Interesting AG Sharpston's Opinion on Lithuanian rules on subcontracting (C-298/15) -- warning on the use & transposition of 63(2) Dir 2014/24 & 79(3) Dir 2014/25?

In her Opinion in Borta, C-298/15, EU:C:2016:921, AG Sharpston assessed, amongst other things, the compatibility with EU law of a prohibition to subcontract part of a public works contract not covered by the relevant EU public procurement directive (in the case, Dir 2004/17). Her assessment thus relies on fundamental rules and general principles of the TFEU (in particular the free movement principles in Articles 49 and 56 TFEU).  

The dispute concerned a Lithuanian tender for the construction of a quay at the port of Klaipėda that ended up in litigation, not least due to a relevant change of participation requirements after the tender had been launched. In my view, the interesting point is that the Supreme Court of Lithuania raised of its own motion the question whether EU public procurement law precludes a provision of Lithuanian law that prohibits subcontracting ‘the main work’ in the context of public works contracts.

This concerns Art 24(5) of the Lithuanian Law on public procurement, according to which the procurement documents require the candidate or tenderer to specify in its tender any proposed subcontractors and may require the candidate or tenderer to specify the share of the contract that it is intended to subcontract to those subcontractors. However, where subcontractors are invited to carry out a works contract, the main work, as specified by the contracting authority, must be performed by the supplier.

Procedural aspects

The admissibility of this referral of its own motion by the Supreme Court of Lithuania could be considered problematic because Art 24(5) of the Law on public procurement was not clearly applicable to the dispute (as stressed in the AGO, C-298/15, para 40). However, AG Sharpston considers that the ECJ has jurisdiction to address the question because 

According to settled case-law, the Court cannot give a ruling on a question referred by a national court where it is quite obvious that the interpretation or the assessment of the validity of a provision of EU law sought by the national court bears no relation to the actual nature of the case or to the subject matter of the main action. That is not however the case here. Paragraph 4.3 of the tender specifications, which lies at the centre of the dispute in the main proceedings, contains an express reference to Article 24(5) of the Law on public procurement. Against that background, it does not appear that [restriction on subcontracting in Article 24(5) of the Law on public procurement] manifestly bears no relation to the actual nature or the subject matter of the action and that question is therefore admissible (AGO, C-298/15, para 41, references omitted and emphasis added).

From a procedural perspective, this is interesting in itself and shows the wide scope for the referral of questions for a preliminary ruling by the ECJ by the highest courts of the Member States even where the clarification of those questions is not core, central or essential to the main dispute. In a different context, this is of relevance for the Brexit litigation before the UK Supreme Court (for discussion see here and here). More generally, the contours of the preliminary reference mechanism seem clearly wide and facilitative of inter-judicial dialogue, as supported by the recently revised Recommendations to national courts and tribunals, in relation to the initiation of preliminary ruling proceedings.

Substantive aspects

Moving on to the assessment of the compatibility with EU law of the prohibition to subcontract the main work under Art 24(5) of the Lithuanian Law on public procurement, there is an interesting preliminary point to note:

The Lithuanian Government submitted at the hearing that Article 24(5) of the Law on public procurement transposed the new rule on subcontracting in Article 79(3) of Directive 2014/25/EU before the expiry of the period prescribed for transposing that directive and that, consequently, the Court should examine the present reference from the perspective of that directive only ... The Commission argued that, on the contrary, Directive 2014/25 could not be taken into account. First, Article 24(5) of the Law on public procurement was passed before that directive was adopted. Second, Lithuania had omitted to notify the measures transposing Directive 2014/25 into Lithuanian law to the Commission (AGO, C-298/15, para 25, references omitted).

AG Sharpston is clear in excluding this analytical approach (which may have resulted in a different outcome of the case) on the basis that

As the Court has held recently in relation to Directive 2014/24, to apply that directive before the expiry of the period prescribed for its transposition would prevent not only the Member States but also contracting authorities and economic operators from benefiting from a sufficient period in which to adapt to the new provisions it introduced. ... to do so would also be inconsistent with the principle of legal certainty. The same applies by analogy to Directive 2014/25 (AGO, C-298/15, para 27, references omitted).

Thus, the analysis of the Lithuanian rule had to be carried out in relation with the EU public procurement acquis at the time of launching the tender: ie, Dir 2004/17. However, given that the value of the contract remained below its quantitative thresholds, and in view of the fact that it had cross-border interest (para 37), the rule had to be

examined against the background of the general principles of transparency and equal treatment arising from Articles 49 and 56 TFEU, which must be respected when awarding public contracts. Given that Articles 49 and 56 TFEU apply ... the [contracting authority] is required to respect the prohibition on discrimination on the grounds of nationality and the obligation as to transparency which those articles lay down (AGO, C-298/15, para 38, references omitted).

In carrying out that assessment, AG Sharpston reverted to the general functional approach to the EU regulation of below threshold public procurement:

Articles 49 and 56 TFEU preclude any national measure which, even though it is applicable without discrimination on grounds of nationality, is liable to prohibit, impede or render less attractive the exercise by nationals of the European Union of the freedom of establishment and the freedom to provide services guaranteed by those provisions.
As regards public contracts and the freedom of establishment and the freedom to provide services, the European Union is concerned to ensure the widest possible participation by tenderers in a call for tenders, even where directives on public procurement are not applicable. That is in the interest of the contracting authority itself, which will thus have greater choice as to the most advantageous tender which is most suitable for its needs. One of the principal functions of the principle of the equal treatment of tenderers and the corollary obligation of transparency is thus to ensure the free movement of services and the opening-up of undistorted competition in all the Member States (AGO, C-298/15, paras 43-44, references omitted).

After clarifying that the prohibition to subcontract the main work under Art 24(5) of the Lithuanian Law on public procurement 'restricts the freedom to provide services and the freedom of establishment' (para 46), she also stressed that 'such a restriction may be justified in so far as it pursues a legitimate objective in the public interest, and to the extent that it complies with the principle of proportionality in that it is suitable for securing the attainment of that objective and does not go beyond what is necessary in order to attain it' (para 47).

In that connection, it is interesting to note that the AG stresses that one of the elements to be taken into account is that 'the contracting authority is entitled to prohibit the use of subcontractors whose capacities could not be verified during the examination of tenders and selection of the contractor for the performance of essential parts of the contract' (para 49, with reference to Siemens and ARGE Telekom, C‑314/01, EU:C:2004:159, paragraph 45, and Wrocław - Miasto na prawach powiatu, C‑406/14, EU:C:2016:562, paragraph 34--and see here). 

Applying this test, AG Sharpston established that

First, that restriction applies even where the contracting authority is in fact in a position to verify the technical and economic capacity of subcontractors during the contract award procedure. An alternative to that restriction would (for example) have been to require the main contractor to identify subcontractors when submitting his tender and to demonstrate both that he will actually have available to him the resources of those subcontractors necessary for the performance of the contract and that those subcontractors are suitable for carrying out the tasks he intends to entrust to them.
Second, Article 24(5) is also both too rigid and too vague to satisfy the proportionality test. Although contracting authorities appear to enjoy flexibility when defining, for each contract, what ‘the main work’ is, the restriction on subcontracting resulting from that provision is defined in particularly broad terms. It applies regardless of the subject matter of the public works contract and is binding upon contracting authorities when they conclude any type of public works contract, even when they may consider that there is no obvious reason for imposing such a restriction at all.
... the restriction on subcontracting in Article 24(5) of the Law on public procurement differs in that regard from Article 79(3) of Directive 2014/25. That provision merely enables a contracting authority, in particular, to require that certain critical tasks be performed directly by the tenderer itself. Contracting authorities may thus assess whether such a limitation is opportune, depending on the circumstances. It follows that, even if, as the Lithuanian Government submits, Article 24(5) of the Law on public procurement were to be regarded as transposing Article 79(3) of Directive 2014/25 into Lithuanian law, that transposition would be incorrect.
For those reasons ... in the context of a public contract not subject to Directive 2004/17 or Directive 2004/18, but which has a clear cross-border interest, the prohibition on discrimination on the grounds of nationality and the obligation of transparency which arise under Articles 49 and 56 TFEU preclude a national rule such as that contained in Article 24(5) of the Law on public procurement, under which the tenderer has itself to carry out the ‘main work’, as identified by the contracting authority, without it being possible to subcontract that part of the contract (AGO, C-298/15, paras 51-54, references omitted and emphasis added).

This is interesting because, even if Dir 2014/25 (and 2014/24) was not relevant to the case, it indicates the direction in which a proportionality assessment of the rule in Art 79(3) Dir 2014/25 and Art 63(2) Dir 2014/24--as transposed into domestic law and as applied by contracting authorities--is likely to be carried out in the future [with a view to minimise their scope, which I would favour, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 353-354].

Additional Thoughts on Brexit and Public Procurement

I had the pleasure of participating in last night's seminar on Brexit and Public Procurement, which was part of the Brexit Seminar Series 2016/17 organised by the Centre of European Law of King's College London. There was interesting discussion of the WTO GPA, UNCAC and UNCITRAL model law requirements and the possibilities they bring after Brexit, including a rather subtle argument why the UK may retain its condition of party to the WTO GPA on the basis of its final provisions in its Article XXII--which I either did not fully understand, or really do not see working out.

However, there was also a good measure of wishful thinking based on the opportunities that dropping the 'straitjacket of the EU single market approach' to procurement regulation could provide, as well as the possibilities that Brexit would bring in order to mend a system that is broken (with reference to both EU public procurement and State aid law), and which covers up an anti-British bias that can only get worse in the future if the Commission manages to adopt its 'Fortress Europe' strategy. I guess that, after this, my remarks (see presentation below) came in as a minoritarian and pro-EU reaction to these arguments. The rest of this post provides a synthesis of the arguments I made.

In order to counteract some of the arguments being made and, hopefully, to put the issue into broader perspective, I focused my remarks around whether the reform of [British] procurement regulation is feasible or a utopia (which links to my broader ideas on the difficulties of reimagining public procurement regulation). I broke this down in four parts: (1) the unavoidable costs of adopting a distinct 'Very British Model' (borrowing this label from Sarah Hannaford QC); (2) what is likely to happen with the Public Contracts Regulations 2015 immediately after Brexit; (3) what level of coordination between UK (Eng) and EU law should be achieved in the future; and (4) what can and should realistically be done to further reform (UK) public procurement law in the future.

1. On the unavoidable costs of a Very British Model, I guess that the simple insight I was trying to stress was that having diverging regulatory regimes increases the cost of doing business for companies aiming to serve markets where different procurement regimes apply. From the perspective of British companies (particularly SMEs, which PM May seems to be intent on actively supporting), this de facto makes it more difficult for them to export to the EU if they get used to a different domestic regulatory regime.

This can in turn result in a change of supply chains where EU 'importers' acquire the goods (works less well for services) from UK manufacturers and then sells them to the public sector in the rest of the EU, which will require the creation of commercial mark-ups / margins that may well wipe out any financial advantage derived from the taking of the Sterling, as well as any increases in productivity in the future.

Moreover, a Very British Model that significantly deviated from the current EU system would create a significant barrier for cross-border collaboration with other public buyers in the EU (which was mentioned could be particularly relevant in terms of defence procurement, given recent policies to boost EU's military capabilities through a joint defence fund), but also with potential third countries (eg Canada). It would also make negotiations to gain (or retain) membership of the WTO GPA and to subject internationally funded (large infrastructure) projects to the revised Very British System because international partners may need to be convinced that, though different, that new system complied with their requirements. If nothing else, this will be a drain of international and trade negotiators' time and energy.

2. On the likely  immediate future of the Public Contracts Regulations 2015, it is hard to make a forecast. Short of their total repeal and the creation of a massive regulatory vacuum in the control of public expenditure in the UK (which I do not think likely, and certainly hope not to be pursued), the PCR2015 are likely to stay in the books for a while (with or without Great Repeal Bill).

It is possible that the UK Government is tempted to chop bits of them off the statute book. Either suppressing the remedies they create for non-domestic bidders, as suggested by Prof Arrowsmith, and which I consider a daft strategy--for the lack of a better term--because it will not only alienate foreign bidders and international trading partners, but also be easy to circumvent through formal submission of tenders by UK-based entities. Or else shooting holes in the PCR2015 to get rid of parts that may be considered particular examples of bar procurement regulation (say, the use of self-declarations in the form of the ESPD). That would diminish the consistency of the regulatory system and could create undesirable effects.

Overall, as I said before, in the short run, the 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.

3. On the desirable level of coordination between future UK rules and EU public procurement law, including the CJEU case law, I submitted that, regardless of the formal legal obligations to comply with CJEU case law under EEA or other types of agreements, from a normative point of view and at least for as long as the law on the books reads the same way (ie up and until there is a repeal and substitution of the PCR2015), UK law should continue to be substantively coordinated with EU public procurement law.

For two reasons. First, because deviations will create the same additional costs of doing business indicated above (1). And, second, because on the whole (and I am not one to cosy up to the CJEU), I consider that its public procurement case law has been progressive and positive, and helped shape a regulatory system that is massively misunderstood and misconstrued, particularly but not only in the UK (more below).

4. On the productive ways in which [British] public procurement can be reformed in the longer run, I took the seemingly radical view that legal reform should not be the main focus and that there are more pressing issues that can only be sorted out with significant investment (which, of course, triggered the reaction from the floor that 'it ain't gonna happen' in this context and with the massive black hole that Brexit will create in the UK's public finances between now and, at least, 2021). I also stressed that the UK had shown no regulatory creativity whatsoever in the transposition of the 2014 Public procurement package, which indicates that there is a lack of direction and strategy on which to build a significant reform of the current system.

I stressed that most of the complaints against the EU public procurement rules coming from the business community, and particularly SMEs, would equally exist with any regulatory regime that imposed any level of red tape on businesses because that is, quite simply, in the nature of things. Same goes for the criticisms from the public sector. Of course, the existing rules are perfectible (topically, on the need to reform the Remedies Directive), but no system will ever be perfect and there is a level of discomfort with public procurement rules that needs to be accepted as trade off for the anti-corruption and pro-competitive / value for money results they achieve.

Additionally, significant problems of legal certainty and difficulties in the coordination of different sets of procurement rules are exclusively a domestically created issue. For example, the difficult coordination of general procurement rules under the PCR2015 and those applicable to healthcare procurement in the context of NHS England are a UK problem that can, and must, be resolved domestically (see eg here, with a focus on conflicts of interest). 

Moreover, I also stressed that the EU public procurement rules are greatly misunderstood and construed as imposing a tight straitjacket on both procurers and businesses. That is simply not the case, particularly after the revision of the 2014 Public procurement package, which has created enormous spaces for administrative discretion and negotiations--that have in turn triggered the need, more than ever, for a competition-oriented interpretation and implementation of the rules.

My view, and I am happy to expand it, is that properly understood and applied, the current EU rules allow for all the goals I have so far heard businesses and public sector officials indicate they want from a revised [British] public procurement system--except those linked to a protectionist industrial policy, which are economically unwise and undesirable in any case.

The real problem is that an improvement of procurement practice requires three main (and very expensive) changes: (a) a serious investment in technology and the effective roll out of eProcurement; (b) significant investment in human capital and the upgrade of the public sector skill set (particularly in non-legal aspects linked to market intelligence and procurement best practice, along the same lines stressed by the European Court of Auditors in the context of EU institutional procurement); and (c) significant investment in strengthening the public oversight powers of entities such as the National Audit Office and the Office for Budget Responsibility (on the worrying contrary trend, see here) so as to reduce the dependence on (and incentives for) private litigation as the only (meaningful?) check on the way procurement is carried out.

Overcoming this problem requires investment and long-term planning. Two things that seem to go against the very grain of the Brexit process. So, overall, I would not hold my breath. I would more generally not expect any significant change in the way procurement is carried out in the UK in the short to medium term, which in itself can create problems in the longer run.

ECJ new recommendations on the initiation of preliminary ruling proceedings sends clear signal to UK Supreme Court that the Miller case must be referred

The Court of Justice of the European Union (CJEU) has published today a new set of Recommendations to national courts and tribunals, in relation to the initiation of preliminary ruling proceedings [2016] OJ C 439/1. This is a very timely document, which clarifies the circumstances under which a reference for a preliminary ruling can or must take place, as well as the basic parameters that those requests must meet in order to effectively enable the CJEU to issue preliminary rulings, including in cases requiring particularly expeditious handling.

In the context of the Brexit related litigation before the UK Supreme Court in the appeal of the High Court's Miller decision, these Recommendations are particularly timely and relevant. There has been a very intense discussion by distinguished legal scholars about the existence or not of an obligation to refer the case to the ECJ for interpretation of Article 50 TEU--and, in particular, in relation with the (ir)revocability of an Art 50(1) notice in view of Art 50(2) TEU. The positions are too wide to discuss here (see this very useful compilation of materials), and I hold the relatively minoritarian view that the UK Supreme Court is under an absolute and inexcusable obligation to request a preliminary ruling on the interpretation of Article 50 TEU.

I find additional support for my view and the underlying interpretation of the CILFIT test in para [6] of the CJEU's Recommendations, which very clearly indicates that:

Where a question is raised in the context of a case that is pending before a court or tribunal against whose decisions there is no judicial remedy under national law, that court or tribunal is nonetheless required to bring a request for a preliminary ruling before the Court (see third paragraph of Article 267 TFEU), unless there is already well-established case-law on the point or unless the correct interpretation of the rule of law in question admits of no reasonable doubt (emphasis added).

Para [3] is also relevant in its stress that:

The jurisdiction of the Court to give a preliminary ruling on the interpretation or validity of EU law is exercised exclusively on the initiative of the national courts and tribunals, whether or not the parties to the main proceedings have expressed the wish that a question be referred to the Court (emphasis added).

In my opinion, the CJEU has sent the clearest possible message to the UK Supreme Court: they expect a request for an interpretation of Article 50 TEU. And the UK Supreme Court will be well advised to do so as soon as possible, once all intervening parties have presented their arguments. Tertium non datur.

Cross-border joint public procurement: some reflections on the puzzling Art 39(2) Dir 2014/24

I gave a seminar on "The emergence of trans-EU public law: public procurement as a case study" yesterday at UEA Law School. My presentation (below) was largely based on this earlier paper of mine, where I discuss the new rules on centralised, joint and cross-border procurement in Directive 2014/24/EU (Arts 37-39). It also aimed to go beyond the technical aspects of the paper in exploring how these new mechanisms of cross-border cooperation between public buyers can help us identify the emergence of trans-EU public law, either of a substantive or 'conflict of laws' type.

The discussion eventually turned on Art 39(1)II Dir 2014/24, which states: "Contracting authorities shall not use the means provided in this Article [ie mechanisms of cross-border collaborative procurement] for the purpose of avoiding the application of mandatory public law provisions in conformity with Union law to which they are subject in their Member State."

This can be seen as an anti-circumvention clause aimed at ensuring that contracting authorities do not seek to disapply mandatory domestic rules by 'escaping' their jurisdiction through international collaboration--and, consequently, as a rule aimed at preserving the competential split between Member States and the EU in an area that arguably exceeds the procurement remit and goes to the core of the principle of national procedural and organisational autonomy.

However, participants in the seminar raised the point that it can also be seen as a 'Trojan horse' indicating further legal integration (and further regulation of these mechanisms in a future 6th iteration or generation of EU public procurement Directives) through the test of 'EU compatibility' of domestic mandatory public law provisions. I find this a very interesting thought, which is worth exploring in more depth. For now, I can only offer a few initial reflections.

From that perspective of 'EU law tests creeping into mandatory domestic public law requirements', and taking the example of free movement of goods, the question would be whether Art 39(1)II Dir 2014/24 does no more than recreate the mechanism of Art 36 TFEU--ie bring to the area of public procurement a 'public policy' (+ proportionality) test that mandatory public law requirements need to meet in order to justify the restriction on free movement that derives from preventing contracting authorities from resorting to enabling provisions for collaborative cross-border procurement. Or, on the contrary, whether it creates a separate test of 'EU law compatibility' that can actually go beyond what could be defended by Member States from a free movement of goods perspective by forcing an interpretation based on the effet utile of the rules in Dir 2014/24 itself--which would, almost by definition, result in more limited scope for absolute restrictions on the possibility to engage in collaborative cross-border joint procurement.

Either way, and having in mind recent cases on 'public policy' justifications for restrictions on free movement of goods, such as the DocMorris 2 case, it seems plausible that Art 39(1)II Dir 2014/24 may effectively be used in the future to demolish traditional public law requirements applicable to public procurement (such as subjection to domestic public contract law, language requirements, etc) on the basis that they disproportionately (or absolutely) restrict the possibility to engage in collaborative cross-border procurement.

For the purposes of the emergence of trans-EU public law, this would be a clear lever for the transformation of Member States' domestic public law requirements applicable to procurement activities, not least because internal market-type analysis would start being applied to public purchasing arrangements and their regulation in a different and possibly more stringent fashion.

So this is an area where I plan to keep an eye in the future and where I would appreciate input concerning any cases that may be developing at domestic level in the Member States. Either now or in the future.

Is the UK moving towards 'innovative small business' procurement set-asides? Would it be a desirable move?

PM Theresa May announced yesterday that the UK Government is to look at how its own public procurement can be used to drive innovation in small businesses that “not only spurs innovation in the public sector, [but] gives new firms a foot in the door”, as part of a review into the Small Businesses Research Initiative (SBRI). It is not clear what innovation in small businesses means, as it could both refer to technologically-innovative small businesses, or to diverse or new forms of small businesses (as part of social or economic innovation more generally).

It is worth noting that PM May indicated that the UK could follow the example of the US government, which concentrates its small business policy in the Small Business Administration (SBA) and the small business set aside of federal government contracts. This seems to indicate a preference for the second type of small business policy (ie a policy for diversity in small businesses, or in support of new business governance forms, on which see here).

In the US, the current, government-wide procurement goal stipulates that at least 23% of all federal government contracting dollars should be awarded to small businesses. This figure is further broken down into additional targeted sub-goals for: Women Owned Small Business (5%), Small Disadvantaged Business (5%), Service Disabled Veteran Owned Small Business (3%) and Historically Underutilized Business Zones (HUBZone) (3%). Notably, none of these set asides are technology-innovation driven, but rather aim to support targeted social groups through a reverse discrimination approach in the award of public contracts.

It is also possible that what PM May had in mind is closer to a policy to provide support for technological innovation-driven small businesses, particularly as she said the review would look at how they could “increase its impact and give more innovators their first break”. 

This is a policy that, even without the industrial policy pressures related to Brexit and its surrounding negotiations and attempts of political capture by economic interest groups, other political parties are seeking to explore in other EU countries. For example, in Spain, a proposal to introduce set-asides of 3% of public contracts for 'legally certified innovative SMEs' was floated recently (see criticism by Dr Pedro Telles and myself here). Thus, a certain trend seems to be emerging in the area of innovation oriented industrial policy, which seems to be the early 21st century hype.

One of the main hurdles to the creation of small business set asides in EU countries derives from EU public procurement law itself, which simply bans this option. Further, the EU's negotiating position in international procurement treaties, and in particular in the WTO Government Procurement Agreement (GPA), have locked in an anti-SME set-aside policy approach (as discussed by K Dawar and M Skalova, 'The Evolution of EU Public Procurement Rules and its Interface with WTO: SME Promotion and Policy Space' in GS Ølykke & A Sanchez-Graells, Reformation or Deformation of the EU Public Procurement Rules (Elgar, 2016)]. 

For the UK, then, the prospect of Brexit may change the legal situation and open the door to an unrestricted 'innovative small business' set-aside policy. But this would only be possible provided the UK exited the single market and resiliated the EU's WTO GPA commitments and negotiating position regarding SME set-asides. This does not seem a likely, and indeed is not a desirable scenario, so the exploratory policy announcement made by PM May may well result in no relevant policy after all. In any case, and more importantly, before aiming to the develop such a policy, the UK would be well advised to think hard about this and try to gain a more sophisticated understanding of the US' system.

Far from the rosy picture painted by PM May and others, the US federal government's set-aside programme is permanently criticised for the opacity of its direct and indirect costs to the tax payer [very clearly, see [AG Sakallaris, ‘Questioning the Sacred Cow: Reexamining the Justifi cations for Small Business Set Asides’ (2006–2007) 36 Public Contract Law Journal 685; and K Loader, ‘The Challenge of Competitive Procurement: Value for Money versus Small Business Support’ (2007) 27 Public Money and Management 307].

The system has clear explicit costs in terms of its administration and the litigation ensuing classifications of businesses as small or not (or innovative or not) in the first place. Additionally, and simply put, the main implicit cost of a small business set-aside programme, be it for innovative enterprises or of a general nature, is that it reduces competition for public contracts, and the reduction of competition resulting from this artificial division of the market comes at a cost in terms of potential higher contract prices as well as reduced incentives for innovation for non-small businesses [generally, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 60-77]. Thus, this is a very expensive system to run and, in a scenario of ever stronger competing pressures for public funds, legitimate questions can be raised about its desirability.

Moreover, already under the existing UK and EU rules, there are plenty opportunities to engage in a small business friendly management of public procurement without creating set aside programmes (see, for instance, the work of the Procurement of Innovation Platform). Providing better access to public procurement for small businesses has the advantage of making the process more accessible to all interested bidders and, in the end, has the potential of unlocking stronger competition for public contracts. This, of course, is also not a cost-free policy and it requires investment in training and skills in the public sector. However, this is bound to be a much more productive investment in the long run.

Overall, then, following PM May's announcement of the inclusion of government procurement in the innovation review, in my opinion, the best path to follow is to think seriously about how public procurement law can really be simplified and transformed in a way that benefits from technological development and with a view of closing the shortage of skills and human resources in the public sector. This is something that can and should be done independently of Brexit, and which can benefit every public procurement system (for my general ideas, see here). Conversely, starting a path of creation of set asides--and, more generally, the emerging policy of piecemeal deals to appease specific business interests--is only bound to leave the UK taxpayer worse off, Brexit or no Brexit (but particularly in the event of Brexit).

ECJ backs up tough Italian approach to exclusion of non-payers of social security contributions -- will this carry on under Directive 2014/24? (C-199/15)

In its Judgment of 10 November 2016 in Ciclat, C-199/15, EU:C:2016:853 (only in FR and IT), the European Court of Justice (ECJ) has issued a preliminary ruling concerning the compatibility with the pre-2014 EU public procurement rules (Dir 2004/18) of a set of Italian rules that mandates the exclusion of undertakings that have been found to have gravely failed to meet all their social security obligations at the time of the tender, and irrespective of any subsequent regularisation of the situation prior to the award of the contract, or even prior to the assessment of that situation by the contracting authority.

According to the relevant Italian rules, contracting authorities must exclude undertakings that have been definitively found to have committed serious offences regarding the payment of social security contributions in accordance with Italian legislation or that of the State in which they are established (C-199/15, para 8, own translation from French). The only tolerance against this ground of mandatory exclusion is that an offence against the social security will not be considered grave where the difference between the sums owed and those paid does not exceed EUR 100 and is less than 5% of the sums owed (C-199/15, para 11, own translation from French). 

The Ciclat case can be seen as a twin of the previous Judgment of 10 July 2014 in Consorzio Stabile Libor Lavori Pubblici (C-358/12, EU:C:2014:2063) where the ECJ assessed the compatibility with EU law of the same Italian rules for the exclusion of undertakings that have committed serious offences against the social security of their country of establishment, but in the context of the procurement of contracts below the EU thresholds. In that case, the ECJ considered that the Italian rule was compatible with Articles 49 TFEU and 56 TFEU and the principle of proportionality. Equally and unsurprisingly, in Ciclat, the ECJ has determined that

Article 45 of Directive 2004/18 ... does not preclude national legislation ... which obliges contracting authorities to consider as grounds for exclusion an offense in relation to the payment of social security contributions, which is established in a certificate automatically requested by the contracting authority and issued by the social security institutions, where such infringement existed at the date of participation in a tender, even if it no longer existed on the date of the award of the contract or that of the automatic control by the contracting authority (C-199/15, para 40, own translation from French). 

Despite not advancing EU public procurement law in any relevant way, the Ciclat Judgment can be criticised on two accounts.

First, because the ECJ ducked a relevant question of reverse discrimination due to the different documentary rules applicable to Italian companies (which were subject to the stringent system of automatic certification by the social security administration that gave rise to the case), whereas non-Italian EU tenderers could benefit from the greater flexibility of self-certification (see C-199/15, paras 38-39). At some point, the ECJ will have to stop avoiding problematic issues of reverse discrimination and start constructing a better line of case law that is more attuned to the needs of undertakings competing in an internal market.

Second, the Ciclat Judgment can be criticised for its excessive rigidity. Not only due to the lack of consideration of the very low threshold amounts of tolerance for unpaid social security contributions (or taxes)--which was already the position after Consorzio Stabile Libor Lavori Pubblici--but also due to the irrelevance given to an effective remediation of the infringement by the tenderer, which goes against trends aimed at facilitating substantial compliance and corporate (voluntary) self-cleaning. 

However, this second criticism may seem as not really relevant from a practical perspective in view of the greater flexibility that Article 57(2) Dir 2014/24 has introduced if compared with Art 45 Dir 2004/18 (see discussion here). Indeed, under the 2014 rules, exclusion on the basis of an infringement of social security law (or tax law), even if the infringement has been established by a judicial or administrative decision having final and binding effect in accordance with the legal provisions of the country in which it is established, this exclusion ground will cease to apply where "the economic operator has fulfilled its obligations by paying or entering into a binding arrangement with a view to paying the taxes or social security contributions due, including, where applicable, any interest accrued or fines."

But a close consideration of this provision shows that the moment in which consideration must be paid by the contracting authority to the remedial action taken by the tenderer that was initially found to infringe social security (or tax) law is not specified, and therefore left to the national implementing conditions adopted in each Member State on the basis of Art 57(7) Dir 2014/24. Thus, a possible reading of Ciclat would be to consider that it is compatible with EU procurement law to establish the last date for the submission of tenders as the cut-off date for the assessment of compliance with (or remedy of an infringement of) social security (and tax) law--to the exclusion of any remedial action taken before the contracting authority evaluates the tenders, or even before the contracting authority actually assesses compliance with exclusion and selection criteria. In my view, that would deprive the new rules in Art 57(2) [and, for the same reasons, in Art 57(6) on self-cleaning] of practical effect.

Consequently, the Ciclat Judgment keeps adding reasons to the need to establish a special inter partes procedure where the contracting authority gives a chance to the undertaking to clarify its current situation of compliance or not with social security (and tax) requirements [but, more generally, in relation to any exclusion ground the contracting authority aims to enforce] before proceeding to its effective exclusion. This is not only a practical need, but a requirement derived from the general principles in the EU public procurement Directives and, more generally, the duty of good administration of Art 41 of the Charter of Fundamental Rights of the European Union. Fur further discussion of this important issue, see A Sanchez-Graells, "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.

Why an appeal of the High Court Parliamentary approval Brexit judgment will bring the litigation to the cjeu?

The High Court has today issued its Judgment in the dispute about the UK Parliament's necessary approval of a Brexit notification--see R (Miller) -V- Secretary of State for Exiting the European Union [2016] EWHC 2768 (Admin). It has ruled that such Parliamentary approval is indeed required as a matter of UK constitutional and public law. The Government has already announced that it will appeal this decision to the UK Supreme Court (UKSC). The implications of such an appeal are important and need to be carefully considered. One such possible consequence is that the appeal (indirectly) brings the case to the docket of the  Court of Justice of the European Union (CJEU).

In my view, an appeal of the High Court's Judgment before the UKSC will indeed trigger a legal requirement under EU law for the UKSC to send a reference for a preliminary ruling to the CJEU. I have rehearsed most of my arguments on twitter earlier (see here and here) and this posts brings them together.

Basic EU Law Background

Article 267(1)(a) TFEU establishes the monopoly of interpretation of the CJEU and it indicates the Court shall have jurisdiction to give preliminary rulings concerning the interpretation of the Treaties. Article 267(2) then goes on to enable the domestic courts of the Member States to issue request preliminary rulings from the ECJ where questions of interpretation of EU law are raised before them and they consider that a decision on the question is necessary to enable them to give judgment. However, that discretion of domestic courts to request preliminary rulings from the CJEU does not apply to the courts or tribunals of a Member State against whose decisions there is no judicial remedy under national law. In that case, Article 267(3) indicates that where a question on the interpretation of EU law is raised, the highest court  shall bring the matter before the CJEU.

The uncertainties surrounding the interpretation of Art 50 TEU before the High Court

One of the extremely complex issues concerning the UK's potential withdrawal from the EU following the Brexit vote of 23 June 2016 concerns the interpretation of Article 50 TEU (on this, see here). One of the difficult sub-questions concerns the (ir)reversibility of an Art 50 TEU trigger notification. This is an essential element for an assessment of the UK's constitutional requirements for the delivery of such notification, as the High Court's Judgment makes clear.

Indeed, as a preliminary issue, in today's Judgment, the High Court has addressed the problematic interpretation of Art 50 TEU. Unanimously, the High Court has indicated that "Important matters in respect of Article 50 were common ground between the parties: (1) a notice under Article 50(2) cannot be withdrawn once it is given ..." para [10]; and that "Once a notice is given, it will inevitably result in the complete withdrawal of the United Kingdom from membership of the European Union and from the relevant Treaties at the end of the two year period, subject only to agreement on an extension of time ..." para [11].

There are two ways of interpreting the High Court's dealing with the argument on irreversibility of an Art 50 notification. First, that the High Court takes this approach in para [11] because it is common ground between the parties ex para [10]--what I would call the UK procedural approach. Second, that the High Court has of its own interpreted an Art 50 notification to be irreversible ex para [11], which happens to align with the common position of the parties in para [10]--what I would call the EU substantive interpretation approach.

The UK procedural approach is saved by the High Court's discretion under Art 267(2) TFEU to consider that the interpretation of Art 50 TEU is actually not necessary for it to adjudicate the matter at hand because this is not part of the controversy between the parties. However, the EU substantive interpretation does trigger some issues because, having recognised the interpretation of Art 50 TEU as an important aspect for the adjudication of the case, the High Court should not have taken it upon itself to interpret it and should rather have requested a preliminary ruling from the CJEU. However, unless under a very expansive interpretation of the principle of sincere or loyal cooperation in Art 4(3) TEU, this does not amount to a breach of EU law.

The uncertainties surrounding the interpretation of Art 50 TEU before the UK Supreme Court

Now, in case of an appeal of the High Court's decision before the UKSC, in my opinion, the referral to the CJEU is legally unavoidable (I will not deal for now with arguments of judicial politics or pragmatic views on the UKSC's likely course of action). Even if the parties do not challenge or even raise to the UKSC's consideration the matter of the (ir)reversibility of and Article 50 notification, it is a logical given that the UKSC needs to take a stance (even if implicit) on this point in order to be able to rule on the case. If it quashes the High Court's decision, it needs to clarify the points of law which the High Court would have gotten wrong--one of which concerns the irrevocability of an Art 50 notification. if it upholds the High Court's decision, it is (implicitly) accepting the assumption that an Art 50 notification is irrevocable. Either way, the UKSC cannot escape a substantial (implicit) consideration of the interpretation of Article 50.

In my view, this engages the UKSC's obligation to request a preliminary ruling from the CJEU under Article 267(3) TFEU and not doing so triggers a risk of infringement of EU law by the UK due to the acts (or omission, in this case) of its highest court.

Semi-Advanced EU Law Background

The UKSC's obligation to request a preliminary reference from the CJEU is controlled by the so-called CILFIT test, which establishes that "a court or tribunal against whose decisions there is no judicial remedy under national law is required, where a question of [EU] law is raised before it, to comply with its obligation to bring the matter before the Court of Justice, unless it has established that the question raised is irrelevant or that the [EU] provision in question has already been interpreted by the Court or that the correct application of [EU] law is so obvious as to leave no scope for any reasonable doubt. The existence of such a possibility must be assessed in the light of the specific characteristics of [EU] law, the particular difficulties to which its interpretation gives rise and the risk of divergences in judicial decisions within the [EU]" (283/81, EU:C:1982:335, para 21).

What does this mean for the UKSC in the Brexit litigation in case of appeal?

In short, my understanding of the CILFIT test is that a highest court of a Member State (the UKSC) must request a preliminary ruling on the interpretation of the Treaties to the CJEU and has no discretion not to do so unless: (a) the question is (objectively) irrelevant for the adjudication of the case, or (b) the provision has already been interpreted by the CJEU, or (c) there is no scope for reasonable doubt in the interpretation of the provision. None of these apply in the specific case of the Article 50 litigation.

First, it is inconceivable to me to argue that the interpretation of Art 50 and the (ir)revocability of a notice under it is irrelevant for the adjudication of this case. A different issue would be whether the UKSC could pragmatically sidestep the need to engage in that interpretation, either by presuming its content (the EU substantive interpretation approach mentioned above), or by insisting on the fact that it is common ground to the parties to the litigation and, therefore, the issue of the (ir)revocability of the notification is not (formally, explicitly) raised before it (the UK procedural approach.

However, in my opinion, neither of these avoidance strategies would meet the basic requirements of good faith in the interpretation of the CILFIT test, coupled with Article 4(3) TEU, which requires the domestic court to assess the need to request a preliminary ruling "in the light of the specific characteristics of [EU] law, the particular difficulties to which its interpretation gives rise and the risk of divergences in judicial decisions within the [EU]". The interpretation of Article 50 TEU is, to put it simply, the most relevant EU constitutional law issue since the OMT litigation and one of the top, if not the top, EU constitutional law issue since the entry into force of the Lisbon Treaty. Engaging in semantics in the analysis of the first prong of the CILFIT test against this background (ie, stretching the narrow interpretation "irrelevant") seems to me logically and legally unacceptable.

Second, it is plain that Art 50 has not been interpret by the CJEU yet. And, thirdly, it is also plain that there is scope (massive scope, a gaping hole) for reasonable doubt in the interpretation of Article 50 TEU. Thus, the so-called acte claire doctrine (ie the counterbalance of the CILFIT test) simply does not apply here.

Overall, in my opinion, the UKSC has an absolute and inexcusable obligation to request a preliminary ruling on the interpretation of Article 50 TEU from the CJEU the moment the appeal against the High Court's Judgment (eventually) reaches its docket. Otherwise, the UKSC risks triggering an infringement of EU law and eventually creating liability in damages under the Kobler / Traghetti del Mediterraneo strand of case law on State liability. Again, I am not dealing with the arguments on the likelihood of an actual infringement case brought forward by the European Commission, or the CJEU's eventual decision. I am, for now, simply stressing the state of EU law, which the UKSC would be well advised to bear in mind and uphold, unless it aims to contribute to the deterioration of the rule of law in the UK and the EU (which is something that keeps me awake at night).

ECJ CLARIFIES COORDINATION BETWEEN TRANSPORT AND GENERAL PROCUREMENT RULES, BUT WILL THIS HELP IN FUTURE? (C-292/15)

In its Judgment of 27 October 2016 in Hörmann Reisen, C-292/15, EU:C:2016:817, the European Court of Justice (ECJ) addressed an issue of growing importance regarding subcontracting arrangements in public procurement, as well as contracting authorities' ability not only to monitor them, but also exclude them.

In Hörmann Reisen, the ECJ was required to assess the compatibility with EU law of a requirement that the main contractor performed a major part of a public passenger transport services itself--or, in other words, a limitation on the acceptable volume of subcontracting for the execution of a given public services contract to 30% of its total value. This was challenged both on the grounds that the limitation itself was illegal and that, in any case, a quantitative restriction of subcontracting was not adequate to ensure that the main contractor performed a major part of the services itself.

It is worth stressing that, as a starting point, the analysis of the ECJ was carried out on the basis of the special procurement rules for the transport sector in Regulation 1370/2007/EC, which Art 4(7) establishes that

Tender documents and public service contracts shall indicate, in a transparent manner, whether, and if so to what extent, subcontracting may be considered. If subcontracting takes place, the operator entrusted with the administration and performance of public passenger transport services in accordance with this Regulation shall be required to perform a major part of the public passenger transport services itself.

As Advocate General Sharpston indicated in her Opinion (C-292/15, EU:C:2016:480), this would seem to cover a straightforward (value) limitation of the subcontractable services. However, the case was complicated by the fact that it was for the provision of bus services, to which Reg 1370/2007 does not entirely apply. Under its Article 5(1),

Public service contracts shall be awarded in accordance with the rules laid down in this Regulation. However, service contracts or public service contracts as defined in Directives 2004/17/EC or 2004/18/EC for public passenger transport services by bus or tram shall be awarded in accordance with the procedures provided for under those Directives where such contracts do not take the form of service concessions contracts as defined in those Directives. Where contracts are to be awarded in accordance with Directives 2004/17/EC or 2004/18/EC, the provisions of paragraphs 2 to 6 of this Article shall not apply.

In short, then, contracts for the provision of bus and tram services that do not constitute services concessions are to be awarded in compliance with the general procurement rules. In the Hörmann Reisen case, due to the fact that the tender took place in 2015, it still had to be carried under Directive 2004/18/EC--but the issues raised by the case are relevant because, since 18 April 2016, these contracts must now be awarded under Directive 2014/24/EU (regardless of domestic transposition or lack thereof). It is also important to stress that, a contrario, concessions for the provision of bus and tram services are solely subjected to the rules of Reg 1370/2007 and explicitly excluded from the scope of application of Directive 2014/23/EU (see Art 10(3) thereof).

The first clarification required from the ECJ in the Hörmann Reisen Judgment concerned whether Art 5(1) Reg 1370/2007 excluded the application of Art 4(7) of the same regulation to the award of bus and tram service contracts due to their subjection to Directive 2004/18. In that regard, the ECJ clearly indicated that

41 ... for the purposes of the award of a contract for public passenger transport services by bus ... solely the provisions of Article 5(2) to (6) of Regulation No 1370/2007 are not to be applied, whereas the other provisions of that regulation remain applicable.
42 ... Article 4(7) of Regulation No 1370/2007 applies in the event of the award of a contract for public passenger transport services by bus coming within the scope of Article 5(1) of that regulation (C-292/15, paras 41-42, emphasis added).

That is important because the approach to subcontracting in Reg 1370/2007 and in the general procurement rules was diametrically opposed. While Reg 1370/2007 aims to restrict or even completely exclude the possibility to subcontract, the scant rules in Art 25 Dir 2004/18 were, if anything, facilitative of subcontracting. It must be borne in mind that the ECJ had itself pushed for such facilitation in Siemens and ARGE Telekom (C-314/01, EU:C:2004:159), where it indicated that the general procurement rules did

... not preclude a prohibition or a restriction on the use of subcontracting for the performance of essential parts of the contract precisely in the case where the contracting authority has not been in a position to verify the technical and economic capacities of the subcontractors when examining the tenders ... (C-314/01, para 45).

It, however, declared that a complete ban on subcontracting would not be compatible with the general EU procurement rules inasmuch as it prevented a service provider from relying on the resources of entities or undertakings with which it is directly or indirectly linked; or, in other words, "[a] tenderer claiming to have at its disposal the technical and economic capacities of third parties on which it intends to rely if the contract is awarded to it may be excluded only if it fails to demonstrate that those capacities are in fact available to it" (C-314/01, para 46). Therefore, the prohibition on subcontracting was limited to a prohibition on post-award (unchecked) subcontracting, but did not allow for the exclusion of service providers on the basis that they would not carry out the entirety of the contract themselves.

In Hörmann Reisen, the ECJ saves the open incompatibility of approaches between Reg 1370/2007 and Dir 2004/18 as follows:

46 ... it should be noted that Directive 2004/18 ... is of general application, whereas Regulation No 1370/2007 applies only to public passenger transport services by rail and road.
47      In so far as both Article 4(7) of that regulation and Article 25 of Directive 2004/18 ... contain rules on subcontracting, the view must be taken that the first provision constitutes a special rule with respect to the rules laid down in the second provision, and, as a lex specialis, takes precedence over the latter (C-292/15, paras 46-47, emphasis added).

This simplified things under Dir 2004/18. However, the relevant question now is whether the same lex specialis derogat generalis approach is desirable or indeed suitable for the coordination of the rules of Reg 1370/2007 with Dir 2014/24, which is required since 18 April 2016. There are a few important points to note concerning the new rules on subcontracting in Dir 2014/24.

Firstly, the ARGE case law concerning the illegality of a prohibition of subcontracting on the basis that it deprived the rules on reliance on third party capacities from effectiveness has now been partially modified in Art 63(2) Dir 2014/24. According to this rule,

In the case of works contracts, service contracts and siting or installation operations in the context of a supply contract, contracting authorities may require that certain critical tasks be performed directly by the tenderer itself or, where the tender is submitted by a group of economic operators as referred to in Article 19(2), by a participant in that group.

This does not deactivate the ARGE case law entirely and the scope of the provision will crucially rest on the future interpretation of what are 'critical tasks', which I consider needs to be subjected to a restrictive interpretation and a strict proportionality analysis. I have criticised this rule elsewhere and for other reasons [A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 315 and ff] but, in terms of coordination between Reg 1370/2007 and Dir 2014/24, Art 63(2) Dir 2014/24 seems to offer the perfect fit for the requirement in Art 4(7) Reg 1370/2007 to be imposed without restrictions. In other words, had the Hörmann Reisen case been subjected to Dir 2014/24, I think the ECJ would have no need whatsoever to create a lex specialis argument, which makes me wonder if this was the best approach overall (at least from a strategic point of view).

Secondly, it should be borne in mind that the limited rules of Art 25 Dir 2004/18 have been significantly expanded in Art 71 Dir 2014/24 on subcontracting, mainly with the purpose of both strengthening the contracting authorities' power to assess subcontracting arrangements where these are allowed and planned to take place, as well as to improve the legal position of subcontractors vis-a-vis the contracting authority (which now could, in specific circumstances, bypass the main contractor in order to ensure compliance with relevant obligations--notably, direct payments). Here, an incompatibility of the additional rules with Art 4(7) Reg 1370/2007 seems difficult to identify.

Thus, in my view, the Hörmann Reisen Judgment needs to be read in a minimalist fashion and construed to simply indicate that the general procurement rules cannot prevent a contracting authority that awards (non-concession) contracts for the provision of bus and tram services from prohibiting subcontracting or, in other words, requiring the transport operator from discharging all contractual obligations directly and in full--that is, they may come to deactivate a strict interpretation of Art 63(2) Dir 2014/24 in the transport sector only. Similarly, the Hörmann Reisen Judgment can be seen to dictate that general procurement rules  cannot alter the way in which a contracting authority in the transport sector that allows for subcontracting imposes restrictions so as to ensure that the operator entrusted with the administration and performance of public passenger transport services performs a major part of the public passenger transport services itself. However, I would not consider it a proper reading to exclude the applicability of the remainder of the rules in Art 71 of Dir 2014/24, notably because they do not seem incompatible with Art 4(7) Reg 1370/2007.

 

NHS England [On-going] Consultation on management of conflicts of interest

Following the National Audit Office (NAO) 2015 Report on Managing conflicts of interest in NHS clinical commissioning groups, which led to a revision of NHS England's Statutory guidance on managing conflicts of interest for clinical commissioning groups in June 2016, it is interesting to note that the on-going [closes on 31 October] public consultation on the broader issue of Managing conflicts of interest in the NHS includes a section on conflicts of interest in procurement.

The management of conflicts of interest in procurement is an interesting area of growing practical relevance, but also one where the law applicable to the activities of NHS England is increasingly complex and in need of consolidation (see the main findings of a recent research project I carried out at the University of Bristol Law School here). In that context, the adoption of additional guidance seems appropriate, although it should be carefully designed to ensure that it does not conflict with mandatory legal requirements.

The Managing conflicts of interest in the NHS consultation document is interesting in many aspects and puts forward a rather specific and quite polished view of the need to increase the transparency of both the rules and the decisions concerning the management of conflicts of interest across the activities of the public health system in England. However, it also contains some principles and rules which, in my view, could be improved and I hope that they will be revised as a result of the public consultation. With that aim, I have submitted a response to the consultation, which I am happy to share with anyone interested via email (a.sanchez-graells@bristol.ac.uk). I would also encourage anyone with a couple of hours to spare to contribute to the public consultation before it closes on Monday.

I will write again about this once the final recommendations of the Task and Finish Group of experts are published.

things that make me love my job - A little ultimatum game

There are many little things that make me love my job as an academic and (almost) forget about the big pressures it comes with. One of them is the possibility to teach subjects I find interesting and intellectually stimulating, such as Economic Analysis of Law, and to engage with students in interactive seminars. In a recent cycle of such seminars, I got my students (all of them 2nd and 3rd year undergraduates) to play a variant of the ultimatum game. It went as follows.

I told them to pair up and decide who would play first and who would go second. I then explained my version of the game. I (symbolically only) offered them £10 to play with. If they reached an agreement on how to split them, they would (theoretically) keep the money and split it the way they decided. If they disagreed on the split, I would keep the money. When they "played", they had to offer their partner a split of the £10 bill (going anywhere in the range between £0.01 and £10) and the partner could only accept or reject the split. They could not negotiate. In order to try to avoid issues of reciprocation or retaliation, I got them to write down separately and confidentially their offer and asking values.

The overall results of the game were interesting. We had 76 games in total (38 pairs of players) and 58 of those were successful (ie a 76% success rate). Only 18 games (24%) resulted in no agreement on a split of the £10 bill.

It is also interesting to look at the descriptive statistics of the game. Most players opted to offer a £5/£5 split and most of them also expected to be offered a £5/£5 split. This is not an uncommon practical result of the game, but it is certainly not what one would expect from a theoretical perspective.

The game led to very interesting conversations about rationality / irrationality / utility / happiness / fairness / the usefulness of law and economics 1.0 and the promises of law and economics 2.0, and a few other things. In short, a highly rewarding teaching experience. Worth sharing (I hope).

 

Launch of the Procuring for Growth Balanced Scorecard - Some Initial Thoughts

The UK's Crown Commercial Service and Cabinet Office have launched a new scorecard system to "use its huge purchasing power to help support economic growth" (emphasis added). Ultimately, the UK Government considers that it "can play an important role in supporting economic growth by helping to level the playing field through the way it buys public goods, works and services. It can maximise the economic benefit of what it spends through public procurement, directly through the outcomes of major investments or by playing a catalytic role in the development of supply market capabilities and competitiveness through the way it designs its procurement and requirements" (emphasis added). Quite frankly, and already from the outset, I struggle to understand the reference to levelling the playing field in any terms that do not hint at protectionism of the local industry as a means of promoting (domestic / local) economic growth (which is also a claim open to contention).

In very similar lines, they also indicate that the aim of this policy is "to maximise the value of taxpayers’ money through public procurement in a way that supports economic growth by ensuring that full value for money is taken into account. The Public Contracts Regulations 2015 provide greater clarity on how broader policy considerations, such as social and environmental factors, may be integrated into procurements. Taking account of relevant broader policy considerations will help to ensure value for money is fully considered and reflected in the procurement process where appropriate, contributing to economic growth in the UK" (emphasis added). Thus, there seems to be a rather strong link between the aim of promoting economic growth in the UK and the inclusion of social and environmental considerations. Certainly, smart procurement can contribute to economic growth (for example, by investing in infrastructure that enables the emergence of new economic activity) but this is an issue on decisions of what to invest in / what to buy, rather than decisions on how to buy it / who to buy it from. In my view, the whole policy seems to focus more clearly on the second type of questions, which should raise some flags concerning its compatibility with EU law.

In that regard, a maybe cynical remark is that the policy comes with an excusatio non petita when it stresses that "On 23 June, the EU referendum took place and the people of the United Kingdom voted to leave the European Union. Until exit negotiations are concluded, the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force. During this period the Government will continue to negotiate, implement and apply EU legislation". This was not necessary at all. It could be seen as a hint that the Government is trying to already implement "Brexit-aligned policies" (whatever that means) within the (recognised?) constraints of EU law. Two points here. One, if everything in this policy is EU compliant, what is the point of mentioning Brexit? And two, if everything that the policy aims to do is EU compliant, then is there any reason to believe that the Government will change its procurement policy in any meaningful way after Brexit actually takes place?

Regardless of those more general ideas, overall, it seems necessary to assess the new scorecard together with the also very recent CCS Guidance on social and environmental aspects of public procurement (Guidance on S&E aspects, criticised here), and, more generally, in view of the economic analysis of the effects that exercising such buyer power can create. 

Scorecard, Guidance on S&E aspects and EU procurement law

According to the press release

The new scorecard system has been designed to help ensure that major government procurements have a positive impact on economic growth, as well as achieving best value for the taxpayer.
The guidance ... introduces a balanced scorecard approach, which government departments should use in designing major works, infrastructure and capital investment procurements where the value is more than £10 million.
The scorecard helps procurers to consider the project requirements and needs, with criteria such as cost balanced against social, economic and environmental considerations.
By using this method, government departments can clearly set out how priority policy themes such as workforce skills development, small business engagement and sustainability may be integrated into their procurement activities.
This underlines to suppliers the overall impact that the department wants to achieve and signals how this will be assessed when considering individual tenders.
Each department should produce a project-specific balanced scorecard to be published with their procurement documentation.

The full scorecard paper provides additional details. It stresses that "A balanced scorecard (BSC) approach is a way of developing a procurement (e.g. the requirements and evaluation criteria) so that more straightforward matters such as cost, are balanced against more complex issues such as social and wider economic considerations" (emphasis added). This may seem to indicate that the BSC is actually a new method that aims to operationalise social and wider economic considerations in a way that makes them compatible with cost-based and legal requirements. 

However, an crucially, the document clearly sets out that "It is important to remember that nothing within the [BSC] guidance ... should be interpreted in a way that overrides or conflicts with departments’ obligations to comply with the PCR 2015, in particular departments’ obligations to determine whether potential requirements would be linked to the subject matter of the contract and proportionate to apply" (emphasis added). 

Thus, obviously, the scorecard cannot be seen to create more space for broader economic, social or environmental considerations than the applicable rules themselves. However, this raises the practical questions (a) why, if the BSC is nothing else than a method that needs to be assessed against regulatory requirements for the inclusion of social, environmental and broader economic considerations, it has been adopted separately from the Guidance on S&E aspects, and (b) to what extent the BSC is actually a useful tool for contracting entities beyond the mere formal aspect of formalising their tender / contract design analysis.

Moreover, the full scorecard paper runs the risk of misrepresenting regulatory requirements in the way that it pushes for the creation of discretionary space for the application of the BSC. Indeed, it stresses that

The EU Directive and the PCRS 2015 make clear that the award of contracts should be on the basis of the most economically advantageous tender (MEAT). The price or cost assessment part of the evaluation of bids must be on a whole life cost basis, and, as set out in the PCRs 2015, the entire cost-effectiveness of the project should be examined, not just the initial price. Cost-effectiveness can include the assessment of the cost of transport, insurance, assembly and disposal as well as costs over the life-cycle of a product, service or works, including: costs of use, such as consumption of energy and other resources, and maintenance costs; and costs associated with environmental impacts, including the cost of emissions (emphasis added).

In my view, this is problematic because Art 67 Dir 2014/24/EU and reg.67 PCR2015 do not actually impose an obligation to assess the price or cost on a "whole life cost basis" but simply allow contracting authorities to do so. This is recognised in technically more accurate terms in a separate piece of Guidance on awarding contracts also published by CCS in October 2016, where it is stated that "When a contracting authority uses cost as an award criterion, it should do so on the basis of a cost effectiveness approach. Life cycle costing (LCC) is an example of this approach, but contracting authorities are free to use other approaches" (emphasis added). 

Indeed, Art 67(2) Dir 2014/24 establishes that "The most economically advantageous tender from the point of view of the contracting authority shall be identified on the basis of the price or cost, using a cost-effectiveness approach, such as life-cycle costing in accordance with Article 68, and may include the best price-quality ratio, which shall be assessed on the basis of criteria, including qualitative, environmental and/or social aspects, linked to the subject-matter of the public contract in question" (emphasis added).

This requires that cost or price (ie cost-effectiveness) forms part of the award criteria (which is nothing new), and simply opens up the opportunity of adopting a life-cycle method, always provided that is in compliance with Art 68 Dir 2014/24, which in turn establishes that "Where contracting authorities assess the costs using a life-cycle costing approach, they shall indicate in the procurement documents the data to be provided by the tenderers and the method which the contracting authority will use to determine the life-cycle costs on the basis of those data." And additionally requires, amongst other issues, for that method to be "based on objectively verifiable and non-discriminatory criteria. In particular, where it has not been established for repeated or continuous application, it shall not unduly favour or disadvantage certain economic operators" (emphases added).

Therefore, unless contracting authorities have a pre-defined (and pre-published) methodology for the assessment of life-cycle costing (which they generally do not, at least currently), the award of contracts on the basis of "whole life cost" analysis is subjected to the double requirement that it focuses on requirements linked to the subject matter of the contract and is also not such as to unduly favour or disadvantage certain economic operators. In my view, this may be sufficient to disincentivise contracting authorities from aiming to actually award contracts on the basis of "self-made" life-cycle costing methods and the BSC may only be effective if such method was developed by the CCS itself for general use.

Further, it seems difficult to square the fact that, on the one hand, the guidance stresses that the BSC must be tailor-made to each procurement process (which would result in evaluation methods not designed for repeated or continuous application), while in that case the contracting authority must not only develop its own life-cycle costing methodology but also ensure that it does not result in an undue advantage of specific economic operators--which pretty much neutralises the incentive effects that the use of the BSC may be intended to create.

The detail of the BSC is also not helpful in that regard because it does include criteria that are discriminatory, such as "Number of UK jobs created or sustained by new government contracts" in terms of employment impacts; or the assessment of community benefits and legacy, which are more likely to advantage domestic contractors. In my view, contracting authorities will be in a difficult position when trying to translate these general criteria into legally-compliant and useful evaluation criteria that are not discriminatory.

 

More generally, on (ab)use of public buying power

The second perspective that is worth considering is that of the long-term effects of the Government's attempt to "use its huge purchasing power to help support economic growth". This reopens yet again the discussion on the desirability of the instrumentalisation of public procurement for extraneous policy goals. Suffice it to say here that (a) the inclusion of social, environmental or wider (community) requirements does not come free because it either raises bidders' costs or reduces competition, or both and (b) that the long term effects can be very significant in terms of reduced dynamic competition. This is an issue I have repeatedly raised (see here, for example) and a more structured analysis is available here

UK issues guidance on social and environmental aspects of procurement, but it is not very useful

The UK's Crown Commercial Service has issued Guidance on social and environmental aspects of public procurement carried out under the Public Contracts Regulations 2015 (see full commentary here), which transposed Directive 2014/24/EU into UK law. The Guidance on S&E aspects includes an overview of the use of procurement to further environmental and social considerations, stresses key points to consider, offers a list of measures that a contracting authority can implement in order to ensure compliance with environmental and social aspects (although it boils down to making sure that it obtains the right information from the contractor), has a list of FAQs and includes suggested contract clauses in its appendix B.

Overall, though, the Guidance on S&E aspects does not go much beyond the text of the relevant rules and, when it provides specific examples, it does not work out the limits derived from general principles of procurement and, most importantly, the requirement for a link to the subject matter of the contract and the implicit proportionality analysis [on that, see A Semple, 'The Link to the Subject-Matter: A Glass Ceiling for Sustainable Public Contracts?']. Thus, in my opinion, the Guidance on S&E aspects is bound to not to be of much practical assistance to contracting authorities.

In uncontroversial terms, the Guidance on S&E aspects stresses that the new Directives "have clarified that contracting authorities may consider incorporating social, ethical and environmental aspects into specifications, contract conditions and award criteria. In addition specific rules have been included for handling abnormally low tenders, and on the exclusion of suppliers who have violated certain social, labour and environmental laws." It also stresses the new light touch regime for social and special services (on which it has also published guidance), as well as the possibility to reserve contracts for sheltered workshops as tools for the inclusion of social aspects in procurement. 

It then goes on to list the rules it considers relevant for the design of social or environmentally-oriented public tenders and goes on to discuss the flexibility they create, including all stages of the procurement process. It includes some useful guidance on the context within which checks of compliance with labour standards need to be carried out by indicating that "It is the law of the country where the work or services are taking place that is relevant. If services are provided at a distance, for example call centres, then it is where the call centre is located and the employees’ work that is key rather than the country to which the services are directed. Consequently a tenderer may only be excluded from a tender for non-compliance with labour law if that labour law is the law of the EU Member State in which the employees are working". This is correct and in line with the recent case law of the ECJ in Bundesdruckerei and in RegioPost. However, it does not provide guidance on the next step of practical difficulty, which concerns the ways in which a UK-based contracting authority can (or not) check compliance with, for example, Spanish employment law and labour standards. 

Moreover, in key aspects such as the use of labels, the use of award criteria, the requirements linked to fair trade certification or life cycle costing methodologies, the Guidance on S&E aspects simply summarises the rules in the PCR2015 and Dir 2014/24, and offers very generic or too open-ended examples. 

For example, it indicates that "Fair trade requirements related to the contract subject matter may be included as a contract award criterion, including the requirement to pay a minimum price and price premium to producers, provided they meet the principles [of proportionality, non-discrimination and transparency]". Or that "Award criteria may include environmental and / or social aspects that relate to any respect and any stage of a life-cycle of the requirements as long as they relate to the subject matter of the contract, namely the works, supplies or services provided under the contract. For example, requesting confirmation that the production of an item did not include toxic materials, or services were and are performed using energy efficient machines, resource efficiency and waste minimization".

This limited level of detail in the examples does not provide very effective guidance. Some of these issues could have been addressed at the level of setting technical specifications and the Guidance on S&E aspects does not include any suggestion of how should contracting authorities decide to go down one or the other route. It could, for example, have stressed that the use as technical specifications (particularly if linked to labels) will imply a pass/no pass assessment, whereas the use as award criteria will allow for a more nuanced approach that allows the contracting authority to balance those considerations with other aspects of the offer (and, very clearly, its price). Moreover, both examples given in terms of life-cycle requirements could be challenged on grounds of proportionality and/or lack of specificity. Thus, the Guidance on S&E aspects may end up creating more uncertainties than intended.

The Guidance on S&E aspects is also confusing because it further indicates that contracting authorities "could, for example, include Fair Trade requirements as contract performance conditions where they are linked to the subject matter of the contract. (See [above] for more details on how fair trade, can be taken into account at an earlier stages)". Reading all this together makes one wonder what additional fair trade requirements could be included as contract compliance requirements that were not already either product specifications (either via labels or as self-standing requirements) or award criteria. They would seem to be linked to employment or labour standards during the execution of the contract, but then this is not necessarily consistent with the part of the guidance mentioned above that clearly stresses that an analysis of those issues is dependent on the jurisdiction where the work is being performed. It also does not address whether this is dependent on that jurisdiction being in the EU, a country covered by the WTO GPA, or otherwise. This does not contribute in any meaningful way to reduce the uncertainties in this area.

It is also worth stressing that the Guidance on S&E aspects also contain some controversial issues regarding the inclusion of social considerations in procurement. That is the case of the reference to the additional guidance on Steel procurement in major projects, which I do not necessarily consider as leading to practices 100% compatible with EU law (see also Pedro Telles' criticism here). The stress put in that additional Steel guidance on issues such as transportation costs and effects on employment and health and safety can clearly be interpreted and used as measures equivalent to non-tariff barriers to trade (in steel), which were coincidentally adopted at the time when the British steel industry was under great international pressure due to its loss of competitiveness. The significant drop in the value of the British pound that has followed Brexit may now have made this redundant, but the fact remains that the (soft) Buy British Steel policy created by that additional guidance had clear protectionist elements.

Further, there are "clarifications" that can lead to the creation of the wrong incentives for tenderers. A case in point is the answer to the following question: "Why is it mandatory to reject an abnormally low tender when it has been proved that costs are low because the tenderer has not complied with environmental, social or labour laws (regulation 69(5)), but only optional to decide not to award a contract when it is proved that the tender does not comply with environmental, social and labour laws (regulation 56(2))?". This is actually a legitimate concern and, in my view, indicates that jurisdictions that want to be serious about smart or sustainable procurement should have made the discretionary exclusion ground mandatory for contracting authorities, as Directive 2014/24 permits. What I find puzzling is CCS' answer to this question in the Guidance on S&E aspects, where it indicates that:

These two are similar in that they both breach the requirement to comply with the applicable environmental, social and labour laws, however, the difference lies in the effects of this non-observance: normal pricing in one case and abnormally low in the other (sic). Tenders that are abnormally low because they are not observing environmental, social and labour laws can lead to ‘social dumping’ and therefore they must be rejected. Where the pricing is normal, the risk of ‘social dumping’ is reduced and the contracting authority has the option to award the contract if it considers the non-compliance is tolerable, or if it works with the supplier to ensure compliance going forward (sic). The UK Government’s policy is that contracting authorities must take appropriate measures to ensure compliance throughout the procurement process. Contracting authorities have flexibility to determine those measures on a case-by-case basis. CCS strongly recommends that when contracting authorities are exercising their option whether or not to award a contract to a tenderer that does not comply with environmental, social and labour laws, that the contracting authority takes note of overarching procurement policy and statutory requirements and carefully considers the potential damage to the environment and society before accepting such a contract (footnotes omitted and emphasis added).  

I find at least two aspects of this answer problematic. First, I do not understand the link that CCS creates between non-compliance and 'normal'/abnormal pricing. If the company infringing labour, social or environmental standards has the right information (and transparency in procurement will generally facilitate that), it will be able to engage in limit pricing so as to avoid an investigation of abnormality of its tender while still undercutting compliant companies. By not rejecting tenders that appear to have 'normal' prices where there is evidence of infringement of the relevant rules, the contracting authority is actually encouraging this doubly-damaging behaviour of legal non-compliance and artificial creation of financial margins to cover for the effects of non-compliance (and/or to extract additional rents derived from non-compliance). Thus, this does not seem to me to make any economic sense.

Second, because the contracting authority cannot "work with the supplier to ensure compliance going forward", or at least not in all cases, because this would potentially imply substantive modifications of the tender and the contract, which can fall foul of a number of additional requirements in the PCR2015 and Dir 2014/24/EU, not least the principle of transparency and equal treatment. Overall, then, I think that the Guidance on S&E aspects offers a wrong and dangerous answer to this question and I would rather see it modified to ensure that contracting authorities do not create perverse financial incentives and do not breach basic procurement guarantees, even if they are acting on the good intention of promoting compliance with otherwise breached social, labour and environmental standards.

Finally, it is worth focusing on the suggested contract clauses for social and environmental issues included in Appendix B. There are clauses concerned with sub-contracting, but those create the same shortcomings as the general clauses, so it is worth focusing on the clause  giving the Authority the right to terminate if the Contractor fails to comply with social, environmental or labour law obligations. It has two options:

Option 1 (free-standing) The Authority may terminate this Agreement [with x months’ notice] if the Contractor fails to comply in the performance of the Services with legal obligations in the fields of environmental, social or labour law.
Option 2 (where there is a defined Supplier Termination Event giving the Authority the right to terminate) Add to definition of Supplier Termination Event - (..) a failure by the Supplier to comply in the performance of the Services with legal obligations in the fields of environmental, social or labour law.
NOTE: in either case the consequences of termination must be considered in the light of the other provisions in the contract.

I find these suggested contract clauses of very limited use. First, because they fail to determine which obligations in the fields of environmental, social or labour law are those that can trigger termination, as well as which evidence of infringement will be required. Second, because it is not clear whether the breaches refer to the execution of the specific contract (in which case there is a closer link to the subject matter) or the general activities of the contractor (in which case there could be issues around the proportionality of the requirement, in particular if the "legal obligations in the fields of environmental, social or labour law" are some that could not have been included in the contract as specific contract compliance requirements, for example). And third because there is no attempt to establish links to other necessary mechanisms to give effectiveness to these clauses, such as information obligations or potential certification by third parties.

Overall, I find the Guidance on S&E aspects rather poor and I would think that contracting authorities will be better off by relying on the European Commission's guidance on buying green and buying social which, despite its own shortcomings and need for an updated in the case of social aspects, have a more practical orientation.

Brexit, the limits of law and legal scholarship

Brexit has created a very troubling and destabilising environment for legal researchers in the UK and beyond. This is particularly true for those directly concerned with EU and international law, as well as constitutional and public law, but it is quickly expanding to all other areas of legal scholarship, such as human rights law or jurisprudence. Brexit has created shock waves that will continue to hit legal academia at least for the coming 5 to 10 years, and not only in terms of its focus as a discipline.

This not only jeopardises the development of previous research plans and the completion of on-going research projects, but also exposes the limits of law and legal scholarship in a way that I considered unimaginable before 23 June 2016. But then, most of what Brexit has brought had never crossed my mind or seemed outlandish. The following are just a few thoughts of what really worries me at the moment, not only as an EU lawyer, but more generally as a legal scholar. Of course, I am also an EU citizen living in the UK, which adds one layer of implications for me personally. However, I hope I can disentangle both dimensions.

Hard Brexit as a coup against the rule of law

We have been waiting all summer for the dust of the referendum to settle and to see what the UK Government and the UK Parliament made of the result and how they formulated their strategy going forward. What is starting to emerge, particularly from the Government's approach and its toying with the idea of a hard Brexit, is worryingly taking the shape of a coup against the rule of law. It is also starting to encapsulate xenophobic and racist elements of the Brexit campaign that are now presented as reasonable policy choices within mainstream movements, rather than being denounced as extreme and contrary to the very basic values of British society--unless they are now made to represent what they seemed to stand against until very recently.

There is an absolute disregard for the acquired rights of millions of people and the rhetoric that no basic protection is guaranteed and all individual and collective rights are on the table and prone to be used as bargaining chips simply goes against basic principles of legal certainty, prohibition of retroactive effects of rules that significantly impinge on individual rights, good faith and sincere cooperation duties under EU and international law. And the troubling part is that the mechanisms that would ordinarily protect those rights and these principles--mainly, cases brought before the Court of Justice of the European Union and the European Court of Human Rights--would not only be too slow off the Brexit mark, but also unlikely to provide effective protection against the actions of what is emerging as a bully State (or at least a bully Government) willing to disregard any legal consequences of its ill-thought policies.

Some of this is not strictly speaking a Brexit byproduct, but a result of the added or twin process of departure from European human rights instruments and standards. It is also compounded by the complexities of UK (unwritten) constitutional law and the absence of a domestic constitutional court strictly speaking, which starts to paint a scenario where the UK Government seems to believe that it can shape the future system of protection (or less) of human rights in the UK without any constraint or respect for the status quo. For a country that promoted human rights internationally in the past, this is such a return to the cave that it is hard to believe that this is actually happening. And the UK highest courts seem to be the only ones (potentially) able to bring a torch to the cave and force the Government out of it. Whether they will do it, or at least pass the issue on to Parliament, is everybody's guess.

"The first thing we do, let's kill all the lawyers" ~ William Shakespeare's Henry VI. 

As lawyers and legal scholars, we are now under the double attack and accusation of being both experts and agitators of the public space. What I would have thought were two of the most precious treasures legal academia and legal practice can protect (knowledge and independence of action) seem to have turned against us. We had to endure the Lord Chancellor and Secretary of State for Justice spit in our faces that “people in this country have had enough of experts”. The Prime Minister now also wants to protect the British Army (and Government, ultimately) from "activist left wing human rights lawyers"--but, not necessarily because of their ideology, but because they "harangue and harass" Britain's armed forces.

It is obvious that having a dissenting voice (particularly if it is informed and shouts evidence-based arguments), or contributing to the proper functioning of the system of checks and balances that a State based on the rule of law depends upon, now make you a public enemy. This really worries me because legal academia (and legal practice, but maybe to a lesser extent) will now be pushed towards a dangerous path to potentially becoming a place of fear and suppression of ideas and arguments that run contrary to what is now accepted as the official discourse or the policy of the day. We need to react against this and do it quickly, firmly and with all our intellectual might. If we fail to do this, there should be no need to kill all the lawyers, because we will (or should have) committed intellectual suicide already.

Brexit as Moby Dick

The final aspect that really worries me is that we will now probably be obsessed with Brexit. And to some extent we will have to if we are to discharge our moral and social duty of resisting the coup against the rule of law and against legal academia and practice as their stewards--against legal scholars and jurists as a collective that must contribute to keeping the Government in check under the rule of law. But this is very likely to also become our white whale, a permanent chase in a run with a moving finish line, something that is so much bigger than us and our capacities that eventually exhausts us and makes us drown (or feel we are drowning).

This obsession will also impoverish our legal scholarship beyond Brexit and drain our energy and absorb our time in ways that will make us stop pushing the boundaries of knowledge we were exploring before 23 June 2016. This is, in itself, one of the Brexit tragedies. By creating this black hole of legal problems and this immense pressure on the structures for the creation and dissemination of legal knowledge, Brexit has already put a heavy burden on law and legal scholarship. Like the value of the currency, which has been on free fall and already moved back the equivalent of almost the entire span of my lifetime, this will take very many years to recover, and I worry that it may never reach the level it had before the Great Repeal Bill was announced.

A final thought

I wish I got all of this wrong. If I have, then ignore it. Treat it as the dark thoughts of someone too personally affected by Brexit. But if I haven't, then please see this as a call for action. Join the conversation, so we can collectively think about ways of getting out of this.

Eversheds publishes report on transposition of procurement rules & interesting (guess)timates about procurement litigation in 20 jurisdictions

Led by Tomasz Zalewski, the procurement team at Eversheds has put together the report "Flagging up the big issues. EU procurement reform guide 2016", where they provide short updates / country reports on the process of implementation of the 2014 Public Procurement Package in 19 EU jurisdictions and in Switzerland. This is a very interesting source of information because it not only offers an update on the process of implementation, but also flags up the most relevant issues and difficulties in the transposition process in each jurisdiction, and includes an Eversheds team's guesstimate of the volume of public procurement litigation in each jurisdiction. This data, even if used with great caution, allows for some reflections.

Transposition

On the point of the status of the process for the transposition of the 2014 Public Procurement Package, the Eversheds report confirms that a significant number of EU countries are late in the transposition of the new rules. No surprises here. As mentioned by a Commission representative in a conference last week, only 11 Member States have transposed all the Directives in the 2014 Public Procurement Package so far and, as of last week, there were 58 (potential) infringement proceedings on the table of the European Commission.

More interestingly, the Eversheds report allows us to get some additional detail (see table below) and this comes to show that the information communicated by the Member States to the European Commission on whether they have adopted (partial) transposition measures for Directives 2014/23, 2014/24 and 2014/25 is not necessarily completely reliable.

For example, Spain has notified measures transposing Directive 2014/24, while that transposition has not actually taken place (to any meaningful extent, anyway). Conversely, Ireland has transposed both Directives 2014/24 and 2014/25, but this is not reflected in Eur-lex. Moreover, a number of Member States have formally transposed the 2014 Public Procurement Package or parts of it, but the reform is not in force due to the need to further executive orders, implementing regulations or other types of secondary legislation (this is clearly the case in Belgium and Italy, but to some extent affects a larger number of jurisdictions where the application of the new rules depends, at least in practice, on additional legislation or guidance). 

In my view, this triggers a significant issue on the accuracy and quality of (qualitative) information about the transposition of the 2014 Public Procurement Package (and Directives, more generally) and the European Commission will be well advised to accelerate work on transposition monitoring (for which it recently tendered a consultancy contract).

Litigation

The Eversheds report is also interesting regarding the picture it offers on the volume of litigation in the area of public procurement. Previous information published by the European Commission in its 2011 Evaluation Report on the Impact and Effectiveness of EU Public Procurement Legislation offers a benchmark for comparison. However, given the time lag between the reported data and the seemingly different types of cases encapsulated in each of the reports, the overview does not necessarily help in getting an understanding about litigation trends, either in each of the jurisdictions or in the EU overall. However, major differences between jurisdictions seem clearly identifiable and a stable trend over the last decade or so. This is puzzling but important in the context of the (abandoned) reform of the Remedies Directives, on which the European Commission is expected to issue a final position soon (for background discussion, see here and here).

Overall, the Eversheds report seems to indicate that countries with and without specialised administrative review bodies or specialised administrative courts show a very different volume of public procurement litigation or, at least, that having such review mechanisms makes the litigation visible--as other jurisdictions, such as the UK (Eng & Wales) or Ireland, probably rely on informal dispute resolution mechanisms (and settlements) to a larger extent, which makes an assessment of the actual litigiousness of public procurement difficult to carry out in a comparable manner.

Final Thought

I think that the Eversheds report must be welcome and it would be useful if others could complement the information for the missing EU jurisdictions. Collection of (reliable) evidence is a big hurdle for sensible public procurement reform. This report sheds some light on important aspects and, even if it needs to be considered carefully due to the lack of common methodology and necessarily impressionistic aspects of a document that is not meant to provide legal advice, it must be welcome that a commercial law firm is willing to take this step and share its procurement intelligence with all of us. I for one would welcome others to follow suit.

A strange Scottish case on evaluation of tenders -- Boston Sci. Ltd v Common Service Agency [2016] CSOH 132

I find the recent Scottish case Boston Scientific Limited v The Common Service Agency [2016] CSOH 132 most confusing. This is a case of healthcare-related procurement whereby the Scottish NHS' central purchasing body, the Common Service Agency, was tendering framework contracts for the supply of certain types of medical equipment--for simplicity, pacemakers and implantable defibrillators.

The litigation concerned the applicable award criteria and the ensuing evaluation of the tender submitted by Boston Scientific Limited. Even if the case seems to be decided mainly on procedural grounds (the claimant, or pursuer in Scottish terminology, seemed to have been time-barred in raising a challenge against the published award criteria), it raises substantive issues that, in my view, should have been dealt with differently by the Court.

The tender had been advertised and the relevant invitation to tender (ITT) had published the applicable award criteria. For each of the lots in which the framework agreement was to be divided, the tenders would be assessed against a pass/fail criterion of essential features (ie mandatory technical specifications) and then evaluated on a 60:20:20 split of the maximum score of 100. The offered price would carry a 60% weight, whereas two quality criteria would carry 20% each: (a) the inclusion of certain defined desirable features and (b) the longevity of the devices.

The challenge was based on Boston Scientific's submission that the assessment of the longevity of the pacemakers must have been wrong. In a nutshell, Boston Scientific claimed that their position as market leaders and the existence of independent tests that demonstrated that their devices had a very long individual life led them to the conclusion that 'there must have been a failure to compare like with like because if there had not been such a failure [Boston Scientific] would have had the highest longevity scores' [para 15]. In short, the tenderer was not convinced that its competitors could (truthfully) have offered devices with a superior longevity.

Boston Scientific's submission of improper technical evaluation of the tenders is complicated by two additional factors. First, that tenderers had only been asked to declare (or self-certify) the longevity of their devices without providing any supporting evidence. Second, that the criteria applicable to the evaluation of the longevity component were not all that clear.

Self-certification of verifiable technical characteristics?

On the first issue, the complaint considers that the contracting authority was not allowed to include as award criteria elements based on pure self-declaration and which it intended not to verify. Indeed, the case seems peculiar because the Common Service Agency 'had stated clearly prior to the date for submission of tenders that supporting evidence was not sought.  It had protected itself in a different way by making clear that the framework agreement would include a clawback provision if battery life fell short of the figure submitted in a tender' [para 18].

This seems to me to be a peculiar way of conducting business because the longevity of devices that need to be implanted in the human body seems a rather important technical characteristic (as submitted by Boston Scientific, but dismissed by Lord Tyre in his Opinion, despite the relevance of this issue for the purposes of EU consumer law as discussed here), and the abrogation of the power to check compliance with technical specifications in this regard seems odd, regardless of the inclusion of financial penalties in the contract. The Judgment relies on two English precedents that would support the legality of relying on self-certification of compliance with contractual terms. Most importantly, it ignores the EU precedent in EVN and Wienstrom (C-448/01, EU:C:2003:651), to which one of the English cases refers, though. A reference to EVN paras [50]-[51] would have sufficed to quash the award procedure (I am thankful to Karen Wontner and Erik Plas for having raised this point in private correspondence).

First, Lord Tyre relies on Public Interest Lawyers v Legal Services Commission [2012] EWHC 3277 (Admin), Cranston J at para [64] to justify the acceptability of self-certification. However, in my view, this precedent is inapplicable here. First, because it concerned an on-going requirement to be discharged during the execution of the contract (ie an element closer to a contract performance clause than a technical requirement) but, most importantly, because in the previous paragraph of that speech Cranston J stressed that 

... the principle behind its decision was the need to ensure the equal treatment of tenderers through the objective and uniform application of the criteria in their assessment. The principle applies whether or not the public authority is able to verify the criteria. If it is able but omits to do so, that is as much a breach of the duty as if it sets criteria which cannot be verified. That is because the outcome may be an inequality of treatment of tenderers through the equal treatment of unequals, i.e. the equal treatment of those meeting and those failing to meet the tender requirements. After all, it is trite law that equality of treatment means not only treating like cases alike but unlike cases differently [at 63].

And this led Cranston J [at para 65] to insist on the need for robust verification where the contracting authority relies on self-certification by the tenderers. This is important in the context of the Boston Scientific v Common Service Agency dispute because, this case, 'Although it was accepted that in some cases a contracting authority might have a duty to validate information provided by a tenderer, this was not such a case. The defender did not have the means to verify independently the figures for longevity provided by tenderers' [para 18]. The issue here would have been whether this inability of independent verification (a) covered a complete lack of engagement with existing technical information and (b) was not attributable to the contracting authority itself and its decisions on how to organise the procurement procedure. Generally, one would expect that the entity running framework contracts for medical supplies has (or has access to) necessary technical knowledge in any case. Thus, this point of the case remains obscure and, in my opinion, shows excessive deference to the contracting authority.

Second, Lord Tyre relies on Parker Rhodes Hickmotts Solicitors v Legal Services Commission [2011] EWHC 1323 (Admin), McCombe J at paras [35]-[40], which in turn refers back to Public Interest Lawyers v Legal Services Commission. The difficulty with this second case is that its ratio rests on the construction or interpretation of the tender documentation, rather than an assessment of the requirements of the principle of non-discrimination of tenderers--which was the legal basis for the challenge in Boston Scientific. Importantly, in Parker Rhodes, the relevant part of the Judgment focuses on the fact that the Information for Applicants (IFA) document had not indicated how the contracting authority would proceed to verifying specific aspects of the offers, which the Court considered to cover the possibility of relying on self-certification.

To me, this makes both precedents irrelevant for (if not contradictory to) the assessment of the claims raised by Boston Scientific, which aimed to strike down the procurement process on the basis that the contracting authority had appended a significant weight to a criterion it actually decided not to verify at all. In my view, there are good arguments under the principle of good administration (Art 41 CFR) to demand that contracting authorities only evaluate what they can assess and, even more, that they do not claim not to be in a position to assess technical characteristics of the products they are buying--if nothing else, by reliance on the rules on test reports, certification and other means of proof (now under Art 44 Dir 2014/24/EU). 

Longevity, price, both or none of the above?

Additionally, and focusing on the point of the need to construct or interpret the tender documents as published, the second argument raised by Boston Scientific deserves attention as well because, indeed, the criteria applicable to the evaluation of the longevity component were not all that clear. In that regard, it must be noted that the ITT had established that:

In relation to longevity, the tender receiving the highest total longevity score would receive 20 points.  Each other tender would receive “20‑X points where X = 0.2 x the percentage by which each price in each tender exceeded the lowest price tender achieving the lowest total price score” (Boston Scientific v Common Service Agency, para [5], emphasis added).

This seems odd because the criterion that is aimed at scoring longevity is (or, at least, seems to be) referential to the price of all tenders except that of the tender with (self-certified) longer individual device life. In my view, this is a breach of the general scoring rule included in the ITT, according to which price would carry a weight of 60%. This would not be true except for the tender self-certifying highest longevity, and all other offers' price would be taken into account twice (once for the price component itself, and a second time for the scoring of longevity). This is, simply, technically incorrect and, in my view, should have sufficed to cancel the tender.

However, this does not seem to be the whole story and a mistake must have happened in the preparation of the ITT (there seems to be an obvious explanation if one thinks in terms of copy and paste ...) because, in a debriefing letter, the contracting authority had indicated to Boston Scientific that:

The weighting for Longevity was 20% therefore in each lot the longest longevity submitted received 20 points. The scoring guidance in section 3.3 clearly identifies the points allocated to longevity and how the tender would be scored ... (i.e. if one product had longevity or 100 months (longest) it would score 20 points and if a different product submitted had a longevity of 50 months it would score 10 points)  (Boston Scientific v Common Service Agency, para [10], emphasis added).

Now, this is the natural understanding of a relative scoring for longevity, but it happens not to be the scoring rule disclosed in the ITT, which made reference to relative prices rather than relative longevity. Such a substantial deviation between disclosed scoring rule (even if absurd) and its application seems to run against the basic requirements of the principles of transparency and equal treatment, as recently recast by the Court of Justice of the European Union in TNS Dimarso (for a comment, see here).

In my view, this should also have been taken into account by the Court and, rather than dismissing the challenge, Lord Tyre should have sought to understand better whether the longevity criterion had been assessed as the debriefing letter said, or rather as the ITT established (which could have led to abnormal results ultimately preventing Boston Scientific from making much sense of the scores obtained). Most likely, a divergence between the published scoring rules and the actual evaluation of the tender should have led to a cancellation of the award in any case.

Overall, I think that there are two main problems with the Judgment in Boston Scientific v Common Service Agency, and both of them seem to me to result from a lack of engagement with the case law of the Court of Justice of the European Union by the Scottish court. First, because it is truly abnormal to allow for self-certification of a technical requirement that can be assessed and verified by the contracting authority--at least, by reference to technical documents. Second, because it is also truly remarkable that a contracting authority can evaluate tenders in a way that deviates from the published criteria without the reviewing court picking up on this important aspect (or anomaly) of the process. Ultimately, in my opinion, this is a strange case. But also a very technically deficient Judgment and an incorrect decision.

ECJ confirms that procurement rules do not apply to licences or authorisations (“concessions”) for betting and gambling services (C-225/15)

In its Judgment of 8 September 2016 in Politanò, C-225/15, EU:C:2016:645, the European Court of Justice (ECJ) followed the Opinion of Advocate General Wahl (see here) and confirmed that the 2004 procurement rules were not applicable to a public contest for the award of concessions (ie licences or authorisations) for the provision of betting and gambling services to the public.

The ECJ did not address AG Wahl’s obiter comments concerning the theoretical applicability of the 2014 Concessions Directive to an equivalent case but, in my view, the stress put by the ECJ in the analysis of the essential elements of remuneration and risk transfer in the definition of a (services) concession indicates that the ECJ would have likely ruled against that applicability.

In the Politanò Judgment, the ECJ addressed the question whether Directive 2004/18 was applicable to a call for tenders for the grant of “concessions” in the field of betting and gambling by focusing on the remuneration element that is necessary for the existence of a public contract.

After distinguishing public service contracts from services concessions by reference to the different modalities of remuneration they imply and the different risk structure that underlies those modalities of remuneration (paras 30 to 31), the ECJ focused on the plain and simple fact that ‘in the case in the main proceedings, the service provider receives no remuneration from the contracting authority and bears the entire risk associated with the activity of collecting and transmitting bets’ (para 32, emphasis added).

This led the ECJ to conclude that such “concessions” could not ‘be classified as a public contract for services within the meaning of … Directive 2004/18’ (para 33), which leaves them outside of its scope of application (para 34). The ECJ does not make an equivalent explicit conclusion concerning the classification of those “concessions” for the provision of betting and gambling services as services concessions because those were explicitly excluded from the scope of application of Directive 2004/18 in any case (para 29).

In my view, however, that conclusion would be unavoidable in an equivalent case that took place after the entry into force of Directive 2014/23 because its Art 5(1)(b) defines a services concession in the following terms:

a contract for pecuniary interest concluded in writing by means of which one or more contracting authorities or contracting entities entrust the provision and the management of services other than the execution of works ... to one or more economic operators, the consideration of which consists either solely in the right to exploit the services that are the subject of the contract or in that right together with payment (emphasis added).

Importantly, Art 5(1) in fine of Directive 2014/23 also requires that

The award of a works or services concession shall involve the transfer to the concessionaire of an operating risk in exploiting those works or services encompassing demand or supply risk or both ... (emphasis added).

Taking all of this into account, and on the basis of the same factual finding that in the case of licences or authorisations for the provision of betting and gambling services (typically) ‘the service provider receives no remuneration from the contracting authority and bears the entire risk associated with the activity of collecting and transmitting bets’ and, possibly more importantly, the fact that 'the "service" under analysis [is] not provided on behalf of the contracting authority' (see Opinion of AG Wahl, para 51), the only possible conclusion is that Directive 2014/23 is equally inapplicable to a call for tenders for the grant of “concessions” in the field of betting and gambling.

This simple and unsurprising conclusion is slightly more interesting when taken together with the also recent Judgment in Promoimpresa (see here) because, together, they provide some additional clarity on the limits of application (or rather, outright inapplicability) of public procurement rules to “concessions” in name that are actually regulatory systems of licences or authorisations to carry out specific economic activities, whether they involve the use of public assets (generally, parts of the public domain) or not.

 

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.

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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.