, the remedies system will be severely damaged and the integrity of public procurement processes put at risk. Thus, a much tighter approach to the dating/timing of documents (one of the much awaited advantages of eProcurement and time-stamping), and an analysis of the evaluation reports that recognises obvious limitations and omissions as insufficient to support any 'reinterpretation' seems much preferable. Particularly because such an approach would provide evaluation teams the right incentives to do a proper job documenting their decisions from the outset and throughout the procurement procedure, which can only result in strengthened procedural robustness and (hopefully) improved decision-making.

For these reasons, at least from the perspective of the first principles applicable to a robust bid protest system capable of ensuring an acceptable level of procedural integrity, I consider the GC Judgment in Orange Business Belgium SA v Commission a very dangerous decision and would very much favour its annulment in case it got further appealed.

AG delineates boundaries of administrative proportionality assessments and intensity of judicial review requirements under EU public procurement law (C-171/15)

In his Opinion of 30 June 2016 in Connexxion Taxi Services, C-171/15, EU:C:2016:506, Advocate General Campos Sánchez-Bordona has addressed two important issues concerning the judicial review of a decision not to exclude an economic operator that had potentially incurred in serious professional misconduct despite the tender documentation indicating that 'A tender to which a ground for exclusion applies shall be set aside and shall not be eligible for further (substantive) assessment'.

The preliminary reference sent to the Court of Justice of the European Union (CJEU) mainly raises two issues: firstly, whether it was possible for the contracting authority to apply a proportionality assessment before proceeding to exclude the economic operator--or, in the circumstances of the case, in order to decide not to exclude. And, secondly, whether EU law precluded national courts from solely engaging in ‘marginal’ review as to whether the contracting authority could reasonably have come to the decision not to exclude a tenderer notwithstanding the fact that that it was guilty of grave professional misconduct, rather than carrying out an ‘unrestricted’ judicial review of the assessment conducted on the basis of the principle of proportionality. Both are interesting issues. Both were to be decided under the 2004 EU public procurement rules, but both are clearly relevant under the revised 2014 package.

Again on the interaction between general (administrative) law and tender documentation

The first issue fundamentally stems from the fact that applicable Dutch law and its interpretative guidance foresee that 'the assessment of whether a tenderer must actually be excluded, having regard to the general principles of Directive 2004/18, must always be proportional and be carried out in a non-discriminatory manner' (Opinion in C-171/15, para 10). In the Connexxion Taxi Services case, the contracting authority engaged in such proportionality assessment despite having published tender documentation that seemed to create an automatic obligation to exclude by stating that: 'A tender to which a ground for exclusion applies shall be set aside and shall not be eligible for further (substantive) assessment'. As a result of the proportionality analysis, it decided not to exclude a tenderer competing with Connexxion , according to which 'the contracting authority [was] not in a position to make an assessment of proportionality having found that the tenderer [had] been guilty of grave professional misconduct. That assessment [had] already been carried out by inclusion of the misconduct as a ground for exclusion in the descriptive document. Given the wording of the latter, it would be contrary to the principles of public access, transparency and equality in matters of administrative procurement for the contracting authority to have the power to assess the proportionality of the ground for exclusion.' (para 30). 

Somehow, this raises a question that can be seen as the mirror image of the controversy underlying the recent Pizzo Judgment (C-27/15, EU:C:2016:404, see comments here). In Pizzo, the contracting authority sought to rely on generally applicable administrative law rules to exclude economic operators. The CJEU ruled against that possibility and created a middle-path whereby a contracting authority seeking to engage in that exclusion would need to provide the tenderer an opportunity to regularise its position and comply with that general obligation within a period of time set by the contracting authority. Conversely, in Connexxion Taxi Services, the CJEU is expected to rule on whether reliance on generally applicable administrative law rules can be used to deactivate specific exclusion choices established in the tender documentation. AG Campos submits that the Court should answer in the affirmative and that this is not contrary to Pizzo. I agree.

In his Opinion, AG Campos stresses that

51. The requirement included in paragraph 3.1 of the descriptive document (‘a tender to which a ground for exclusion applies must be set aside’), precisely because of its quasi-regulatory nature, must, in my view, be read in the light of the interpretative rules applicable to all subordinate legal rules, which cannot disregard the more general rules which govern them. If the [applicable rule] provides that exclusion on the ground of grave professional misconduct requires that the contracting authority examine each particular case ‘on the basis of the nature and size of the public contract, the type and scope of the misconduct and the measures taken in the meantime by the undertaking’, the fact that the descriptive document is silent as to that necessary and individual application of the principle of proportionality cannot result in that principle being disregarded.
52. That approach is confirmed from the perspective of EU law. The case-law of the Court on the optional grounds for exclusion, rejecting their automatic application, confirms the need for that consistent interpretation. It follows from the judgment in Forposta and ABC Direct Contact that automatic exclusion (of a tenderer guilty of grave misconduct) could go beyond the discretion conferred on Member States by Article 45(2) of Directive 2004/18 (Opinion in C-171/15, paras 51-52, references omitted and emphasis added).

In my view, it must be right that contracting authorities are always under a general obligation of acting in a proportionate manner and, consequently, each decision they adopt needs to be proportionate under the circumstances and pro-competitive, and ultimately 'a contracting authority must retain the power to assess, on a case-by-case basis, the gravity of the circumstances that would lead to exclusion of the tenderer. And it is submitted that it must also balance them against the effects that such exclusion would have on competition' [see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 293, references omitted]. Thus, the final consideration of AG Campos seems entirely correct when he stresses that

In the invitation to tender at issue, the conditions and the selection procedure, the same for all applicants, were not modified. The contracting authority checked that their tenders satisfied the criteria applicable to the contract and applied no ground for exclusion which was not provided for in the descriptive document. The fact that, in order to assess one of those grounds for exclusion expressly included in that document it applied the criterion of proportionality, which was not expressly referred to in the descriptive document but is required by the general ... rules on public procurement (as well as by the case-law of the Court), is, in my view, consistent with the principle of equal treatment and its corollary, the obligation to act transparently (Opinion in C-171/15, para 58, references omitted and emphasis added).

The more difficult issue of the standard of (intensity) of judicial review

The second question fundamentally focuses on the fact that, given the contracting authority's engagement in a proportionality analysis, a mere 'marginal' review of the decision in order to ascertain whether the contracting authority could reasonably have come to the decision not to exclude a tenderer could fall short of meeting the requirements of the Remedies Directive.

After some interesting remarks on the gradual increase in the requirements of intensity of judicial review in areas of EU substantive law where there has been a harmonisation of remedies--which, consequently, reduce the scope of limitations derived from the general principle of procedural autonomy--AG Campos enounces what he considers should be covered by a mechanism of review compliant with the Remedies Directive. In his view,

the judicial review imposed by Directive 89/665 requires something more [than a mere 'marginal' review, or solely assessing whether or not the contested decision was arbitrary] to deserve that name. The assessment by the court cannot end with a mere assessment of the ‘reasonableness’ of the contested decisions, especially as those decisions must comply with detailed rules covering formal and substantive matters. A court hearing an application in this field will have to assess whether the disputed award observed the rules of the invitation to tender and whether the successful tenderer’s application can withstand the critical analysis which its competitors present in the action. That assessment will require, in many cases, verification of the decisive facts (which the administration may have determined incorrectly), as well as evidence concerning the relative merits of the various applications. It will also involve gauging whether the administrative action is duly reasoned and whether it is in line or at variance with the objectives which underlie it (in other words, whether there is evidence of misuse of powers) and the other legal provisions which govern it. Examination of all that evidence goes beyond, I repeat, a mere assessment of the ‘reasonableness’ of the contested measure and involves matters of fact and law of a more ‘technical’ and usually more complex nature, which every court having jurisdiction to review administrative acts usually carries out (Opinion in C-171/15, para 73, emphasis added). 

This leads him to suggest to the Court to declare that 

Articles 1 and 2 of Council Directive 89/665/EEC of 21 December 1989 on the coordination of the laws, regulations and administrative provisions relating to the application of review procedures to the award of public supply and public works contracts are not compatible with legislation, or the usual practice, of a Member State which limits the scope of the review procedures to a review merely of the reasonableness of the decisions of contracting authorities (Opinion in C-171/15, para 85, emphasis added).

On principle, this seems unobjectionable and, as AG Campos suggests, it would also be compatible with the CJEU decision in Croce Amica One Italia (C-440/13, EU:C:2014:2435, see comment here), where it effectively clarified that

Article 1(1) of Directive 89/665 requires the decision of the contracting authority withdrawing the invitation to tender for a public contract to be open to a review procedure, and to be capable of being annulled, where appropriate, on the ground that it has infringed EU law on public contracts or national rules transposing that law (para 34).

The question is whether (all) the specific details of the full review advanced by AG Campos in para 73 of his Opinion are necessary in order to allow the review body or court to assess compatibility of procurement decisions with EU law and domestic transposing measures. As I read his Opinion, he advocates for three main components: (1) a review of the decisive facts, (2) a review of the relative merits of the offers, (3) a review of the reasons given by the contracting authority for its choices and the soundness of those reasons (or, in his own words, to check that there has been no misuse of powers). In my view, elements (1) and (3) are relatively uncontroversial. However, element (2) is very likely to create difficulties if the review body or court is expected (or empowered) to second guess the technical evaluation of the tenderers and their tenders. I think that the risk of allowing review courts and bodies to substitute the contracting authority's discretion for their own would be going a step too far. Thus, while the minimum requirements of the review procedures mandated by the Remedies Directive clearly seem to indicate the need to go beyond a mere assessment of arbitrariness and engage in a full review of legality, it also seems clear to me that the review cannot go as far as to allow for a second-guessing of the contracting authority's discretion. 

This is clearly an area where drawing bright lines is complicated or, as AG Fennelly put it writing extra judicially,

There remains a somewhat imprecise formulation of the standard of substantive review. Respect, to the extent appropriate, is paid to the discretion of the awarding authority. Nonetheless, the cases show that the intensity of scrutiny is greater than in traditional cases, where judges have been very slow to substitute their own evaluation of the facts for that of the decision-maker. In tendering, it is natural, other things being equal, to expect the contract to be awarded to the lowest price. Even where the criterion adopted is the “most economically advantageous,” there will usually be an identifiable lowest price. It will normally be incumbent on the authority to claim that other things are not equal and to show why. Thus, the substantial justification for the decision shades into the adequacy of the reasons, even if sufficiency of reasons is usually treated as a separate ground of judicial review (emphasis added). 

It may well be that this discussion is more about the semantics than substance of how to describe the standard for judicial review. Be it as it may, however, it will be interesting to await for the final decision of the Court in the Connexxion Taxi Services case, which hopefully will bring some clarity on the specific requirements of intensity of judicial review that stem from the Remedies Directive.

Brexit may have negative effects for the control of public expenditure, particularly regarding subsidies to large companies

In the current state of turmoil, it is difficult to speculate on the exact relationship between the EU and the UK that can result from the Brexit vote and the future negotiations to be held under Article 50 TEU, in case it gets triggered. However, in order to contribute to the debate of what that relationship should look like in the interest of taxpayers in the UK, it is important to consider the implications that a post-Brexit deal could have in terms of the potential disappearance of the EU rules applicable to the control of how public funds are spent. A reduction in the control mechanisms applicable to certain types of public expenditure could indeed diminish the effectiveness of policies funded by UK taxpayers and create shortcomings in public governance more generally.

This is particularly clear in the case of the EU State aid rules in Articles 107 to 109 TFEU and accompanying secondary legislation, which ultimately aim to avoid subsidy races, as well as the protectionist financing of national champions by Member States. Ultimately, these rules establish a set of controls over the selective channelling of public funds to companies, be it in the form of direct subsidies, or in more indirect ways such as tax exemptions, special contributions to pension plans, or the transmission of public assets (such as public land) in below-market conditions.

The European Commission has created a framework that allows Member States to use State aid for horizontal purposes (such as the support of environmental, innovation or employment-related activities), but also aims to prevent the use of public funds in order to benefit specific companies, in particular through a subsidisation of their operating costs. The European Commission enforces these rules and can bring Member States that breach them before the Court of Justice of the European Union. Additionally, competitors of the companies that receive State aid can challenge those decisions in their domestic courts.

Even if these rules are admittedly imperfect and their enforcement could be improved,* there is no question that the European Commission has been active and rather effective in combating the use of public funds to benefit specific large companies. Remarkably, Member States need to notify State aid measures to the European Commission and must not provide any aid until the Commission has authorised it. Overall, this means that in cases involving large companies, no State aid contrary to the EU rules is generally put in effect, as demonstrated by the discussions surrounding the Hinkley Point project. Where Member States infringe this standstill obligation, the Commission can force a recovery of the aid. The recent tax avoidance cases involving Starbucks or Fiat are a clear testimony of this important role in controlling the way public funds are spent in support of large companies.

The European Commission is thus heavily involved in the State aid measures aimed at specific large companies and acts as a filter to ensure that the expenditure of public funds pursues a legitimate objective in compliance with EU law. This was particularly the case of the State aid channelled to banks in the aftermath of the 2008 financial crisis.

Overall, then, at least for cases of State aid involving large sums of money and large companies, the Commission acts as an important filter to prevent damaging economic interventions in the economy, which constitutes an important check on how public money is spent. Whether such a tight system could be relaxed in order to enable a more proactive EU-wide industrial policy is a subject of significant debate, but the constraints that EU State aid rules currently impose on the provision of direct and indirect financial support to large companies are certainly not perceived as minor.

The question is thus whether a post-Brexit deal could free the UK Government from such State aid control, at least in the medium to long-run, so that it could engage in largely unchecked public subsidy policies, such as creating particularly beneficial tax conditions in order to try to retain or attract large multinational companies considering relocating elsewhere in the EU, or channelling public funds to chosen companies, either in support of industrial policy goals or otherwise.

These would be policy interventions clearly tackled by the European Commission under existing rules, and they would also be caught by the EFTA Surveillance Authority in case the post-Brexit deal resulted in the UK joining the European Economic Area (the so-called ‘Norwegian option’), which would require compliance with the same rules. However, whether interventions aimed at subsidising large companies would be caught in case of a ‘WTO-based’ trade scenario is less clear because the WTO rules on subsidies are not as tight as the EU’s, and their enforcement ultimately relies on other WTO Members bringing a complaint against the UK to the dispute settlement board, which is a very political decision ultimately reliant on trade calculations. To be sure, the EU itself could bring cases against the UK, but this would be a highly contentious issue in the framework of a relationship already very strained by the UK’s exit from the EU and detachment from the EEA.

Should the UK not be a part of the internal market via membership of the EU or the EEA, and in the absence of effective WTO-based external checks on the use of public funds to provide financial support to large companies, the control of this form of public expenditure would fall solely to Parliament and the domestic UK institutions, such as the National Audit Office.

This can be seen as an advantage by those convinced by arguments of self-control and UK-centric governance, but economic regulatory capture theory, and public policy theory more generally, have repeatedly demonstrated that such a self-policing architecture is unlikely to prevent ‘politicised’ uses of public funds. It seems clear to me that, in that case, the possibilities for any given Government to engage in expenditures of this type would be greater than they currently are, which would not necessarily result in the pursuance of the best interests of taxpayers in the UK.

Therefore, if there is value in having an external control of subsidies to large companies in order to avoid anti-economical protectionist policies or redistributive policies that take money away from other pressing social priorities—and I would certainly argue that there is—it seems clear to me that any post-Brexit deal that does not include the application of EU/EEA State aid rules would imply a net loss in terms of public governance and, in particular, in terms of an effective control of public expenditure, particularly regarding subsidies to large companies. Ultimately, then, from this perspective, it seems to me to be in the interest of taxpayers in the UK to strongly support a post-Brexit arrangement that retains State aid control, either by the European Commission or the EFTA Surveillance Authority.

__________________

* A Sanchez-Graells, “Digging itself out of the hole? A critical assessment of the Commission’s attempt to revitalise State aid enforcement after the crisis” (2016) 4(1) Journal of Antitrust Enforcement 157-187.

New International Public Procurement Blog Launched by Prof Yukins

Prof Chris Yukins (George Washington University Law School, DC, USA) has launched a new international public procurement blog. As its motto indicates, this is a new resource on public procurement practice, policy and law, from around the globe.

So far, its content has been quite focused on Brexit and its implications from the perspective of the revision of UK procurement law, but it is clearly meant as a platform to bridge scholarship and practitioner-academic engagement worldwide. This is a project Prof Yukins has been clearly advocating for and working towards in the last decade or so, and the blog is a good tool to raise the visibility of work on public procurement at the international level. Do not forget to bookmark it in your favourites tab!!!

Some thoughts on Brexit and its implications

© Barry Blitt / New Yorker

© Barry Blitt / New Yorker

Brexit occurred and it is difficult to overcome the shock and focus your thoughts on what’s next. 

From a legal perspective, in my mind, the only clear thing is that nothing has yet happened and nothing will happen until Article 50 TEU is formally engaged. With Cameron leaving, the Tory leadership in the air and the Labour leadership under mounting pressure, the problem is though that the EU is going to push hard to receive the Article 50(2) TEU notification as soon as possible. Political pressure has started to mount, although Chancellor Merkel seems intended to at least soften the tone of the opening salvos by representatives of the European Institutions.

Nevertheless, the pain of waiting for an internal UK decision to pull the Article 50 TEU trigger may be too big a bullet to bite, particularly if the bleeding in the financial markets continues and there are further signs of internal destabilising pressures by Eurosceptic groups (from France, the Netherlands, Denmark… or elsewhere). In the end, for the EU, every concession to the UK in this time of turmoil is a very dangerous path—as the echoes of Le Pen’s statement that ‘The UK has started a movement that will not stop’ clearly evidence.

Reasonably, the only way to show ability to manage the situation in an orderly and effective way is to get started as quickly as possible with the negotiations leading to an Article 50(3) TEU withdrawal agreement, either upon request of the (new) UK Government or unilaterally by an EU that may well get to the limit of its patience sooner rather than later and seek ways to construct the necessary notice as served in order to force the UK to sit at the negotiating table. All legal possibilities must certainly be under consideration in different corners of the EU.

In my opinion, and strictly from the perspective of EU law, there are good arguments to consider that a prompt Article 50(1) TEU notification is part of the duty of loyalty and sincere cooperation under Article 4(3) TEU. However, it also seems clear that getting the clock ticking towards the 2-year guillotine when one of the parties is not ready or willing to negotiate may be more than counterproductive. And, more generally, it also seems clear that there is no obvious enforcement mechanism for such duty to notify (if it indeed exists) and that any attempt by the European Commission to bring the UK to the Court of Justice of the European Union would not only be self-defeating but also probably ineffective in the long run. So, all in all, it seems that EU law is very limited in its ability to overcome classic problems of enforceability of international public law when the issues that need addressing are classical problems of strategic behaviour by a sovereign state.

To complicate matters further, the situation is somewhat surreal and difficult to tackle from a legal perspective because the significant complexities of internal UK constitutional law cast a very long shadow on the ‘realness’ of Brexit and the (theoretical) possibilities to disregard the result of the referendum either at the Westminster Parliament or in the corridors of Whitehall. Moreover, as lawyers, we are in danger of falling into a fallacy of presumed effectiveness of the law as we conceive it, particularly if we forget that enforcing EU law against the UK will be particularly difficult and time-sensitive in any given scenario.

Thus, the sad reality is that, more than ever, law is now a slave of politics and the existing legal framework will undoubtedly be bent beyond recognition in order to accommodate whatever is politically feasible at any given point of the impossible to anticipate chain of developments. This creates growing frustration because the impossibility to enforce the legal framework may well lead to its disregard, which threatens to have long-lasting damaging effects on the trust in the rule of law in the UK and the EU.

Hard times for legal pragmatism, which probably advises us to stay away from the craziness of the initial developments after the Brexit referendum and save our thoughts for later, when specific proposals reach the public sphere. However, it is very hard to refrain from commenting, not least because so much is at stake. 

Another State aid decision by GC follows restrictive approach to standing of interested parties (T-118/13)

Following its previous restrictive case law on the granting of active standing to challenge State aid decisions to competitors of their beneficiaries (see here), the General Court (GC) of the Court of Justice of the European Union (CJEU) reiterated this position in its Judgment of 22 June 2016 in case Whirlpool Europe v Commission, T-118/13, EU:T:2016:365.

The case at hand is a long-lasting saga where producers of large household appliances (Electrolux and by Whirlpool) have been challenging France's restructuring aid to one of their competitors (Fagor France). In this iteration of the approval of the aid and its ensuing challenge, the Commission has adopted the strategy of challenging on of the competitors' standing. Whirlpool has opposed this approach on several basis, including the fact that its legal standing had not been challenged in the previous iteration of approval / challenge, that its market share is affected by keeping Fagor in the market, and due to Whirlpool's very close involvement in the case throughout.

The Commission dismisses all arguments. In the Commission's view,

the fact that an undertaking’s views were heard and that the conduct of the procedure was largely determined by its observations, although a factor which is relevant to the assessment of locus standi, does not relieve that undertaking of having to show that the aid at issue is liable to result in its market position being ‘substantially affected’. As regards that ‘substantial effect’, the Commission states that, in accordance with the case-law, it cannot suffice, in order to prove that the undertaking at issue is individually concerned, to establish that the aid at issue may exercise ‘an influence’ on the competitive relationships and that the undertaking concerned is in a competitive relationship with the addressee of the aid. On the contrary, it should be demonstrated that the applicant was particularly affected by the aid in relation to its competitors (T-118/13, para 28, emphasis added).

In short, the GC has accepted the Commission's arguments and, in particular, stressed that

44 Where an undertaking calls into question the merits of the decision appraising the aid ... the mere fact that it may be regarded as concerned within the meaning of Article 108(2) TFEU cannot suffice to render the action admissible. It must go on to demonstrate that it has a particular status within the meaning of the judgment of 15 July 1963 in Plaumann v Commission (25/62, EU:C:1963:17) ... That applies in particular where its market position is substantially affected by the aid to which the decision at issue relates (see, to that effect, judgment of 13 December 2005 in Commission v Aktionsgemeinschaft Recht und Eigentum, C‑78/03 P, EU:C:2005:761, paragraph 37 and the case-law cited).
45 In that regard, not only the undertaking in receipt of the aid but also the undertakings competing with it which have played an active role in the procedure initiated pursuant to Article 108(2) TFEU in respect of an individual aid have been recognised as individually concerned by the Commission decision closing that procedure, provided that their position on the market is substantially affected by the aid which is the subject of the contested decision. An undertaking cannot therefore rely solely on its status as a competitor of the undertaking in receipt of aid but must additionally show, in the light of its participation in the procedure and the magnitude of the harm to its position on the market, that its factual circumstances distinguish it in a similar way to the undertaking in receipt of the aid (see order of 7 March 2013 in UOP vCommission, T‑198/09, not published, EU:T:2013:105, paragraphs 25 and 26 and the case-law cited; see also, to that effect, judgment of 28 January 1986 in Cofaz and Others v Commission, 169/84, ECR, EU:C:1986:42, paragraph 25, and order of 27 May 2004 in Deutsche Post and DHL v Commission, T‑358/02, EU:T:2004:159, paragraphs 33 and 34).
46 As regards establishing such an effect, the Court of Justice has had occasion to explain that the mere fact that a measure such as the contested decision may have some influence on the competitive relationships existing on the relevant market and that the undertaking concerned was in a competitive relationship with the addressee of that measure cannot in any event suffice for that undertaking to be regarded as individually concerned by that measure (see, to that effect, judgments of 10 December 1969 in Eridania and Others v Commission, 10/68 and 18/68, EU:C:1969:66, paragraph 7, and 22 December 2008 in British Aggregates v Commission, C‑487/06 P, EU:C:2008:757, paragraph 47).
47 According to settled case-law, the applicant must provide evidence to establish the particularity of its competitive situation (order of 27 May 2004 in Deutsche Post and DHL v Commission, T‑358/02, EU:T:2004:159, paragraph 38, and judgment of 10 February 2009 in Deutsche Post and DHL International v Commission, T‑388/03, EU:T:2009:30, paragraphs 49 and 51) and demonstrate that its competitive position is substantially affected in comparison with the other undertakings competing in the market at issue (see, to that effect, order of 27 May 2004 in Deutsche Post and DHL v Commission, T‑358/02, EU:T:2004:159, paragraph 41; see also, to that effect, judgments of 10 February 2009 in Deutsche Post and DHL International v Commission, T‑388/03, EU:T:2009:30, paragraph 51; 13 September 2010 in TF1 v Commission, T‑193/06, EU:T:2010:389, paragraph 84; 15 January 2013 in Aiscat v Commission, T‑182/10, EU:T:2013:9, paragraph 68; 5 November 2014 in Vtesse Networks v Commission, T‑362/10, EU:T:2014:928, paragraph 55; and 3 December 2014 in Castelnou Energía v Commission, T‑57/11, EU:T:2014:1021, paragraphs 35 to 37) (T-118/13, paras 44 to 47, emphasis added).

Once more, the substantive analysis in which the GC engages in Whirlpool Europe v Commission results in a threshold of 'comparatively more adverse substantive negative competitive impact' that is almost impossible to discharge. This is bound to keep on restricting the number of State aid cases that can be successfully challenged, which will continue to contribute to a reduction in the effectiveness of the State aid control system [as criticised in A Sanchez-Graells, 'Digging itself out of the hole? A critical assessment of the Commission’s attempt to revitalise State aid enforcement after the crisis' (2016) 4(1) Journal of Antitrust Enforcement 157-187]. Thus, this Judgment must also receive criticism for its disproportionately restrictive assessment of the conditions to grant active standing to challenge State aid decisions under Art 263 TFEU.