CJEU backs automatic exclusion of tenderers that had relied on no longer qualified third parties (C-223/16)

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In its Judgment of 14 September 2017 in Casertana Construzioni, C-223/16, EU:C:2017:685, the Court of Justice of the European Union (CJEU) has confirmed the legality of the automatic exclusion of an economic operator that had relied on the capacities of an auxiliary undertaking, where the latter lost the required qualifications after the submission of the tender. The CJEU has ruled that the relevant provisions of Directive 2004/18/EC (Arts 47(2) and 48(3)) did not preclude such automatic exclusion, and that they did not require offering the concerned tenderer the possibility to replace the now not-qualifying auxiliary undertaking.

In doing so, the CJEU has followed the Opinion of Advocate General Wahl (criticised here), and created a precedent that is at odds with the new rules in Directive 2014/24/EU (Art 63) and that raises new interpretive difficulties. This post will first rehearse the main reasons why AG Wahl's and now the CJEU's approach is criticisable. It will then look into the interpretive difficulties that can carry through to the interpretation of Article 63 of Directive 2014/24/EU.

Not necessarily a proportionate or pro-competitive approach

In a nutshell, the reasons given by the CJEU to accept the automatic exclusion of a tenderer that relied on the capacities of an auxiliary undertaking that disappear once the offer has been submitted are the same as those of AG Wahl, and are summarised by the CJEU as follows:

as the Advocate General observed ..., the possibility afforded, unpredictably, exclusively to a consortium of undertakings to replace a third-party undertaking which belongs to that consortium and has lost a qualification that is required in order not to be excluded would amount to a substantial change of the tender and the very identity of the consortium. Indeed, such a change of the tender would compel the contracting authority to carry out new checks whilst at the same time granting a competitive advantage to that consortium which might attempt to optimise its tender in order to deal better with its competitors’ tenders in the procurement procedure at issue.

Such a situation would be contrary to the principle of equal treatment which requires that tenderers be afforded equality of opportunity when formulating their bids and which implies that the bids of all tenderers must be subject to the same conditions, and would amount to a distortion of healthy and effective competition between undertakings participating in a public procurement procedure (C-223/16, paras 39-40, emphasis added).

This encapsulates three reasons: (i) discrimination because one consortium is given the opportunity and other tenderers are not, (ii) discrimination because the beneficiary consortium can substantially alter the terms of its tender, and (iii) additional work for the contracting authority. In my opinion, the first reason is spurious because the opportunity to substitute would only arise where a consortium is affected by the loss of qualification of one of its auxiliary undertakings and, barring a case where two or more competing consortia found themselves in that predicament, there is no discrimination for allowing substitutions on a need basis.

The second reason is equally unpersuasive, in particular because it conflates the strict issue of substitution of the member of a consortium with the separate problem of changes to the content of the tender. As I said in relation to AG Wahl's Opinion, provided that the way in which the contracting authority allowed for the substitution between third entities on which capacity the tenderer relied did not confer a competitive advantage to the tenderer, there can be good reasons to allow it. For example, if the application of the qualitative selection criteria did not involve a ranking, but was rather on a pass / no pass basis, and where the terms of the tender were not altered at all because the new entity simply stepped into the shoes of the no longer capable entity, there seems to be limited scope to consider that the tenderer derives a competitive advantage (for more details, see here). Thus, rather than excluding the possibility altogether, the CJEU could have imposed conditions to establish what is an acceptable substitution of auxiliary undertakings and what is not.

Finally, the point on additional checks being required from the contracting authority is relevant. However, rather than considering it a sufficient reason to prevent the substitution, a proportionality assessment would have seemed more appropriate. Given that the exclusion narrows down competition for the contract, the contracting authority should be able to demonstrate that there are sufficient administrative difficulties to justify proceeding this way.

Thus, in outline, I would have preferred that the CJEU departed from AG Wahl's Opinion and declared that the general principles of EU procurement law, and in particular the principle of proportionality coupled with the principle of competition, oppose the automatic exclusion of tenderers that have relied on the capacities of third parties that later lose them, unless the contracting authority can demonstrate that allowing for the substitution of the third party would either infringe the principles of equal treatment, non-discrimination and the obligation of transparency (eg in a situation where the qualitative selection criteria were not assessed on a pass/no pass basis), or would create a disproportionate administrative burden or delay in the conclusion of the procurement procedure. This could create closer functional compatibility in the case law on reliance on third parties and on subcontracting, which I think are currently at risk of imposing functionally incompatible interpretations of the relevant EU public procurement rules.

In my view, my preferred interpretation is encapsulated in Article 63(1) of Directive 2014/24/EU, in particular as read in the light of the principle of competition in Article 18(1) thereof [see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Hart, 2015) 315-318]. However, the Casertana Judgment may raise some questions around that approach, which requires some closer analysis.

New doubts concerning Article 63(1) of Directive 2014/24/EU

In the Casertana Construzioni Judgment, the CJEU follows its previous approach in Partner Apelski Dariusz (paras 82-94, see here) and the Opinion of AG Wahl and rejects both (i) the application of Article 63(1) of Directive 2014/24/EU to the case ratione temporis (which is uncontroversial, as the tender took place in 2013) and (ii) the possibility of interpreting the rules of Directive 2004/18/EC in light of Article 63(1) of Directive 2014/24/EU. Casertana reiterates the finding in Partner that Article 63(1) of Directive 2014/24/EU introduces 'substantial amendments as regards the right of an economic operator to rely on the capacities of other entities in the context of public contracts' (C-223/16, para 26) and is therefore not suitable as an interpretive tool in relation to Directive 2004/18/EC because the latter is not affected by 'problems of interpretation' (C-223/16, para 28). However, the case is not limited to ignore Article 63(1), but rather seems to consolidate a strict interpretation of this provision. Additionally, given the divergence between Article 63(1) of Directive 2014/24/EU and the Casertana Judgment, the latter creates a potential difficulty concerning the cut-off point at which the possibility to replace non-qualified third parties ends.

Seemingly too restrictive (implicit) interpretation of Article 63(1) of Directive 2014/24/EU

Both the Partner and Casertana cases stress that the new rules foresee that "Article 63(1) of Directive 2014/24 now provides that economic operators may ‘only rely on the capacities of other entities where the latter will perform the works or services for which these capacities are required’ ... and that ‘the contracting authority shall require that the economic operator replaces an entity which does not meet a relevant selection criterion, or in respect of which there are compulsory grounds for exclusion’" (C-223/16, para 25). The second part of this statement has been discussed above (and could have been reconciled with the pre-2014 rules by operation of the principle of proportionality). The first part of the statement is problematic. 

Indeed, this incipient consolidation of the rules in Article 63(1) could trigger difficulties because, according to its literal wording, the restriction of reliance on third parties where they will perform the work or services for which the capacities are required solely concern "criteria relating to the educational and professional qualifications as set out in point (f) of Annex XII Part II [ie the educational and professional qualifications of the service provider or contractor or those of the undertaking’s managerial staff, provided that they are not evaluated as an award criterion], or to the relevant professional experience" -- or, in other words, economic operators are allowed to rely on financial, economic and other types of professional qualifications of third parties even if those parties will not directly carry out the works. This comes to allow for consultancy and technical support contracts to back up the tenders of economic operators that may not have all those resources in-house and is generally pro-competitive. By adopting a blanket approach to the requirement of direct involvement in the execution of the contract beyond the limited remit established in Article 63(1) of Directive 2014/24/EU, a broad reading of the Casertana and Partner cases could deactivate large parts of the flexibility for the formation of consortia that are inherent to the system.

In the specific case of Casertana, all we know is that 

Casertana participated in the call for tenders within the framework of an ad hoc tendering consortium under formation, as lead company, and declared that it relied, as regards the qualifications required by [the applicable Italian rules], on those of two auxiliary undertakings, one being Consorzio Stabile GAP. 

In the course of the procedure and after the end of the stage of admission to the call for tenders, that auxiliary undertaking [is Consorzio Stabile GAP] lost qualification for the required category of services, thus becoming qualified for a lower category of services only (C-223/16, paras 11-12).

Put simply, it is not known why Consorzio Stabile GAP saw its qualification reduced for a lower category of services. If the reasons were not linked to the educational and professional qualifications of its managerial staff or the relevant professional experience of the undertaking, then an acritical application of the decision of the CJEU to the case would imply an unnecessary (and illegal) restriction of the flexibility foreseen in Article 63(1) of Directive 2014/24/EU.

Unresolved timing issues -- when does Article 63(1) of Directive 2014/24/EU stop applying?

In Casertana, the CJEU simply indicated that there is no requirement to give the tenderer an opportunity to substitute auxiliary undertakings that have lost the required qualifications after the tender has been submitted because that would amount to allowing for a substantial change of the tender (see above). It also indicated that tenderers could not claim force majeure (or, more generally, the unpredictability of the loss of qualification by the auxiliary undertaking) to gain such an opportunity to substitute them because, although the procurement rules enable "a tenderer to rely on the capacities of one or more third party entities in addition to its own capacities in order to fulfil the criteria set by a contracting authority, that tenderer remains responsible, in its capacity as the lead undertaking in a consortium of undertakings, for the compliance of those undertakings with the obligations and conditions for participation in the call for tenders laid down by the contracting authority in the documents relating to the procurement procedure at issue" (C-223/16, para 41). A question arises on how to interpret these two issues in situations where Article 63(1) of Directive 2014/24/EU is applicable.

Taking the second aspect first, it seems clear that under Article 63(1) of Directive 2014/24/EU, the responsibility for ensuring compliance with the selection criteria included in the call for tenders is shared between the lead undertaking and the contracting authority. In that regard, it is worth emphasising that the provision foresees that

The contracting authority shall ...verify whether the entities on whose capacity the economic operator intends to rely fulfil the relevant selection criteria and whether there are grounds for exclusion ... The contracting authority shall require that the economic operator replaces an entity which does not meet a relevant selection criterion, or in respect of which there are compulsory grounds for exclusion. The contracting authority may require or may be required by the Member State to require that the economic operator substitutes an entity in respect of which there are non-compulsory grounds for exclusion.

Given this wording, and in case the contracting authority issues a favourable opinion on the qualifications held by a given auxiliary undertaking (or fails to check them, as was the case in Casertana, where the loss of qualification was only raised in the context of a counter-claim against Casertana's challenge to the award of the contract to a different consortium), issues will arise concerning legitimate expectations, in particular concerning the ability to replace no loner qualifying third parties at any point of the procurement process, all the way through to award (including any litigation concerning findings of loss of compliance with selection criteria at tender evaluation stage). However, this would be in stark contrast with the first aspect of the Casertana Judgment, which considers a substitution of auxiliary undertaking an impermissible tender modification. Therefore, the question will arise whether Article 63(1) is applicable throughout the procurement procedure, or only up to the point of submission of tenders.

In my view, the answer to the question cannot be all-or-nothing (as has been the case in AG Wahl's Opinion and in the Judgment), but rather require an analysis of the terms of the substitution (if the new auxiliary undertaking simply assumes all obligations of the previous undertaking in the exact same conditions, where is the advantage?), as well as a proportionality assessment of any new verification work required from the contracting authority as a result of the substitution (in the Casertana case, the issue revolved around qualifications administered by a third party [ie a Certification Body], so it would have seemed rather easy to substitute auxiliary undertakings without requiring much from the contracting authority). Failing that, there is a risk of limiting Article 63(1) to a one-shot remedial opportunity restricted to the contracting authority's first assessment of the tenderer's (and its auxiliary's) compliance with exclusion and qualitative selection rules. Even if this would be an improvement over the 2004 system (in particular as interpreted in Casertana), it would fall short from the flexibility that can be derived from a broader and more dynamic reading of Article 63(1) of Directive 2014/24/EU.

Increasing space for unfair competition from the public sector in procurement markets ~ What now?

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Last week, I had the pleasure of participating in the Scottish Competition Forum discussion on 'Unfair competition from the public sector in commercial markets'. In my presentation (slides below), I concentrated on the increasing space that recent reforms in EU public procurement law have created for situations of potential unfair competition and crowding out of private economic initiative by the commercial activities of the public sector, in particular in small markets.

The discussions at SCF indicated that there is scope (and need) for additional regulation ensuring competitive neutrality where "arms' length" organisations (such as in-house entities, vehicles for public-public cooperation, or central purchasing bodies) engage in economic activities in competition with the private sector. This is along the lines of the work that my co-author Dr Ignacio Herrera Anchustegui and I have been carrying out concerning the submission of these entities (in particular, central purchasing bodies) to competition rules -- see here and here.

This is also in line with some of the insights resulting from other discussions in a recent event organised by the Finnish Procurement Association, on which I plan to blog soon. Keep an eye on this space if you are interested in the emerging challenges derived from increased marketisation / commercialisation of the activities of instrumental entities carrying out procurement.

Recent Case Law on EU Institutional Procurement under the Financial Regulation (II): Abnormally Low Tenders

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Before the summer recess, the General Court adopted two interesting decisions on public procurement carried by the EU Institutions. One concerns the debarment of tenderers that have been found to breach EU procurement rules and negatively affect the financial interests of the Union (T-151/16). The other concerns the obligation to state reasons in the context of allegations that a tender is abnormally low (T-392/15). The first case was discussed in a previous post, while this blog now discusses the second case.

In its Judgment of 4 July 2017, European Dynamics Luxembourg and Others v Agence, T-392/15, EU:T:2017:462, the GC assessed once more the limits of the obligation incumbent upon contracting authorities to state reasons in the context of an assessment of an apparently abnormally low tender. The case is decided under the rules of EU Institutional Procurement (ie the Financial Regulation and Rules of Application), but its basic principles seem to me to be also of relevance for procurement covered by the 2014 Public Procurement Package and, in particular, Article 69 of Directive 2014/24/EU.

The distinctive peculiarity of the case is that the challenge concerns the retendering of lots of a previous procedure that had been partially cancelled. As a result of the cancellation of the original procedure post-evaluation and the disclosure of information in the debriefing linked to that tender, participants in the retendering had the advantage of availability of substantial pricing information concerning their competitors (which is certainly one more reason to take confidentiality of information in these processes very carefully, in particular where disclosure of information allows for a 'reverse engineering' of the prices offered by other tenderers--see the discussion in A Sanchez-Graells, 'Transparency in Procurement by the EU Institutions' (August 16, 2017). As a result of having that information, one of the tenderers challenged the award decision in the retendering on the basis that some of the values of the preferred tenders were 'excessively low' and that the contracting authority, having access to that information, was under a duty to provide explicit reasons why it did not consider the tenders received in the second run abnormally low (see paras 68-69) .

In order to decide on the dispute, the GC first recasts the existing provisions and case law on the duty to provide reasons as part of the right to good administration under Article 41 of the Charter of Fundamental Rights of the EU (paras 72-80) and stresses that 'the obligation to state reasons for an act depends on the factual and legal context in which it was adopted' which in the specific requires that 'account ... be taken of the ... regulatory framework applicable in the present case governing abnormally low tenders' (para 81). The GC then discusses such regulatory framework (paras 82-90), stressing that previous case law 'has held that the contracting authority’s obligation to check the seriousness of a tender arises where there are doubts beforehand as to its reliability, bearing in mind that the main purpose of that [investigation] is to enable a tenderer not to be excluded from the procedure without having had an opportunity to explain the terms of its tender which appears abnormally low. Thus, it is only where such doubts exist that the evaluation committee is required to request relevant information on the composition of the tender, before, if necessary, rejecting it' (para 85, references omitted). This creates a two-stage approach to the analysis, where first the authority needs to assess if there is an appearance or suspicion of abnormally low values and,only in that case, engage in the inter partes detailed investigation that will trigger the need for additional justification of its final position on the abnormality or not of the tender. In the analysis of the GC, thus, whether there is a duty to investigate in detail and the extent to which reasons need to be given depend on whether 'there is evidence which arouses a suspicion that a tender may be abnormally low' (para 89).

Elaborating on this, the GC establishes that 'the contracting authority need, in the first stage, only carry out a prima facie assessment of the abnormally low character of a tender, that its duty to state reasons is limited in scope. To require the contracting authority to set out in detail why a tender does not appear to be abnormally low does not take into account the distinction between the two stages of the examination' (para 92). Thus, in even clearer terms, 'where a contracting authority accepts a tender, it is not required to state explicitly in response to any request for a statement of reasons ... [why] the tender it accepted does not appear to it to be abnormally low. If that tender is accepted by the contracting authority, it follows implicitly, although not necessarily, that the contracting authority considers that there was no evidence that that tender was abnormally low. However, such reasons must be brought to the attention of an unsuccessful tenderer which has expressly requested them' (para 93).

In my view, this test is helpful, as it sets a clear balance of duties between the contracting authority -- a duty to assess whether there is evidence to support a suspicion of abnormality, but no duty to justify why it does not consider that this is the case in each and every single instance -- and the tenderers -- which can express their concerns about the appearance of abnormality of competing tenders and demand that the contracting authority clarifies the reasons for its disagreement, where prompted to do so. In my view, this is a useful and practical approach generally applicable to procurement, both under the rules of EU Institutional procurement and that covered by the 2014 Public Procurement Package.

 

Recent case law on EU Institutional Procurement under the Financial Regulation (I): Self-Cleaning

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Before the summer recess, the General Court adopted two interesting decisions on public procurement carried by the EU Institutions. One concerns the debarment of tenderers that have been found to breach EU procurement rules and negatively affect the financial interests of the Union (T-151/16). The other concerns the obligation to state reasons in the context of allegations that a tender is abnormally low (T-392/15). This blog discusses the first case, while a subsequent post comments on the second.

Judgment of 27 June 2017, NC v Commission, T-151/16, EU:T:2017:437, is concerned with the registration in the Early Warning and Detection System database (ie the registry of tenderers and contractors debarred from EU Institutional procurement, currently relabelled as Early Detection and Exclusion System, EDES) of tenderers that have been found  to have committed serious breaches of contractual obligations--in this case, as established by OLAF, the simulation of procurement procedures for the acquisition of equipment ultimately funded by the EU. The case is affected by the additional difficulty that the rules controlling EU Institutional procurement (ie the Financial Regulation and its Rules of Application) were modified in the period between the irregularities were committed (2008 and 2009) and the time of the imposition of the sanction of debarment by the Commission (which crossed over between 2015 and 2016). This triggered two legal complications in terms of retroactivity of most favourable/lenient substantive rules: first, the effect that needed to be given to a reduction in the maximum period of debarment from 5 to 3 years; second, the possibility to neutralise a ground for exclusion on the basis that the affect undertaking had taken sufficient remedial measures demonstrating its reliability (ie had self-cleaned). On top of that, there were procedural complications due to the revised procedures leading to registration in EDES, which currently require a panel opinion that was not part of the pre-2016 procedure for the registration in the Early Warning and Detection System database.

On the procedural point, which the GC examines first, the dispute hinges on the fact that the debarment decision was adopted on 28 January 2016 (which would have required an involvement of the EDES panel, active from 1 January 2016; see para 32), but the Commission considered the administrative procedure 'completed' on 17 December 2015 (thus subjecting it to the 'no-panel' procedure in force until 31 December 2015; see para 34). This ground is ultimately dismissed by the GC on the basis that there is no reason to establish the retroactive application of the procedural rules to investigations started before 1 January 2016, which would 'imply recommencing the preliminary procedure completed properly before that date, in particular having regard to compliance with the adversarial principle' (para 43).

This decision goes against the general principle that new procedural rules that do not contain specific transitional provisions accompanying the fixing of their general application date also apply to on-going/pending procedures (see para 36). The decision is based on an exception to such created in the Judgment of 8 November 2007, Andreasen v Commission, F-40/05, EU:F:2007:189, whereby that rule can be excluded to avoid 'the retroactive annulment of procedures or procedural steps which complied with the rule in force when they were completed' (para 38; see also para 43 of T-151/16).

What I find interesting, though, is that the GC considers that such assessment is not altered '[e]ven if the introduction of that panel was intended to strengthen the rights of the defence of parties contracting with the Union who may be subject to a penalty under the Financial Regulation' (ibid). In my view, this is a very ad hoc finding, which the GC reaches only because it considers the pre-2016 rules already sufficiently protective of individual rights of the affected undertaking, and to have been adequately followed in the specific instance. Had this not been the case (eg, had the previous procedure been seen to fall short of complying with the adversarial principle), the decision by the GC may well have been the opposite. Thus, on this point, the decision of the GC seems difficult to extrapolate to other contexts and the exception that seems to derive from Andreasen and now NC needs to be taken with a pinch of salt.

On the substantive points, first concerning the retroactivity of a more lenient rule allowing for self-cleaning, the GC takes the view that the possibility to self-clean and thus exclude debarment makes the new rules clearly more favourable (para 57). On that basis, the GC takes issue with the fact that the Commission took into account remedial measures for the purpose of setting the duration of the exclusion below the maximum exclusion period (initially at 2 years, later reduced to 18 months) but did not assess it with a view to completely exclude the debarment on the basis of satisfactory self-cleaning. As the GC put it: 'Although the contested decision shows that the remedial measures taken by the applicant were taken into account to determine the duration of the exclusion imposed, no reason is given in that decision as to why those measures were insufficient to satisfy the conditions' for an operator that has taken certain remedial measures demonstrating its reliability not to be excluded from the contracts and grants of the Union (para 58). Second, and along the same lines, on the assessment of the implications of a reduction the maximum debarment period from 5 to 3 years, the GC considers that the new spread of debarment times should have been explicitly taken into account by the Commission (paras 59-60). This eventually leads to an annulment of the debarment decision (para 63).

In my view, this strict approach adopted by the GC on the basis of the guarantees enshrined in Article 49 of the Charter of Fundamental Rights of the EU and interpretive case law (paras 53-55) comes to strengthen the procedural guarantees involved in the adoption of debarment decisions. Extrapolating this to procedures not covered by the rules on EU Institutional procurement, but rather by the 2014 Public Procurement Package and its transposition at domestic level by the Member States, it seems clearer than ever to me that there is a need for the revision of the remedies directive in order to ensure the effectiveness of the same level of protection--as discussed, over a year ago, in A Sanchez-Graells, '"If It Ain't Broke, Don't Fix It"? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts' (August 11, 2016), to be published in S Torricelli & F Folliot Lalliot (eds), Administrative oversight and judicial protection for public contracts (forthc). Available at SSRN: https://ssrn.com/abstract=2821828.

Interesting guidance on confidentiality of commercial secrets in procurement litigation issued by the TCC

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In July 2017, the Technology and Construction Court (a sub-division of the Queen's Bench Division, part of the High Court of Justice for England and Wales) adopted new guidance on procedures for public procurement litigation (see Appendix H to the Technology and Construction Court Guide; the TCC guidance).

The TCC guidance includes two interesting sets of recommendations. One concerns an invitation to exhaust the possibilities for alternative dispute resolution before proceeding to full-fledged litigation (see paras [4] to [8]). The other concerns the disclosure of confidential information between the parties of the dispute (see paras [27] to [48]).

The latter is an issue that raises difficult problems for the protection of business secrets, and I find the TCC guidance interesting in the balance it tries to achieve between ensuring that disappointed tenderers gain access to the information they need to support their claims, and the broader considerations surrounding the need to ensure adequate protection of business secrets in order not to deter participation in public tenders (which is a tricky issue facing all EU jurisdictions, including the rules applicable to procurement carried out by the EU Institutions, and on which we are concentrating in the on-going research of the EPLG).

As the TCC guidance puts it, indeed, "[c]onfidentiality is not a bar to disclosure. However, the need to protect confidential information needs to be balanced by the basic principle of open justice", at para [27]. The TCC guidance aims to achieve such balance through practical approaches and general criteria for the balancing of interests. The approaches adopted by the TCC have been praised for being less restrictive than some of the decisions previously adopted in the context of procurement litigation in England and Wales (Kotsonis & Williams). 

In my view, beyond the effects it can have in litigation in England and Wales, the TCC guidance can be useful as a benchmark for the treatment of confidential information in other jurisdictions -- provided that the practical solutions that derive from the peculiarities of the British legal culture are adapted to domestic idiosyncrasies.

In particular, there are three aspects that I would identify as best practice susceptible of replication or adaptation in other legal contexts:

1. Promotion of the use of redacted versions of documentation rather than absolute bans on the disclosure of materials, as the use of redacted documents enables documents to be more widely disclosable (see paras [32]-[33]), and thus avoids decisions on confidentiality being taken on an 'all-or-nothing' basis for each of the documents. The guidance also indicates the best way of preparing and submitting to the court redacted versions of documents containing confidential information in a manner that allows for scrutiny and a speedy narrowing down of any discrepancies between the parties on the need to redact any specific bits of information.

2. Creation of one- or two-tier confidentiality rings. TCC guidance defines confidentiality rings as comprising persons to whom documents containing confidential information may be disclosed on the basis of their undertakings to preserve confidentiality, at para [34]. Importantly, the guidance indicates both that the party's external legal advisors will need to be included in the confidentiality ring (para [37]) and that the inclusion of personnel of the parties, including their in-house lawyers, will need to be assessed on the basis of relevant factors likely to include "that party’s right to pursue its claim, the principle of open justice, the confidential nature of the document and the need to avoid distortions of competition and/or the creation of unfair advantages in the market (including any retender) as a result of disclosure" (para [39], emphasis added). In reaching a decision about a specific individual, account needs to be taken of "his/her role and responsibilities within the organisation; the extent of the risk that competition will be distorted as a result of disclosure to them; the extent to which that risk can be avoided or controlled by restrictions on the terms of disclosure; and the impact that any proposed restrictions would have on that individual (for example by prohibiting them from participating in a re-tender or future tenders for a period of time)" (para [40], emphasis added). Similar reasoning would apply to other specialist advisors (such as accountants or other experts) (see para [43]).

Interestingly, the TCC guidance clarifies that employee representatives may need to be "admitted to a confidentiality ring on different terms from external representative" (para [41]), this giving rise to two-tier confidentiality rings--which administration can take different forms: ie, either court administered, with the judicial body establishing the conditions of access by different categories of representatives of the parties, or by delegating the management of the access to the confidentiality ring to the external advisors of the parties, who would then act as gatekeepers of the confidential information (para [42]). This second possibility may be foreign to practice and legal culture in other jurisdictions, but the first (court-administered) possibility for a two-tier confidentiality ring seems quite promising to me.

3. Establishment of (enforceable) undertakings to prevent unauthorised uses of the information gained as part of a confidentiality ring. TCC guidance establishes that access to confidential information will only be allowed where the members of confidentiality rings provide undertakings that "will preclude the use of the relevant material other than for the purposes of the proceedings and prevent disclosure outside the ring" (para [44]). More importantly, the TCC guidance explicitly contemplates the possibility for additional undertakings to be necessary "where there are concerns that disclosure could have an impact on competition and/or any subsequent procurement", and that such additional measures can include: "(1) Preventing employee representatives from holding copies of documents at their place of work and requiring them to inspect the material at a defined location (such as the offices of their external lawyers) ; (2) Limiting the involvement of a recipient of a document in any re-procurement of the contract which is the subject of the litigation; (3) Limiting the role which a recipient can play in competitions for other similar contracts for a fixed period of time in a defined geographic area; and/or (4) Preventing the recipient from advising on or having any involvement in certain matters, again for a fixed period of time" (para [45], emphasis added).

Of course, the monitoring of such undertakings will be complex and there can be very difficult evidentiary issues linked to claims of undue subsequent use of confidential information gained in the context of previous procurement litigation. On that issue, the TCC guidance establishes a strict proportionality test, whereby "[w]hilst the Court will give weight to the need to protect competition in the market, the more onerous the proposed restriction is, the more clearly it will need to be justified" (para [46]). In my view, this will play both ways. On the one hand, high risks of competition distortions will be able to justify the imposition of heavy restrictions on future activity of the employee concerned. On the other, an in reverse reasoning, the Court will have to ensure that future restrictions are not disproportionate to the value of the information and the position of the employee within its organisation.

However, there is a third implication that may bear spelling out, which is that some risks of future distortions of competition will be so high, that no acceptable restrictive measure can be designed--in which case I would argue against the inclusion of the relevant person in the confidentiality ring (eg I would not grant the CFO of a company access to the detailed financial schedule of any of its competitors).

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Overall, I think that the TCC guidance will be useful and it will be interesting to see to what extent the practical roll-out of these recommendations provide an even more detailed case study that can serve as benchmark in other jurisdictions seeking to regulate the disclosure of confidential information in the context of public procurement litigation.

Transparency in Procurement by the EU Institutions

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The next collaboration of the European Procument Law Group (EPLG) will be on 'Transparency in public procurement'. Thanks to Dr Kirsi-Maria Halonen, we will meet in Helsinki on 4-5 September 2017 to discuss comparative reports on 11 jurisdictions, including 10 EU Member States and the rules applicable to the procurement of the EU Institutions. I was tasked with the last topic, and my draft report on 'Transparency in Procurement by the EU Institutions' is here: https://ssrn.com/abstract=3020168. Comments most welcome: a.sanchez-graells@bristol.ac.uk.

New paper on EU public procurement and national interest

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I have recently finished a new paper on the regulatory space for Member States' national interest under EU public procurement law, which will be published in an edited collection putting together the main academic outputs of an international project led by Dr Varju (Institute for Legal Studies, Hungarian Academy of Sciences).

Its abstract is as follows:

EU public procurement law has been increasingly criticised for the restrictions it places on Member States’ regulatory autonomy and for the imposition of neoliberal conceptions of State intervention in the economy that do not necessarily match the general preferences of Member States with a social market economy orientation. Following that view, it could be thought that there is a limited (and possibly narrowing) space for Member State interests in EU public procurement law—or, in other words, that pursuing national interests goes against the grain of the internal market foundations of the 2014 Public Procurement Package.

The purpose of this chapter is to dispel this conception by making three points. First, that despite its competition-orientedness, the 2014 Public Procurement Package does not impose a ‘one-size-fits-all’ straitjacket on domestic economic systems, but is rather compatible with diversity of economic models at national level. A series of complex trade-offs resulting from the last revision of the EU public procurement rules, where Member State interests played a multifaceted role, have consolidated a competition-based model with significant flexibility for non-market and non-competed mechanisms, as repeatedly tested before and confirmed by the Court of Justice. Second, that EU public procurement law, however, does appropriately prevent Member States from pursuing protectionist policies, even if they consider them to be in their national interest—quod non, because the proper working of the internal market is both in the collective interest of the EU and of the individual Member States. Third, that EU public procurement law, in particular in its current incarnation in the 2014 Public Procurement Package, emphasises the ability of Member States to pursue secondary policies (such as the promotion of innovation or sustainability) in a diverse manner, in accordance with their domestic interests and local particularism. On the whole, thus, EU public procurement law allows Member States significant space to pursue their national interests, always provided that they are also compatible with their own interest in the proper functioning of the internal market.

The full paper is freely downloadable on SSRN: A Sanchez-Graells, 'Against the Grain? -- Member State Interests and EU Procurement Law' (August 18, 2017). To be published in M Varju (ed), Between Compliance and Particularism: Member State Interests and European Union Law (Springer, forthcoming). Available at SSRN: https://ssrn.com/abstract=3022053. As always, comments most welcome: a.sanchez-graells@bristol.ac.uk. 

UK Government's Position Paper on CJEU jurisdiction: A Short List of Tricky Issues

Earlier today, the UK Government has published its position paper on the jurisdiction of the CJEU post-Brexit: Enforcement and dispute resolution - a future partnership paper (23 August 2017). The paper has been received as constructive by eg David Allen Green and Prof Armstrong, and Prof Peers has stressed on twitter that there is a clash of redlines despite the effort the paper makes to distinguish issues of enforcement (of individual rights) and dispute resolution (between the UK and the EU). I am sure I have already missed some useful reactions and that the commentary on the position paper will keep piling up in the coming hours.

With this post, I only intend to highlight some of the tricky issues that I have identified on first reading of the paper. They are presented in the same order of the relevant paragraphs of the paper where they first appear, but this does not necessarily reflect their level of trickiness.

  1. The way the position in EU is depicted may be too simplistic, in particular concerning the acceptance of international dispute resolution agreements. For example, paragraph 20 refers to the Association Agreements with Ukraine and Moldova as instances where the EU has accepted submission to binding (international) arbitration mechanisms.

    However, taking the EU-Ukraine Agreement as example, the arbitration mechanism is limited due to the need to ensure CJEU supremacy when it comes to interpretation of EU law. In that regard, Art 322(2) clearly establishes that '[w]here a dispute raises a question of interpretation of a provision of EU law [relating to regulatory approximation contained in Chapter 3 (Technical Barriers to Trade), Chapter 4 (Sanitary and Phytosanitary Measures), Chapter 5 (Customs and Trade Facilitation), Chapter 6 (Establishment, Trade in Services and Electronic Commerce), Chapter 8 (Public Procurement) or Chapter 10 (Competition), or which otherwise imposes upon a Party an obligation defined by reference to a provision of EU law], the arbitration panel shall not decide the question, but request the Court of Justice of the European Union to give a ruling on the question. In such cases, the deadlines applying to the rulings of the arbitration panel shall be suspended until the Court of Justice of the European Union has given its ruling. The ruling of the Court of Justice of the European Union shall be binding on the arbitration panel'. Given that these are matters that would be at the core of an EU-UK agreement, the extent to which agreeing on binding internal arbitration would circumvent (direct) CJEU jurisdiction to interpret EU law and identical provisions can be questioned.

    This is however presented in very soft terms in the position paper. In relation with the EU-Moldova Agreement, and under the heading 'Provision for voluntary references to CJEU for interpretation', the position paper indicates that '[t]his approach can apply in respect of both judicial and political dispute resolution models. For example, Article 403 of the EU Moldova Association Agreement requires that an arbitration panel established to resolve disputes shall, where the dispute concerns interpretation of EU law, refer the question to the CJEU and be bound by its interpretation' (para 56, emphasis added); and that 'In the case of the Moldova Association Agreement, the responsibility to make a reference rests with the arbitration panel ... These examples do not involve one party to the agreement deciding, unilaterally, to seek a binding interpretation of the agreement from the CJEU' (para 58). While this is *technically* correct, it is also presented in a misleading way because should an arbitration panel not seek the CJEU's interpretation, whcih it is required to do so, the final award would clearly not be enforceable. Ultimately, in my view, the restrictions derived from the need to ensure the CJEU's position as sole interpreter of EU law create a much harder and relevant restriction on the design of international arbitration or other dispute resolution mechanisms than the image that evaporates from the position paper.

    In fairness, this is somehow recognised in para 38 of today's position paper: 'there are limitations to the matters on which the EU can subject itself to the binding decisions of a quasi-judicial or judicial authority, like an arbitration panel. The arbitration panel cannot adjudicate on matters of interpretation of EU law so as to bind the EU and its Member States'. However, this is not followed by a view on how to resolve this limitation, should the future EU-UK agreement be subjected to international arbitration--maybe this is just aimed at creating space for negotiations, but a clearer position of the UK Government on the acceptance (or not) of a reference mechanism to the CJEU as part of arbitration-based dispute resolution mechanisms will be needed sooner rather than later and the answer seems constrained to a binary yes/no ...
     
  2. Whether the EU would accept to the creation of another, parallel court, like the EFTA Court can be highly questioned. The assumption in para 21 that the EFTA court is a 'model' that can be replicated seems to me difficult to accept. In my opinion, the only way of benefiting from that solution would be for the UK to become a member of the European Economic Area (which the UK Government does not want to pursue), or else for the EFTA Court to be reformed to expand its jurisdiction to the EEA + UK (which seems unlikely). In my opinion, the creation of another institution with EFTA Court features but with jurisdiction only for the EU-UK relationship does not seem plausible.

    This has a major effect on the viability of post-Brexit coordination of UK and CJEU case law as discussed in paras 46-51 of the position paper because, as is clear from all the examples in that section, the mechanisms for mutual coordination of jurisprudence have so far only been accepted within the scope of the EEA (+ Switzerland). Outside of the scope of the EEA / EFTA Court jurisdiction, it seems difficult to see the EU accepting this type of mechanisms, which are the historical result of a different time of the European integration process. Moreover, the UK government seems to point at differential approaches to case law coordination when it indicates that 'extent to which this approach may be valuable depends on the extent to which there is agreement that divergence should be avoided in specific areas' (para 51). It seems difficult to accept that the EU can tolerate divergence in any areas that are considered of relevance in the context of the future EU-UK relationship (and those not relevant, are likely to be or end up outside of the framework).
     
  3. The position that 'in both the UK and the EU, individuals and businesses will be able to enforce rights and obligations within the internal legal orders of the UK and the EU respectively, including through access to the highest courts within those legal orders. This would be the case in respect of both the Withdrawal Agreement, including an agreement on citizens’ rights, and the future partnership' (para 23) seems to simplistic to me. First, because this is precisely one of the redlines of the EU's negotiating position, which has indicated that there has to be a 'possibility of administrative or court proceedings to be initiated post-exit for facts that have occurred before the withdrawal date' (para 16 of EU negotiating guidelines), which implies the need to preserve CJEU intervention for the interpretation of the relevant EU law provisions as they applied at the time of the material facts. Second, because litigation is likely to raise complex issues of conflict of laws that can hardly be addressed unilaterally by either of the legal systems.

    As recognised in yesterday's position paper on cross-border civil and commercial litigation: 'Ending the direct jurisdiction of the CJEU in the UK will not weaken the rights of individuals, nor call into question the UK’s commitment to complying with its obligations under international agreements; where appropriate, the UK and the EU will need to ensure future civil judicial cooperation takes into account regional legal arrangements, including the fact that the CJEU will remain the ultimate arbiter of EU law within the EU' (para 20, emphasis added). The same will, of course, happen in every other dimension of legal relationships and, consequently, the same mechanism to 'take account of the position of the CJEU' will need to be extended universally. In my view, this is far away from the streamlined assumption that litigation will be contained in either of the jurisdictions.

    Interestingly and confusingly, para 24 of today's position paper takes a different approach and stresses that 'Ending the direct jurisdiction of the CJEU in the UK will not weaken the rights of individuals, nor call into question the UK’s commitment to complying with its obligations under international agreements. The UK’s commitment to the rule of law has been built over centuries, and reaffirmed time and again by effective, independent courts. That commitment to the rule of law means that anyone seeking redress within the UK’s legal systems will know they will be judged by clear rules applied in accordance with the law by the UK’s expert, independent and internationally respected judiciary.' The extent to which both position papers are in contradiction, or the extent to which the UK government can seriously aim to create CJEU-friendly mechanisms for civil and commercial matters and simultaneously CJEU-avoiding mechanisms for eg public law seems to me to be prone to provoke more than a few headaches for anyone trying to solve the puzzle.
     

Overall, I think that the conclusion in the position paper that 'there are a number of additional means [not involving the direct jurisdiction of the CJEU] by which the EU has entered into agreements which offer assurance of effective enforcement and dispute resolution and, where appropriate, avoidance of divergence, without necessitating the direct jurisdiction of the CJEU over a third party' (para 67) may be overstated and that the position paper, while more flexible than could have been expected, still seems to head full steam ahead for a clash with the unique position of the CJEU in interpreting EU law and preserving individual (citizens') rights. Time will tell.

AG Kokott Advocates Restrictive Interpretation of Security-Based Derogations of EU Procurement Law (C-187/16)

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In her Opinion of 20 July 2017 in case Commission v Austria, C-187/16, EU:C:2017:578, AG Kokott assessed the limits of the exemption on security grounds, under Article 346 TFEU and the Rules on Defence and Security Procurement (Directive 2009/81/EC), from the obligation to carry out a tender procedure for the award of a contract for the manufacture of identity and other official documents (such as biometric passports, driving licences or residence permits).

Even if based on previous generations of EU public procurement rules (both the 1992 and the 2004 procurement directives controlling the award of service contracts), the Opinion and future decision by the Court of Justice will be important for the coordination of the 2014 Public Procurement Package and the rules on Defence and Security Procurement.

As AG Kokott aptly put it, the main legal issue in the dispute requires ascertaining whether Member States are justified in directly awarding contracts for the manufacture of such documents to undertakings they 'consider to be particularly trustworthy' (para 2), in particular if they happen to be 'formerly State-owned undertaking[s] which [have] now been privatised' (para 3, which triggers considerations on the limits of the in-house exemption as well, see paras 29 and ), on the basis of the undisputed argument that such documents 'must be manufactured in compliance with particular secrecy and security requirements, as the issue of such documents is an expression of the exercise of fundamental State functions. The documents are used as part of everyday life and the importance of public confidence in their authenticity and veracity is not to be underestimated. Consequently, highest priority is given to security of supply, protection against counterfeiting and responsible handling of these documents, including of data processed in their manufacture, and abuse must be effectively prevented' (para 1)--all of which are ultimately incarnated in the rules of Regulation 2252/2004/EC on standards for security features and biometrics in passports and travel documents issued by Member States (see paras 13-14). Regardless of the peculiarities of the documents, the position taken by the European Commission is that it is 'perfectly possible to organise a public invitation to tender in such a way that only undertakings which [specialise] in the manufacture of documents subject to special security requirements and [are] supervised accordingly could be successful' (para 21). Austria, as the defending Member State in the case, opposes this reasoning and defends its use of the Article 346 TFEU exemption on the basis of the need to ensure the 'protection of essential national security interests. Protection of secret information, safeguarding of the authenticity and veracity of the documents concerned, security of supply and guaranteed protection of sensitive data' (para 20).

On that note, in her Opinion, AG Kokott also stresses that the case will give the Court of Justice an opportunity to go beyond procurement and provide further clarification of the limits of the security-based derogations from EU law that Member States can undertake under Article 346 TFEU (para 4). I am not necessarily convinced that the Court will follow that route, for it tends to avoid making general declarations on the meaning and interpretation of EU law, and it is clearly possible for the Court to take a narrow approach and provide a decision solely for the case at hand, without aiming to establish bright lines on the scope of Article 346 TFEU more generally. In any case, the Court's approach can in itself be interesting.

On the specific issue whether there was an obligation to tender the contract for the manufacturing of the official documents, AG Kokott suggests that the Court of Justice should declare the existence of such an obligation and, therefore, a breach of EU procurement law by Austria. Her main arguments are that:

  • The award of the contracts that gave rise to the dispute was covered by an obligation to launch an EU-wide tender procedure where the relevant value thresholds were exceeded (ie for all but one type of official documents) (paras 30-32).
  • The undeniably sensitive nature of the documents object of the contract does not justify the invocation of a public security exemption compatible with either the specific rules of the procurement directives (based on the fact that their performance requires compliance with special security measures, or on requirements linked to the protection of essential interests of the State), or with Article 346 TFEU more generally (paras 40-45).
    • A derogation from EU law based on the protection of essential national security interests requires Member States 'to offer substantiated evidence to show precisely which national security interests are affected and to what extent compliance with certain obligations under EU law would in practice be contrary to those security interests' (para 48).
    • Where the State shows the existence of a sufficient national interest at stake, the derogation from EU law, being an exception to fundamental internal market freedoms, needs to be interpreted strictly--and this applies to both derogations based on Article 346 TFEU in general, and to any specific derogations under secondary EU law, including the procurement directives (para 53). The test ultimately requires the 'Member State to prove that it is necessary to have recourse to the measures taken by it in order to protect its essential national security interests' (para 54).
    • In the case at hand, neither (i) the need for centralised performance of the printing contracts (paras 56-58), (ii) the need for effective official controls (paras 59-63), or (iii) the need to ensure the trustworthiness of the contractor (paras 64-72), are sufficient to demonstrate the necessity of directly awarding the contract because, in relation with each of the requirements, the Member State had a satisfactory less restrictive alternative measure available.
      • AG Kokott does not consider the need for centralised performance a good enough reason to exclude the tendering of the contract because, even if security justifications based on the easier control or one than several undertakings, and the ensuing reduced risk of access to security arrangements or sensitive materials by unauthorised parties are convincing, because that 'can ultimately only explain why the printing contracts at issue are only ever awarded to a single undertaking (and not to several at the same time). On the other hand, there is no plausible justification, based on the need for centralisation, why it should be necessary, in order to protect essential national security interests, to commission only ever the same undertaking' (para 57).
      • She also dismisses the argument based on the need to carry out special official controls because it is largely based on restrictions self-imposed on Austrian authorities by Austrian legislation (paras 61 and 63) and because, in any case, the need for the official controls does not justify the absolute exclusion of EU procurement rules because it is disproportionate (paras 62 and 63).
      • Finally, and in a very clear manner, AG Kokott dismisses claims based on the need to preserve on-going 'special relationships of trust' between public authorities and specific contractors. As she eloquently puts it: 'it would run flagrantly counter to the basic principle underpinning the European internal market in general and public procurement law in particular if a Member State almost arbitrarily classified a single undertaking — especially its formerly State-owned and now privatised ‘historic’ provider in a certain area — as particularly reliable and trustworthy according to the motto ‘tried and tested’, whilst a priori denying or at least questioning the reliability and trustworthiness of all other undertakings' (para 66, references omitted).
      • To stress the restrictions on the possibility for the Member State to derogate from EU law in order to avoid disclosure of security-related information to foreign undertakings or undertakings controlled by foreign nationals (paras 69-70), AG Kokott highlights the need for such concerns to inform Member State decisions in a 'consistent and systemic manner'. In that regard, AG Kokott dismisses Austria's claim on the basis that 'Austria has not ... taken precautions which could effectively prevent [its formerly State-owned undertaking] falling under the control of foreign shareholders or becoming a subsidiary of a foreign legal person. The Austrian State has neither stipulated, for reasons of security, voting rights in [its formerly State-owned undertaking] in the form of a special share (‘golden share’) nor made the sale of shares in [its formerly State-owned undertaking] subject to any restrictions on security grounds' (para 70, references omitted).

On the whole, I think that AG Kokott's Opinion is well-argued and her arguments are convincing. From the public procurement perspective, it seems clear that in cases where the Member State can resort to less restrictive measures--such as carrying out a tender with high requirements embedded in the relevant selection criteria (including an exceptional obligation to carry out the performance of the contract in the territory of the contracting authority; see para 63 and the cited Judgment of 4 December 1986, Commission v Germany, C-205/84, EU:C:1986:463) and imposing extensive confidentiality obligations--the possibility to exclude compliance with EU law should be excluded.

There are other aspects of the Opinion that seem more open to opposing arguments, such as the need to ensure watertight consistency in the use of derogations based on Article 346 TFEU (where warranted), or some of the (implicit) elements of mutual trust and recognition between Member States in the context of their cooperation in security issues. In my view, it is not likely that the Court of Justice will engage with them in detail. If I were to guess, I would expect a short Judgment in this case, simply stating that Austria's interpretation of the exemptions from the EU public procurement rules was too wide and that, in any case, the direct award of the contract fails a strict proportionality assessment. We will know soon enough.

Good news and happy holidays

One more year, the time for the summer break has arrived. Thank you all for following the blog and for all the interactions we have had at conferences, workshops and training sessions during the academic year that just finished. Your continuous encouragement and support has helped me develop professionally and this has now been reflected in my promotion to Reader in Economic Law at the University of Bristol Law School from 1 August 2017. 

I will now take a break from blogging to celebrate the promotion, go on holidays and write up a couple of articles that require some concentration. I will return to blogging in the run up to the next academic year. I hope you will all have an enjoyable summer and hope to find you here in September.

All best wishes, Albert

ECJ confirms that procurement rules do not apply to allocation of airport space to groundhandling companies (C-701/15)

In its Judgment of 13 July 2017 in Malpensa Logistica Europa, C-701/15, EU:C:2017:545, the European Court of Justice (ECJ) has established that the 2004 Utilities Procurement Directive did not require conducting a public selection procedure prior to the allocation, including a temporary allocation, of areas within airports to be used for the provision of groundhandling services for which no remuneration is to be paid by the manager of the airport.

The reasoning of the Court is straightforward and considers that the allocation of space to groundhandling operators does not fall within the scope of the relevant public procurement rules because "the managing body responsible for Malpensa Airport did not acquire a service provided by the supplier in return for remuneration" (para 29). In my view, and as I discussed in relation to the Opinion of AG Campos in this case (discussed here) , this is the correct approach. Indeed, it is now clear that a procedure for the allocation of airport space to groundhandling operators authorised to provide services in that airport should not be covered by the utilities procurement directive (either the 2004 version, or the current 2014 version, or the 2014 concessions directive) because the body managing the airport is not procuring services from those companies when it takes the space allocation decision. 

In my view, the ECJ could have been clearer in establishing the error implicit in the Italian case law that originated the referral. Indeed, as presented by the referring court, "according to [Italian] national case-law, the exploitation of airport areas (geographical areas), including, therefore, internal areas, in connection with the activities usually performed by air carriers falls within the material scope of the rules governing [procurement in the] special sectors" (para 21), which led to the conclusion that "the provision of groundhandling services in airports, by the exploitation of geographical areas, also falls within the material scope of those rules" (para 22). In that regard, the ECJ could have clarified the multiple dimensions involved in an assessment of scope of coverage of the EU procurement rules (in the utilities or special sectors), which cannot be constrained to an assessment of the activities involved, but more importantly need to include an explicit consideration of the extent to which the contracting authority or entity is engaged in procurement (ie sourcing goods, services or works) or other types of (quasi-regualtory) activities.

In any case, given the simple functional criterion that derives from the Malpensa Logistica Europa Judgment, this is a welcome clarification.

ECJ allows contracting authorities to require performance bonds as selection criteria (C-76/16)

In its Judgment of 13 July 2017 in INGSTEEL and Metrostav, C-76/16, EU:C:2017:549, the European Court of Justice (ECJ) has followed the Opinion of AG Campos (discussed here) and accepted the use of financial guarantees (performance bonds) as economic selection criteria rather than as contract compliance clauses (which was the Commission's approach). The ECJ has also set some minimum requirements of proportionality in their assessment. The Judgment is based on the 2004 public procurement rules, but will be relevant in the context of the 2014 Directive as well.

In the case at hand, the tender documentation “required the participants in the tendering procedure to provide a statement from a Slovak bank or a Slovak branch office of a foreign bank confirming that it would grant them credit in the amount of at least EUR 3 000 000, a sum which should be available to them throughout the entire duration of the contract. That statement was to be in the form of a loan agreement or credit facility agreement and have been given by a person authorised to commit the bank in question” (C-76/16, para 16, please note that the description is not entirely coincidental with that of the AG Opinion, which did not refer to a 'loan agreement or credit facility', but rather to a 'guarantee ... to ensure performance of the contract'; however, the issue of the legal nature of the requirement may not have played a significant role in the ECJ's decision).

The disappointed tenderer did not provide such a bank statement, but rather "a statement, given by a bank, which contained information on the opening of a current-account credit facility for an amount exceeding EUR 5 000 000, and a sworn statement from the tenderer certifying that, if its bid was successful, it would have available in its current account, at the time of conclusion of the contract for works and throughout the period of performance of the contract, a minimum amount of EUR 3 000 000" (C-76/16, para 17).

The difference in the content of the bank statements is important because the core of the issue was that, as argued by the disappointed tenderer, it would have been "objectively impossible for it to satisfy the requirements relating to economic and financial standing set by the contracting authority in any other way, drawing on statements made by Slovak banks questioned by the latter to the effect that a binding undertaking to grant credit, such as that required by the contract notice, could be issued only after approval of the transaction covered by the credit and satisfaction of all the requirements laid down by the bank for the conclusion of a loan agreement" (C-76/16, para 18).

Taking the view that the unsuccessful tenderer had not satisfied the economic and financial standing requirements, the contracting authority decided to exclude it from the tendering procedure. The rejection was eventually challenged before the Supreme Court of the Slovak Republic, and the preliminary reference to the ECJ derives from a procedure mainly aimed at assessing (i) whether the contracting authority could introduce this requirement in compliance with the rules on economic and financial standing (Art 47(1)(a) and (4) Dir 2004/18); and (ii) whether the contracting authority should have accepted the documentation as alternative to the specified bank certificate (Art 47(5) Dir 2004/18). Only the first point deserves analysis, as the ECJ has left the second point completely open and referred it back for assessment by the domestic court.

It is also worth stressing that the Commission had challenged the approach of assessing performance bond requirements as selection criteria and submitted that: (i) the requirement for financial guarantees that had to be effective post-award should be assessed as a contract compliance clause under Art 26 Dir 2004/18 and, further, (ii) that given that such provision does not exhaustively govern the special conditions for performance, those conditions may be assessed in accordance with primary EU law. AG Campos rejected the Commission's approach and invited the ECJ to assess the requirement in the framework of economic selection criteria. The ECJ has now followed that approach and, after reiterating its case law on the setting of economic and financial selection criteria and the discretion that contracting authorities enjoy to that effect (paras 25-34), it has established that

35      As regards, first, the requirement expressly laid down in the contract notice that the financial guarantee should be provided ‘to ensure performance of the contract’, it appears ... that the contracting authority believed that that requirement was not satisfied since the credit granted to the tenderer, although exceeding the amount required by the contract notice, was a current-account credit facility that was not tied to performance of the contract.

36      In this respect, it must be noted that a requirement to obtain a loan tied to performance of the contract is, objectively, a reasonable means of obtaining information on the economic ability of the tenderer to perform the contract successfully. As the European Commission noted, the grant of a loan is an appropriate means of establishing that the tenderer has at its disposal resources which it does not itself own and which are necessary for the performance of the contract (see, to that effect, judgment of 2 December 1999, Holst Italia, C‑176/98, EU:C:1999:593, paragraph 29). It is, however, once again for the referring court to confirm that the amount required in the contract notice is proportionate to the subject matter of the contract.

37      In respect, second, of the requirement, also laid down in the contract notice, regarding the grant of credit in a minimum amount of EUR 3 000 000 ‘for the period of performance of the contract (48 months)’, although, admittedly Article 47 of Directive 2004/18 does not expressly provide that the contracting authority may require a tenderer to have at its disposal the resources necessary for the performance of the contract throughout the duration of the performance of the contract, it must be noted, as the Advocate General observed in point 46 of his Opinion, that the contracting authority’s verification of the tenderer’s compliance with the economic and financial criteria in a tendering procedure, is intended to provide that authority with the assurance that the successful tenderer will indeed be able to use whatever resources it relies on throughout the period covered by the contract (see, to that effect, judgment of 14 January 2016, Ostas celtnieks, C‑234/14, EU:C:2016:6, paragraph 26 and the case-law cited).

38      Moreover, the continued availability of the amount required throughout the period of performance of the contract is a useful tool in assessing, in a tangible manner, the economic and financial standing of the tenderer with respect to its commitments. The proper performance of the contract is indeed intrinsically linked to whether the tenderer has the financial means for the execution of the contract.

39      Therefore, in the present case, the condition requiring the tenderer to have the funds available throughout the period of performance of the contract is appropriate for securing the objectives of Article 47(1) of Directive 2004/18.

40      However, it is for the national court to determine the relevance of the evidence provided by the tenderer for that purpose, in particular the contract opening a current-account credit facility.

41      It follows from the foregoing that the answer to the first question is that Article 47(1)(a) and (4) of Directive 2004/18 must be interpreted as meaning that a contracting authority may exclude a tenderer from a tender procedure on the ground that it does not fulfil the criterion regarding economic and financial standing laid down in the contract notice with respect to the provision of a statement given by a bank undertaking to grant credit in the amount specified in the contract notice and to guarantee that that amount will be available to the tenderer throughout the period of performance of the contract (C-76/16, paras 35-41, emphasis added).

In my view, and as I said in relation with the AG Opinion in this case, the analysis carried out by the ECJ is technically flawed. Put simply, the EU public procurement directives (both the 2004 and the 2014 generations) do not regulate the possibility for contracting authorities to demand financial guarantees from economic operators participating in tender procedures – neither tender/participation guarantees, nor performance/completion guarantees [see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 326-7 & 425-6]. Such requirements are not regulated as part of the assessment of the economic operator’s economic and financial standing for selection purposes – which is designed as an information-based screening process, not as a phase where the contracting authority can secure financial rights for itself –and this is also not related to the conditions for the performance of the contract. Moreover, a reinterpretation of the selection rules on economic and financial standing (but also on professional or technical standing) that made them forward looking creates significant distortions in the system of EU public procurement law, as well as potentially make it impossible to assess.

The specific reasoning of the ECJ in this case supports the fact that an assessment of performance bonds as selection criteria is problematic. The ECJ has stressed that the two main reasons why it considers these requirements acceptable concern the fact that (i) "a requirement to obtain a loan tied to performance of the contract is, objectively, a reasonable means of obtaining information on the economic ability of the tenderer to perform the contract successfully" (para 36), and that "the continued availability of the amount required throughout the period of performance of the contract is a useful tool in assessing, in a tangible manner, the economic and financial standing of the tenderer with respect to its commitments. The proper performance of the contract is indeed intrinsically linked to whether the tenderer has the financial means for the execution of the contract" (para 38).

In the abstract and taken into account in their own terms, these statements may seem uncontroversial. However, the extent to which they reflect the nature of the requirement for a performance bond or financial guarantee can be doubted. The economic and financial standing of the contractor is assessed in general terms at selection stage and the contracting authority always run an implicit risk that the economic and financial standing of the contractor may change during the execution of the contract, in particular if this is of a long duration. Thus, the requirement of performance-related financial guarantees does not have an informative aim, but rather a risk management aim and possibly a cashflow management aim.

By requiring the contractor to have an available credit of 12% of the procurement value (€3mn for a €25.5mn contract), the contracting authority seems to want to cover risks of mis- or under-performance (possibly through the imposition of contractual penalties) and/or to anticipate that the contractor will always be making investments ahead of expected payments for partial completion of the works. In that case, the function of the requirement is not to allow the contracting authority to assess the undertaking's financial standing, but rather to have access to implicit finance for the project and/or to reduce the financial risk of the project for the authority itself. Moreover, it is not clear whether the funds have to be 'frozen' and available throughout the duration of the contract, or if the contractor can use them to perform the contract. In the second case, assuming that a credit of 12% (or any other value, except for an excess of 100%) ensures adequate performance of the contract is only partially justified because at some point in the execution of the contract, the 12% funds will be exhausted and, barring the existence of other sources of finance (including payments by the contracting authority), the very same issues that the financial guarantee is supposed to exclude would arise.

From that perspective, in my opinion, both the suitability and the proportionality of the requirement need to be taken into account. It should be assessed whether the contracting authority has made efforts to design the contract in a cashflow neutral way (including initial downpayments, for instance), or if there are any other ways in which the management of risk can be satisfactorily conducted without requiring performance bonds. This is something that the ECJ has not done, and it has simply referred the issue back to the domestic court, so that it assesses "the relevance of the evidence provided by the tenderer for [the purpose of having funds available throughout the period of performance of the contract], in particular the contract opening a current-account credit facility" (C-76/16, para 40).

The problem, in my view, is that the ECJ has implicitly accepted that the requirement is legitimate and that contracting authorities can require undertakings to have specific levels of funds available to them during the execution of the contract as a matter of qualitative selection. This can be problematic because the creation of imbalanced cashflows can exclude undertakings from competition for the contract (in particular, SMEs) and because contracting authorities are not necessarily in the best position to assess the financial arrangements that undertakings have put in place for their operations. Moreover, if this was the best way of assessing the undertakings' economic and financial standing, then qualitative selection could be limited to demanding performance guarantees (possibly of 100% of the value) rather than assessing the undertakings' financial documentation. There would be no need to assess annual turnover or any other indicators, as contracting authorities would be absolutely certain that the contract would be financed. However, this clearly seems excessive and, in any way, excessive as compared to the role and purpose of qualitative selection. As the ECJ stressed in the INGSTEEL Judgment, 

the requirements in terms of economic and financial standing must be objectively such as to provide information on such standing of an economic operator and must be adapted to the size of the contract concerned in that they constitute objectively a positive indication of the existence of a sufficient economic and financial basis for the performance of that contract, without, however, going beyond what is reasonably necessary for that purpose (C-76/16, para 33, emphasis added).

In my view, requirements of performance bonds or financial guarantees do not aim to obtain "positive indications" of the financial viability of the project, but rather "positive assurances" to that effect. In that regard, they do not relate to the general standing of the undertaking, but rather to the specific risk profile of the tender, and as such need to be assessed as contract performance clauses and under a strict proportionality test. The fact that the ECJ has taken a different analytical approach is, in my view, a lost opportunity.

New Paper on Extraterritoriality of EU Procurement Rules

I am presenting a paper on the extraterritoriality of EU public procurement rules at the research workshop "Extraterritoriality of EU Law & Human Rights after Lisbon: Scope and Boundaries", held at the Sussex European Institute on 13 & 14 July 2017.

The paper is entitled "An Ever-Changing Scope? The Expansive Boundaries of EU Public Procurement Rules, Extraterritoriality and the Court of Justice", and is available at SSRN: https://ssrn.com/abstract=3000256.

As the abstract indicates:

This paper looks at how the EU public procurement rules have shown a tendency to permanently expand their scope of application, both within and outside the EU. Inside the EU, the expansion has primarily resulted from blurred coverage boundaries and a creeping application outside their explicit scope. Outside the EU, the extraterritoriality has concerned scenarios such as the applicability of EU financial rules to procurement carried out as part of the EU’s external action in other areas (such as common foreign and security policy), or the regulatory transfer (or ‘export’) of EU procurement rules as part of trade deals—notably, the EU-Canada CETA, but also the EU-Ukraine DCFTA.

Concentrating solely on the ‘external’ dimension of the expansive scope of EU public procurement rules, in trying to explore some of the impacts of the extraterritorial effects of EU public procurement law on the legal and regulatory systems of third countries, this paper focuses on the implications that this expansion and extraterritoriality can have in terms of jurisdiction of the Court of Justice, as well as in terms of difficulties for the coordination of remedies systems in the area of public procurement. The paper concludes that the extraterritorial expansiveness of the EU’s public procurement rules is creating areas of potential legal uncertainty that deserve further analysis. Given the highly speculative nature of those scenarios at this stage, however, the paper does not attempt to provide any specific answers or tentative solutions to the issues it raises.

I intend to review the paper after the workshop and will appreciate any additional feedback that helps me improve it so, if you have the time and inclination to read the paper, please email me any comments to a.sanchez-graells@bristol.ac.uk, or feel free to post them in the comments section. Thank you in advance for any input.

Comments to Danish Draft Guidelines on Joint Tendering

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The Danish Competition and Consumer Authority has published draft guidelines on joint bidding under competition law and invited comments by 1 September 2017. The following are the comments I have provided in the context of this public consultation. It will be interesting for me to see if the Authority takes any of these issues into account in the final version of its guidance.

The document provides a useful overview of the issues involved in an analysis of the compatibility of undertakings’ collaboration for the submission of joint tenders for public contracts with Article 101 TFEU (and domestic equivalents). The guidance is largely applicable to subcontracting arrangements as well, and it usefully incorporates recent examples of competition investigations in Scandinavian jurisdictions—with special attention given to the recent EFTA Ski Taxi Judgment.[1] It is particularly welcome that the Danish Competition and Consumer Authority has made the effort of publishing the guidelines in English, which can position them as an important point of reference in all EU/EEA jurisdictions after their official adoption.

The draft guidelines pivot centrally around the consideration of whether undertakings seeking to collaborate in the submission of a joint tender could bid independently for a given contract. That is, they follow the standard approach of considering that collaboration in the form of joint bidding (or subcontracting) is problematic where it reduces the level of competition that could otherwise exist for a public contract, unless it generates net efficiencies that are passed on to the contracting authority.[2] From that perspective, the draft guidelines send some useful clear messages, such as the need:

  1. for undertakings to conduct objective self-assessments of their own capacity to individually perform the contract prior to engaging in discussions with potential consortium partners;
  2. to tailor the analysis to the size and requirements of the lots in which a contract can be divided, rather than limiting the assessment to a holistic view in relation to the execution of the whole contract;
  3. to carry out case-by-case assessments of that capacity and the ensuing warning against stable joint tendering arrangements that fail to meet the thresholds for the creation of a full functioning joint venture; and
  4. to keep adequate records of those assessments for the purposes of enabling full and considerate responses to requests for information in the context of a competition investigation.

Given the complexity of the topic, however, there are some aspects of the draft guidelines that are less clear cut and where, in my opinion, there is scope for improvement and further clarification in the guidance finally adopted by the Authority. The assessment of relationships of potential competition in the context of restrictions of competition by object and the treatment of risk-driven collaborations deserve some careful consideration. These are issues that have spillover effects on the treatment of exchanges of information between undertakings considering bidding jointly for a public tender. This contribution addresses these three issues.

1. Treatment of potential competition

 The guidelines concentrate on the analysis of joint tendering by competitors and, implicitly, recognise that non-competing undertakings can freely cooperate in the context of public procurement (as in any other area of economic activity). This could be said explicitly, but there is no indication to the contrary in the draft guidelines. However, given the broad approach to the consideration of potential competition relationships between consortium members, and the assumption that joint bidding can be assessed as a restriction of competition by object because it involves price setting (following the EFTA Ski Taxi Judgement, above, in p. 20, box 2.11), the guidelines create some uncertainty.

On the one hand, because they indicate the possibility of joint tendering benefitting from block exemption regulations (BERs, see p. 30, para 3.2), despite the fact that price fixing is a hardcore restriction that excludes the applicability of the BERs. It would thus need to be clarified whether the Authority considers joint tendering as a restriction by object structurally involving price fixing or not, as well as the consequences of the position taken on this point. On the other hand, the guidelines create uncertainty because they do not address the tricky boundary issue of joint tendering by potential competitors as clearly as it would be possible.

The ambivalence or lack of clarity of the guidelines on this issue permeates the analysis and sometimes results in confusing expressions, such as the indication that chapter 3 assesses “the conditions that must be fulfilled for a consortium (including between competitors) to be exempted from the prohibition against agreements that restrict competition” (p. 23, introduction, emphasis added). Literally, this statement is incorrect, as joint bidding by consortia between non-competing undertakings does not run against the prohibition of Article 101(1) TFEU. In this case, it is possible that some word (such as “potential” competitors) is missing, but it is also possible that the guidelines are not too clearly set on the limits to the extension of the prohibition of Article 101(1) TFEU to (theoretically) potential competitors for a public contract.

This is an issue that has been recently discussed to some length,[3] and one which affects different aspects of the analysis under Article 101(1) and 101(3) TFEU that do not appear explicitly interconnected in the draft guidelines. In my view, there are two aspects that can be clarified.

First, the guidelines are not explicit in indicating how to carry out the analysis of an undertaking’s condition of potential competitor for a contract. There is just a mention to the effect that, in the assessment of “whether a company [rectius, undertaking] could [potentially] be able to bid individually, the Authority looks at whether this could constitute a sustainable economic strategy for the company (sic). This means firstly that a mere theoretical possibility of carrying out a contract is not enough; the possibility must be real and is shall include assessing that the offer must be profitable. The assessment shall be made on an objective basis” (p. 9, para 2.2).

This triggers two issues. One concerns the relevance of economic sustainability where the execution of a public contract is a one-off instance or involves a short to medium term project, where sustainability does not seem to raise particular issues or be the prime consideration. Another one concerns the assessment of profitability, in terms of the existence of economic incentives that justify potential additional investments, which requires a complex analysis of risk (discussed below 2). It seems clear that it is not sufficient to simply establish that an undertaking could have invested in additional resources to tender for the contract individually, but that it is necessary to establish that such investment was the rational economic decision to make under the circumstances (rather than engaging in a joint tender), which is always an ex post facto determination. In my opinion, great caution needs to be exercised here to avoid creating disincentives for joint tendering.

The guidelines could be improved by sketching, at the minimum, the circumstances in which the Authority would be willing to accept that an undertaking is justified in foregoing the potential investment to participate in the public tender, and the extent to which this can (and how it should) be documented. Logically, the same conditions need to justify a decision not to tender at all. If an undertaking is justified in not tendering (i.e., that is considered as the economically rational strategy), then it should also be justified in seeking collaboration. As mentioned below, this relates to an implicit duty to tender or else have a good rational for the tender hold-up, which seems more adequate for analysis under Article 102 TFEU than under Article 101(1) TFEU. In any case, difficult issues arise around any expectation or duty to participate in public tenders and the undertakings’ freedom to conduct a business under Art 16 of the EU Charter of Fundamental Rights, so careful consideration is necessary.

Second, the guidelines could be clearer in terms of the place for the establishment of counterfactual assessments. It seems that the guidelines do not consider the possibility of establishing an undertaking’s condition of potential competitor for a contract on the basis that it could have jointly tendered with undertaking(s) other than the one(s) it is eventually collaborating with. Such a possibility is only mentioned in relation with the assessment of the indispensability of an existing joint tendering agreement, where the draft guidelines indicate that, for an anticompetitive joint tender between (potential) competitors to be justified under Article 101(3) TFEU, “[t]here shall be no other economically viable and less restricting ways of achieving the efficiencies. This can be either in the form of bidding instead individually or forming a consortium with undertakings other than the ones in the current consortium” (p. 29, para 3.1.3, footnote omitted and emphasis added).

The fact that the existence of potential alternatives for collaboration is not use both to establish potential competition and the existence of potentially less restrictive forms of competition (ie, that it is not used both under an assessment of the Art 101(1) prohibition and the Art 101(3) exemption) should be welcome.

However, in my view, its use for the purposes of Art 101(3) is problematic. Once an undertaking has expressed its preference in collaborating with given consortium partner(s), it is difficult to accept the Authority’s role in second-guessing that an alternative collaboration would have been preferable (not only in competition terms, but also in business terms). The analysis of Art 101(3) TFEU should not involve this type of speculation, and it should suffice to establish that the joint bidders have not exceeded the limits required for the generation of the efficiencies derived from their agreement.

The possibility of having partnered with other undertakings seems to belong to the same logical plane as the decision not to partner with anyone (ie bid solo), or whether to tender at all. This is indicated in the draft guidelines itself themselves (see quote above), by linking the assessment of the undertaking’s ability to tender individually or to partner with other undertakings to do so. Those two decisions are equivalent in terms of establishing the undertaking’s condition of potential competitor for the contract, but they are not equally suitable for an assessment of whether less restrictive means existed, for the following reasons.

Where two potential competitors team up, then it can be argued that none of the restrictions was necessary at all and thus the assessment under Article 101(3) TFEU must fail. Conversely, where the agreement is between undertakings that would not have been potential competitors by themselves, the fact that a theoretically superior joint bidding arrangement could be conceived is irrelevant because the analysis under Article 101(3) TFEU must be limited to whether the arrangement in place generates efficiencies by the least restrictive means concerning the undertakings involved in the consortium. Considerations concerning third parties should be limited to an assessment of the fourth condition, concerning the consortium’s ability to eliminate competition for the contract—or, eventually, issues concerning infringements of Article 102 TFEU by the tenderer that could have participated solo and rather decided to ‘grab’ a partner that could have been strategic for a third party.

Therefore, it would seem more appropriate to move the assessment of the counterfactual consisting in the potential teaming with third party undertakings to the analysis of Art 101(1) TFEU with the sole purpose of establishing whether the joint tendering agreement is anticompetitive to begin with. In that setting, the circumstances in which a theoretically potential collaboration that is foregone is anticompetitive should also be clarified (as mentioned above) and, in my view, the clarification should be that such theoretical third arrangement is irrelevant.

Overall, taken together, these two issues point towards the need for more clarity in the guidelines concerning the assessment of situations where an undertaking is considered a potential competitor for a given public contract because it could have tendered for it (either individually, or in collaboration with third parties) but rather decides to team up with another potential competitor. As mentioned above, this seems to fit the framework of the rules applicable to a tender hold-up, which could be functionally assimilated to refusals to deal. In my view, developing the draft guidelines along these lines would improve them.

2. Treatment of risk-driven collaborations

The second main area where the draft guidelines could benefit from some clarification concerns the treatment of risk assessments carried out by undertakings considering the possibility to tender for a contract (either at all, or as part of a given consortium).

The first issue concerning risk-assessments that could be clarified is the extent to which they will actually be taken into account by the Authority. It seems contradictory or, at least confusing, that the draft guidelines indicate that “risk spreading is an element of the overall assessment of whether an undertaking can complete a contract on its own or whether it is objectively necessary to work with one or more undertakings” (p. 10, para 2.2) and at the same time that “[i]t will be difficult for a competition authority to make an ex post objective assessment of the risk taking on a contract … In this context, the issue of risk spreading will not necessarily be considered as an element when the Danish Competition and Consumer Authority assesses an undertaking’s capacity” (p. 11, same para). I find this difficult to understand and can see how the undertakings to which the draft guidelines are addressed may be confused. More clarity on the conditions in which the Authority will use or not internal documentation concerning risk-assessments would be desirable.

A second issue concerns the extent to which simultaneous tendering for different public contracts and their impact on the undertaking’s productive capacity features in the analysis. The draft guidelines usefully include a section on the analysis of the undertaking’s available capacity to undertake a contract and they recognise that, in some circumstances, foreseeable (recurring) commitments can be taken into account to establish that an undertaking does not have sufficient capacity to individually participate in a tender (pp. 14-15, para 2.2.4).

However, the guidelines do not seem to take into due consideration that undertakings active in procurement markets may (regularly) be tendering simultaneously for various contracts, which prospects of award are difficult to establish. In these cases, it is possible that a prudent business strategy requires the reservation of certain capacity in case the undertaking is successful in all of the simultaneous tenders (and this includes tenders which process of evaluation is live at the time of preparing the next tender), or at least a mitigation of that risk via cooperation with third parties (either by forming consortia, or through subcontracting).

Given the relevance (and, I would say, practical prevalence) of this circumstance, it would be desirable that the guidelines addressed it explicitly. Not only due to its impact on the assessment of the condition of potential competitor for a contract under Article 101(1) TFEU, but also due to the relevance that the draft guidelines give to this issue in terms of exemption under Article 101(3) TFEU (p. 26, para 3.1.1.1). In that regard, the guidelines indicate that “[i]n many cases, the risk of taking on a specific contract cannot in itself justify that companies shall not be considered competitors with regards to the contract. In such cases, risk considerations will only determine that the agreement is lawful under the competition rules if risk diversification leads to or contributes to companies submitting a better bid together than they would have been able to individually”. However, it could be that sometimes a joint bid is the only bid that potential competitors are willing to consider because their second best option is not a solo tender, but rather to withhold a tender for a contract that, if awarded, could tip them over their maximum capacity. In my view, more nuance could be introduced in relation with this aspect.

A third issue concerning risk assessment relates to the relevance given in the draft guidelines to the consortium’s expectation of competition for the contract. It is not clear to me why it would be relevant or adequate to consider that “[i]f a consortium that (sic) for instance participates in a public call for tenders where there are many participants and therefore there is effective competition for the contract, there will be greater likelihood that efficiencies are passed on to consumers in terms of lower offer price than if the consortium expects for example only another participant in the call for tenders” (p. 28, para 3.1.2). I find this inconsistent with economic theory. What is important to test the consortium’s incentives to tender aggressively (or the constraints to a limit pricing strategy) is whether they anticipate any (including only one) tender by an equally or more efficient tenderer. And, in any case, I struggle to envisage a legal test that could determine the extent to which the consortium was anticipating more or less competition for the contract. In that regard, I think that this element of risk management / strategic bidding should be clarified in the final version of the guidelines.

3. Spillover effects on exchanges of information

Given the issues surrounding the assessment of risk and the uncertainties concerning the effectiveness of using risk assessments to exclude the consideration of potential competitors of the consortium members or the existence of acceptable efficiencies in their joint tendering, the way in which the illegality of information exchanges is presented could constitute a significant disincentive for undertakings considering joint participation in public tenders.

In particular, the dissuasive effect can derive from the drafting of the paragraph that indicates that “[i]f it turns out that the undertakings that have considered entering into a consortium will themselves be able to bid for the contract and, thus, they are competitors, the information exchange that has taken place, will in fact constitute information exchange between competitors. This will be a criminal offence if the information is sensitive from a competition perspective. It is therefore important that each undertaking clarifies beforehand whether it can complete the contract individually and thus whether the undertakings are competitors” (p. 31, para 4.1, emphasis added).

It is possible that this dissuasion is mitigated by introducing more clarity concerning aspects of risk assessment identified above, in particular concerning the possibility of having teamed up with third parties and the assessment of potential capacity constraints. Otherwise, it could be advisable to provide more detail of the circumstances in which such exchange of information could lead to a prosecution.

In that regard, it would also be necessary to avoid statements that could be potentially misleading. In particular, in my view, it would be necessary to reconsider the indication that seeking legal advice could reduce the likelihood of an investigation or prosecution, not least because that could potentially run contrary to the interpretation of Article 101 TFEU by the Court of Justice of the European Union in its Schenker Judgment,[4] where it clearly indicated that “legal advice given by a lawyer cannot, in any event, form the basis of a legitimate expectation on the part of an undertaking that its conduct does not infringe Article 101 TFEU or will not give rise to the imposition of a fine”.[5]

_______________________

[1] For discussion, see here and A Sanchez-Graells, “Ski Taxi: Joint Bidding in Procurement as Price-Fixing?” (2017) 8(6) Journal of European Competition Law & Practice, forthcoming, available at https://academic.oup.com/jeclap/article-lookup/doi/10.1093/jeclap/lpx043, last accessed 07/07/2017.

[2] This is, in my view, the right general approach. See A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 336-340.

[3] E.g. see here, here, C Thomas, “Two Bids or not to Bid? An Exploration of the Legality of Joint Bidding and Subcontracting Under EU Competition Law” (2015) 6(9) Journal of European Competition Law & Practice 629-638; C Ritter, Joint Tendering Under EU Competition Law (February 1, 2017), available at https://ssrn.com/abstract=2909572, last accessed 07/07/2017; and most recently, and with a consolidation of all previous debates, I Herrera Anchustegui, “Joint Bidding and Object Restrictions of Competition: The EFTA Court’s Take in the ‘Taxi Case’” (2017) European Competition & Regulatory Law Review (CoRe) 174-179, available at https://ssrn.com/abstract=2966374, last accessed 07/07/2017.

[4] Judgment of 18 June 2013 in Schenker & Co. and Others, C-681/11, EU:C:2013:404.

[5] Idem, para 41.

Comments on draft Catalan regional law on public procurement

I had the honour of being invited by the Catalan Parliament's Commission on Economy and Public Finances to submit comments to the draft Catalan regional law on urgent public procurement measures. These may be of limited interest and are written in Catalan (so not very accessible), but I thought I would post them here anyway. The full text of the draft law to which the comments refer is accessible here.

A LA MESA DE LA COMISSIÓ D’ECONOMIA I HISENDA

 APORTACIONS PER ESCRIT EN RELACIÓ AL PROJECTE DE LLEI DE
MESURES URGENTS EN MATÈRIA DE CONTRACTACIÓ PÚBLICA (tram. 200-00009/11)

Distingits membres de la Comissió d’Economia i Hisenda del Parlament de Catalunya,

Els agraeixo l’oportunitat de presentar observacions en relació al projecte de llei de mesures urgents en matèria de contractació pública.

Com a nota preliminar, voldria aclarir que la perspectiva d’aquesta aportació és la del dret europeu de contractació pública i, per tant, la major part de les meves observacions tendeixen a analitzar el contingut del projecte de llei amb l’objectiu d’assegurar el compliment de la normativa de la Unió. En concret les meves observacions es limiten a la compatibilitat amb la Directiva 2014/23/UE, de 26 de febrer de 2014, relativa a l’adjudicació dels contractes de concessió i amb la Directiva 2014/24/UE, de 26 de febrer de 2014, sobre contractació pública. Per tant, qüestions d’interacció entre el projecte de llei catalana i la futura llei estatal de contractes del sector públic – actualment en tramitació parlamentària al Congrés dels Diputats – queden al marge d’aquestes aportacions.

Addicionalment, cal tenir en compte que aquestes observacions no pretenen oferir una visió exhaustiva del projecte de llei, ans es limiten a aquelles qüestions problemàtiques on, en la meva opinió, aquesta Comissió hauria de plantejar-se la necessitat d’introduir canvis i esmenes al projecte de llei.

Sotmeto a la seva consideració les següents observacions:

01. Preàmbul

El preàmbul conté una afirmació incorrecta que cal aclarir, sobretot per la rellevància que es dona a aquesta afirmació en termes de la necessitat d’aprovar una llei de mesures urgents. En concret, és incorrecte indicar que l’aprovació de la Directiva 2014/24/UE ha produït una “reducció dels supòsits en què es pot utilitzar el procediment negociat sense publicitat que es deriva de l’aplicació directa dels articles 26 i 32 de la Directiva 2014/24/UE i que, si bé d’una banda aporta més transparència als procediments de contractació, de l’altra obliga a recórrer a procediments més llargs i complexos amb un impacte substancial en la tramitació dels procediments de licitació que impedeix, en un termini relativament breu de temps, fer front a la contractació de serveis públics.

En aquest sentit, cal tenir en compte que el contingut material de l’article 31 de l’anterior Directiva 2004/18/CE, regulador dels supòsits en què és legítim recórrer a l’adjudicació directa de contractes, s’ha traslladat íntegrament a la Directiva 2014/24/EU, però no únicament als articles 26 i 32, sinó també a l’article 72, en relació a l’adjudicació directa de contractes per entregues addicionals. Més clarament, el supòsit de l’antic article 31(4)(a) de la Directiva 2004/18/EC (entregues addicionals resultants de necessitats imprevisibles de l’administració, fins a un 50% del valor original del contracte) té correlació directa amb el supòsit del nou article 72(1)(b) de la Directiva 2014/24/UE (que només ha alterat la redacció de les condicions aplicables a aquest supòsit). Per tant, les consideracions basades en el caràcter aparentment més restrictiu de la nova normativa de la Unió no estan justificades per un canvi real de dret substantiu i, en la meva opinió, això s’ha de reflectir adequadament en el preàmbul del projecte de llei.

02. Article 3. Càlcul del valor estimat de les concessions

La metodologia de càlcul del valor estimat de les concessions i, en concret, la regla general de l’article 3.1 del projecte de llei es desvia de la regla prevista per l’article 8(2) de la Directiva 2014/23/UE. Aquesta darrera norma preveu que el valor d’un futur contracte de concessió serà equivalent al volum de negoci estimat de la futura empresa concessionària durant la durada total del contracte, excloent-ne exclusivament l’IVA. En canvi, l’article 3.1 del projecte de llei preveu la possibilitat d’excloure, no només l’IVA, sinó també “qualsevol altre tribut que fos d’aplicació”. Aquesta desviació respecte la norma europea és molt rellevant, sobretot si dona peu a interpretacions encaminades a permetre l’exclusió de l’impost de societats, però també en el supòsit de descomptar altres impostos, com ara els relacionats amb la propietat d’immobles, o altres tributs locals, directes o indirectes. Per tant, l’article 3.1 s’ha de modificar per suprimir aquest esment final, de manera que indiqui que “... el valor estimat del contracte es calcula en base al volum de negoci estimat de la futura empresa concessionària, com a conseqüència de l’adjudicació de la concessió, excloent-ne l’IVA”.

De manera similar, l’article 3.2 del projecte de llei es desvia de la regla prevista per l’article 8(3) de la Directiva 2014/23/UE, ja que la llista de criteris que, com a mínim, s’han de tenir en compte per determinar el valor estimat de les concessions es incomplerta. Per tant, l’Article 3.2 del projecte de llei s’ha de modificar, de manera que estableixi que:

... ha de tenir en compte, com a mínim:

 – El valor de les possibles modificacions i les pròrrogues.

– Les rendes procedents de l’abonament de les tarifes i qualssevol multes per part dels usuaris, quan no siguin tarifes, taxes o preus públics recaptats a compte i per ingressar a l’òrgan contractant.

– Els pagaments, subvencions o avantatges financers que s’abonin a l’empresa concessionària, per part de l’òrgan de contractació, de qualsevol altra administració o ens públics, o de tercers, derivats de la concessió, incloent-hi qualsevol compensació pel compliment d’obligacions de servei públic i subvencions a la inversió pública.

– Les rendes derivades de la venda o arrendament de qualsevol bé o actiu que formi part de la concessió.

– El valor de tots els béns, subministraments i serveis que l’òrgan de contractació posi a disposició de l’empresa concessionària, sempre que siguin necessaris per a la prestació del servei o l’execució de les obres.

– Les primes o pagaments als candidats o empreses licitadores.

03. Article 4. Documentació acreditativa del compliment de requisits de capacitat i solvència

Convindria completar la regulació d’aquest article en dos sentits. D’una banda, a efectes de garantir el compliment de la obligació creada per l’article 59(4) segon paràgraf de la Directiva 2014/24/UE, cal aclarir de manera expressa l’obligació dels òrgans de contractació de demanar, abans de l’adjudicació del contracte, que la empresa seleccionada com a futura contractista presenti documentació actualitzada que demostri la veracitat i correcció del contingut de la declaració responsable. D’altra banda, convé establir un període adequat per a la presentació d’aquesta documentació, així com les conseqüències derivades de la falta de presentació, que haurien d’assegurar la desqualificació de l’empresa afectada i l’adjudicació del contracte a la següent empresa en ordre de valoració de les ofertes rebudes.

04. Article 6. Valoració de les proposicions

En relació a l’article 6.2 del projecte de llei, cal prendre en consideració que els criteris que s’indiquen per a la valoració del cicle de vida no són suficients per donar efectivitat a la possibilitat prevista per l’article 68 de la Directiva 2014/24/UE. En el seu cas, conforme a l’article 68(2) d’aquesta norma, la valoració del cicle de vida s’ha de dur a terme conforme a una metodologia pre-establerta que ha de complir totes i cadascuna de les següents condicions:

(A) Es basa en criteris objectivament verificables i no discriminatoris. En particular, quan no s'hagi establert per a una aplicació repetida o contínua, no ha d'afavorir o desavantatjar indegudament qualsevol operador econòmic;

(B) És accessible a totes les parts interessades;

(C) Les dades requerides per a l’aplicació de la metodologia es poden proporcionar amb un esforç raonable per part d'operadors econòmics normalment diligents, inclosos els operadors econòmics de països tercers que formen part de l’acord de l’Organització Mundial del Comerç sobre Contractació Pública Governamental o altres acords internacionals pels quals la Unió Europea estigui vinculada.

Com a mínim, això s’hauria d’incloure expressament en un nou apartat de l’article 6 del projecte de llei.

05. Article 8. Mesures de gestió eficient en la tramitació

Hi ha tres qüestions específiques del règim de gestió eficient que poden esdevenir problemàtiques.

D’una banda, en relació a l’apartat d), és difícil preveure que el requisit d’inscripció obligatòria no limiti la concurrència. Per tant, no sembla adient que es creï la possibilitat d’exigir aquesta inscripció amb caràcter absolut. Convé tenir en compte que, tot i que aquest règim sigui aplicable a contractes de valor inferior als llindars comunitaris, si un contracte té interès comunitari el requisit d’inscripció obligatòria pot resultar contrari al dret europeu. Per tant, proposo que es consideri la supressió d’aquest apartat.

D’altra banda, convé tenir en compte que la revelació excessiva d’informació pot afavorir la col·lusió entre empreses competidores per contractes públics. Per tant, en línia amb allò previst per l’article 55(3) de la Directiva 2014/24/UE, és adient incloure a continuació del tercer paràgraf de l’apartat f) que:

Durant la fase pública i, en general, en relació amb tota la informació inclosa a l’expedient, la mesa de contractació i altres departaments de l’òrgan de contractació han de garantir la protecció d’informació confidencial i assegurar que no es revela informació que pugui impedir l'aplicació de la llei o la revelació de la qual, de qualsevol altra manera, sigui contrària a l'interès públic, perjudiqui els interessos comercials legítims d'un operador econòmic en particular, ja sigui públic o privat, o pugui afectar la competència efectiva entre operadors econòmics.”

Finalment, en relació amb l’apartat i), convé considerar l’oportunitat de preveure expressament que qualsevol queixa contra la decisió d’adjudicació que s’interposi durant el període de 5 dies suspendrà la possibilitat de formalitzar el contracte en tant no s’hagi resolt la disputa.

06. Article 9. Causes de modificació dels contractes

Aquest article crea un règim excessivament simplificat en relació a l’article 72 de la Directiva 2014/24/UE. Es tracta d’un article que introdueix desviacions rellevants respecte al règim comunitari i que, a la vegada, crea confusió a causa de l’apartat 3, que fa una referència total al règim del dret de la Unió. Convindria un replantejament complet d’aquest article i seria recomanable transposar, sense canvis, el text literal de l’article 72 de la Directiva 2014/24/EU. En defecte d’aquesta solució, com a mínim s’haurien de fer els següents canvis:

a)   L’article 9.1 s’ha de modificar per garantir la seva compatibilitat amb l’article 72(1)(b) de la Directiva 2014/24/EU, per tal que estableixi que “Els contractes es podran modificar quan sigui necessari perquè calgui realitzar prestacions addicionals que hagin esdevingut necessàries, no estiguin previstes en el contracte original i que únicament pugui portar a terme el contractista original per raons econòmiques o tècniques, o perquè una nova adjudicació pugui generar inconvenients significatius, com ara requisits d'intercanviabilitat o interoperabilitat amb equips, serveis o instal·lacions existents obtingudes en virtut de la contractació inicial, o un augment substancial de costos per a l’Administració. En qualsevol cas, el límit màxim global d’una modificació per aquesta causa serà del 50% del valor inicial del contracte. Quan es facin diverses modificacions successives, aquesta limitació s'aplicarà al valor de cada modificació.”

b)   L’article 9.2 s’ha de modificar per garantir la seva compatibilitat amb l’article 72(1)(a) i (d) de la Directiva 2014/24/EU, que no preveu la possibilitat de modificar el contracte només pel fet de que es produeixi una cessió. Per tant, cal canviar el tenor literal de l’article per tal que indiqui que: “La successió en la persona del contractista per fusió, absorció, escissió, aportació o transmissió d’empresa o branca d’activitat, així com la revisió de preus en cas que, en aquest darrer supòsit, s’admetin en els plecs, s’hauran de tramitar com a modificació de contracte.

07. Disposicions addicionals

Tinc dubtes de compatibilitat amb el dret europeu de la regulació de les “formules no contractuals de gestió de serveis socials” prevista en les disposicions addicionals. Els dubtes principals estan en relació amb (i) l’assumpció que aquestes “fórmules no contractuals” no són contractes públics a efectes de la normativa de la Unió, (ii) la preferència que es pretén crear per a entitats sense ànim de lucre, i (iii) la delegació reglamentària de la vigència màxima d’aquestes fórmules. Les principals raons pels meus dubtes són les següents:

(i)      L’estructura d’aquest sistema d’autorització + concert correspon, a efectes de la definició de contractació pública prevista per l’article 1(2) de la Directiva 2014/24/UE, a una fórmula contractual que, per tant, s’ha de regir per la totalitat d’aquestes normes (com indico després). La jurisprudència del Tribunal de Justícia ja s’ha ocupat de la interpretació d’aquest concepte de contractació pública (‘procurement’) en la Sentència de 2 de juny de 2016 en el cas Falk Pharma, C-410/14, EU:C:2016:399. Allí el Tribunal va establir que llevat dels casos on la selecció del proveïdor no depengui de l’elecció de l’administració pública, aquesta mena de sistemes de conveni s’han de sotmetre a la normativa de la Directiva 2014/24/UE. Per tant, llevat que els pacients i beneficiaris dels serveis tinguin una llibertat total per a l’elecció del proveïdor de serveis, no és possible considerar el sistema creat per les disposicions addicionals com a “fórmules no contractuals” a efectes de compliment amb la normativa de la Unió.

(ii)    La creació de preferències per l’adjudicació de contractes públics a entitats sense ànim de lucre és, en general, contrària al dret de la Unió. Així ho va establir el Tribunal de Justícia a la Sentència d’11 de desembre de 2014 al cas Azienda sanitaria locale n. 5 «Spezzino» and Others, C-113/13, EU:C:2014:2440, on només va admetre la creació d’aquesta mena de preferències quan el marc constitucional de l’Estat membre en qüestió així ho permeti (com era el cas d’Itàlia). En la meva opinió, la Constitució espanyola de 1978 no ofereix aquesta possibilitat i, per tant, la creació d’una tal preferència vulnera el dret comunitari.

(iii)   La durada màxima dels contractes ha d’ésser establerta a nivell de llei. Addicionalment, ja que el sistema previst és, com a mínim, funcionalment equivalent als acords marcs de l’article 33 de la Directiva 2014/24/EU, la seva durada màxima no pot excedir els quatre anys.

Amb caràcter més general, em sembla que el projecte de llei no pren en consideració les particularitats de règim jurídic que els articles 74 a 77 de la Directiva 2014/24/UE estableixen per a aquesta mena de serveis socials i especials, que permetrien la creació d’un sistema de reserva de contractes de durada màxima de tres anys per a entitats sense ànim de lucre. En definitiva, em sembla que els objectius de política social implícits en el sistema previst a les disposicions addicionals es pot fer compatible amb el dret de la Unió, però no de la forma establerta. Si fos d’interès per a aquesta Comissió, i amb temps i finançament adequats, podria contribuir amb una contra-proposta detallada.

Agraint-los novament l’oportunitat de presentar aquestes consideracions, quedo a la seva disposició.

3 de juliol de 2017

 

Interesting AG Opinion on treatment of on-going criminal cases & self-cleaning under 2004 rules (C-178/16)

In his Opinion of 21 June 2017 in Impresa di Costruzioni Ing. E. Mantovani and Guerrato, C-178/16, EU:C:2017:487 (not available in English), Advocate General Campos Sanchez-Bordona analysed an Italian case concerning the interaction between mandatory and discretionary exclusion grounds related to an undertakings' director's criminal record, as well as the self-cleaning measures adopted by the undertaking as it aimed to carry on participating in tenders for public contracts. The case requires the interpretation of the 2004 EU public procurement rules, but its rationale will be relevant in the future interpretation of Art 57 of Directive 2014/24.

In the case at hand, a former director (Mr B) of a tenderer (Mantovani) was under criminal investigation for having run a scheme of fraudulent invoices, and it was publicly known (vox populi) that he had entered into a plea bargain deal. When Mantovani submitted a tender for the construction of a new prison in Bolzano (the irony is inescapable...), and as part of the documentation aimed at demonstrating its good personal and professional standing, it submitted a self-certification indicating that Mr B had ceased his position as president of the board of directors 4 months prior to the start of the tender procedure and that, to the best of Mantovani's knowledge, no conviction by final judgment or plea bargain deal had been had been adopted.

Relying on the public information of which it was aware, the contracting authority requested a copy of Mr B's criminal record. It revealed that a sentence based on the plea bargain deal had become final after the submission of the self-certification by Mantovani (the sentence being adopted only the day after the submission of the first self-certification by Mantovani). The contracting authority decided to exclude Mantovani, which challenged this decision on the basis that: (a) the conviction had been published and become final after the submission of the self-certification, and (b) that it had taken remedial action to severe all ties with Mr B (including cessation of his directorship, restructuring of the board of directors, repurchase of Mr B's shares in Mantovani, and suing Mr B for director's liability).

Interestingly, the contracting authority asked for consultation to the Italian Anti-Corruption Agency (ANAC), which advised that, even if it could be found that Mantovani did not submit a false self-declaration (which onus probandi fell on the contracting authority), and in particular due to the (technical) fact that the conviction was not final at the time of the self-declaration, the contracting authority has a duty to assess the effectiveness of the self-cleaning measures and it is conceivable that Mantovani's integrity is compromised due to the fact that it had not taken positive steps to make the conviction know to the contracting authority once it became official and final. In ANAC's view, and according to Italian case law, failure to actively keep the contracting authority informed of developments in a criminal investigation (where there is an eventual conviction) reveals the absence of disengagement with the former director, and is thus a violation of the duty of loyal cooperation that can justify its exclusion from the procurement procedure.

The contracting authority decided to keep Mantovani's exclusion, and this was challenged. The assessment of the case is complicated by the peculiarities of the Italian rules (which triggered significant debate between the interveners before the ECJ, and which AG Campos rightly  considers the Court incompetent to rule on, see paras 37-38), as well as by the fact that the new rules on self-cleaning are not applicable ratione temporis, which creates some vacuum in the framework for the assessment of the contracting authority's exercise of discretion in this case. However, AG Campos' assessment of the case offers some interesting interpretive pointers. In my view, these are the relevant points of the Opinion:

  • The key issue concerns the contracting authority's decision to exclude Mantovani not directly on the basis of the criminal conviction of Mr B, but rather on Mantovani's own failure to keep the contracting authority informed once that conviction was official. This thus requires an assessment of compatibility with the ground of exclusion based on the existence of evidence that the economic operator is guilty of grave professional misconduct, which renders its integrity questionable [Art 45(2)(d) Dir 2004/18 and now Art 57(4)(c) Dir 2014/24] (paras 42-46).
  • Member States have significant discretion to regulate the conditions applicable to discretionary exclusion grounds, and this is only limited by the impact that such grounds and their exercise can have on freedom of establishment and freedom to provide services. Such impact needs to be subjected to a balancing exercise vis-a-vis the public interest in the probity of the procurement process, under a proportionality assessment (paras 51-53).
  • Under that analytical framework, nothing prevents an extension to the economic operator of (some of) the consequences of the criminal behaviour of one of its former directors, and it is adequate to make the burden of proving effective disengagement and adoption of effective remedial measures (ie, self-cleaning) on the undertaking (paras 54-65).
  • It is adequate, and certainly not incompatible with EU law, to treat the economic operators' silence (or the omission of an implicit duty to keep the contracting authority informed based on a more general duty of loyal cooperation) as evidence of professional misconduct capable of justifying a decision to exclude it from the tender procedure. Where no documentary evidence exists that could allow for a pre-defined check of compliance with (or absence of) exclusion grounds -- notably, those concerning professional misconduct or failure to supply required/adequate/truthful information -- the contracting authority enjoys a broad degree of discretion to assess the circumstances and evidence potentially leading to an exclusion decision (paras 72-83).
  • Importantly, given that the exclusion of the economic operator is not automatic, but rather based on an ad casum assessment, and that such discretionary assessment is subjected to judicial review, this does not place the economic operator in a situation where it cannot defend its interests (para 84).

I think that AG Campos shows two interesting guiding principles that the ECJ should support in its Judgment in Impresa di Costruzioni Ing. E. Mantovani and Guerrato, as well as more generally in the future. First, that contracting authorities need to be given space to exercise discretion aimed at ensuring the probity of the procurement process. And, second and equally important, that the exercise of that discretion needs to be subjected to appropriate checks and balances, including an opportunity to challenge exclusion decisions under appropriate procedural guarantees.

In my view, this functional approach also stresses the need to create effective inter partes procedures for the economic operator and the contracting authority to exchange information prior to the exclusion decision being effective, as well as ensuring swift review of those decisions at a stage where they can still be undone (as the logic in Marina del Mediterraneo requires, see here). Thus, this supports, once more, the need to revise and reform the remedies directive, largely along the lines I drew in A Sanchez-Graells, "'If It Ain't Broke, Don't Fix It'? EU Requirements of Administrative Oversight and Judicial Protection for Public Contracts", in S Torricelli & F Folliot Lalliot (eds), Administrative Oversight and Judicial Protection for Public Contracts (Larcier, 2017, forthc)].

Anti-competitive, excessively broad, long-term service contracts as a substitute for legislated reform of the NHS in England? -- re manchester out of hospital care tender

In my previous post, I had tried to scope the potential impact of Brexit for NHS procurement in England. There, I stressed the peculiarities derived from the traditional purchaser-provider split that has characterised the activities of the English NHS since the 1990s. That split has evolved beyond a pure "public management" tool and, over the past 25 years or so, resulted in the emergence of mixed markets where public and private undertakings compete for the provision of certain services that are procured or commissioned by a different (buying) branch of the NHS. Those markets are controlled by competition and public procurement rules, which are in part of EU origin, and in part purely domestic instruments -- such as the Health and Social Care Act 2012 and the NHS (Procurement, Patient Choice & Competition) No 2 Regulations 2013.

I also stressed that this domestic policy aimed at creating an "NHS internal market" with clear elements of a mixed economy was (and is) not mandated by EU law. In my view, there is nothing in EU law that obliges member states to open up public healthcare services to competition (see Art 14 and Protocol (No 26) TFEU). EU law simply sets specific rules and constraints applicable to situations where member states independently decide to open up those markets to competition. My arguments for this are largely along the same lines of those maintained by Hervey & McHale (2015, see ch 9).

Therefore, if policy-makers identified the NHS purchaser-provider split as a problem for the introduction of reforms in the way NHS England operates, with or without Brexit, it would be possible to move back to a fully integrated public healthcare system without infringing EU law. Or, in other words, there is no reason why policy reform aimed at undoing the purchaser-provider split in the English NHS could not fit within the blueprint of EU law. 

However, the way in which such change of model can be legally delivered is not without constraints, both under UK and EU law. In my opinion, it is not possible for policy-makers to move away from the current "NHS internal market" without changing its basic regulatory framework (ie without legal reform), and decisions aimed at bringing the existing mixed markets under public control under an appearance of compliance with public procurement and competition law are highly problematic. An on-going project to alter the market for the provision of out of hospital care services in Manchester offers a clear example of this. Given that Manchester's is the first in a series of parallel on-going projects, this can well serve as a cautionary tale.

As part of the implementation of a sustainability and transformation plan (STP), Manchester authorities responsible for health and social care (including three Clinical Commissioning Groups, CCGs, and the Manchester City Council) tendered a contract for the creation of a ‘Local Care Organisation’ (LCO) for a range of out of hospital health and care services for Manchester. The LCO would aim to "deliver sustainable, high quality, safe and affordable prevention, primary, community, secondary health and social care services, through a blend of direct and sub-contracted provision." Furthermore, the contract notice also indicated that "Over time, some services currently provided in the acute sector may be transferred to the LCO; commissioning intentions may result in the transfer of some low acuity, non-surgical (or non-complex surgical) services, into the LCO from year 3 (2020/21) at the earliest, and possibly thereafter over the contract term." In short, this was a contract for the provision of virtually all health and social care services with the exception of in-hospital services. The tendered contract was for a duration of 10 years and an estimated value of £5.9 billion, and was designed as a single block, thus excluding the possibility of awarding it by lots. This was the biggest ever NHS tender at the time of being launched, but other similar contracts are already being sought by local NHS commissioners (see here).

It is worth stressing that the contract was advertised on 14 March 2017 and expressions of interest had to be submitted by 28 April 2017, which does not seem like a particularly long time frame, given the complexity and duration of the contract. The tender notice also explicitly indicated that "The contract will be awarded without further advertisement of this opportunity and there will be no further opportunity to express interest", which clearly created time pressure and possibly discouraged potentially interested tenderers that did not consider it possible to submit a competitive (or even a complete) qualification questionnaire within 6 weeks.

Unsurprisingly, it has now emerged that only one offer has been received fro this contract, and that this offer has been submitted by "the Manchester Provider Board, which is a consortium made up of Manchester City Council, local GP federations, the city's three acute trusts [ie hospitals], community service providers and the Greater Manchester Mental Health Trust". In my view, there are two plausible reasons for this less than competitive outcome: first, that the tendered contract exceeds the delivery capabilities of any given organisation (as demonstrated by the fact that the only offer comes from a collaborative effort that aggregates virtually the entirety of the public providers -- which probably also count on continued reliance on private providers); and, second, that the entities participating in the design of the Manchester STP had, at least, a clear time advantage to prepare their tender (if not also information not available to other potentially interested tenderers). On the whole, it seems that the advertising of the contract was never intended to create real competition, and is simply a formal step aimed at creating an appearance of legality of this strategy aimed at side-stepping the (NHS) market.

I am concerned about at least three dimensions or implications of the strategy followed in the (partial) delivery of the Manchester STP through the tendering of such excessively broad, long-term services contract in less than competitive conditions.

First, at the immediate level of the tender, I am concerned that its design is anti-competitive and potentially breaches the requirements of the principle of competition established in reg. 18(2) and (3) of the Public Contracts Regulations 2015 (in transposition of Art 18(1) Dir 2014/24, on which see here), which requires contracting entities not to artificially narrow competition, in particular by favouring or disadvantaging certain economic operators. Similar issues of interpretation of the requirement of effective competition in the tendering of procurement contracts in the health sector has arisen in other jurisdictions and, in the specific case of Finland, there is an important precedent against the creation of exceedingly large contracts leading to a single potential supplier (for discussion, see here). If I am right and there is a breach of this principle, the whole procurement process should be quashed (although it also seems clear that litigation is unlikely at this stage).

Second, and at a more general level, I think that the effort behind the STP is not merely aimed at streamlining the functioning of the existing NHS market for the provision of out of hospital health and social care services, but rather at setting aside that market altogether. Rather than simply searching for better service delivery through aggregation in the patients' interest (within the limits of the NHS (Procurement, Patient Choice & Competition) No 2 Regulations 2013 -- for discussion, see here), this aims to deliver a change of model for the management of the NHS (and ancillary social services) and clearly exceeds the policy-making space of the procurement regime. If this is the case, I do not think that this can be done through the procurement of a massive umbrella contract capable of eating up the NHS market (while also indicating that there is space for subcontracting and for the future placement of additional services under that umbrella). Legal reform is necessary, in particular to ensure full debate in Parliament of the move away from the purchaser-provider split, as well as the broader implications of the (apparent) project of de-marketisation of the NHS. This is necessary because a change of model is not without consequences, in particular if (foreign) investors in private health care providers raised claims against the UK Government for what could amount to an expropriation in terms of international investment law, as well as a potentially disproportionate (ex post) restriction of EU fundamental freedoms of establishment and movement.

Third, and looking at the future, I am concerned that the delivery of this macro umbrella contract will be highly challenging and difficult to achieve within the terms of the original contract (although I have not seen them). It seems clear that such a long-term and broad contractual object will require permanent adjustments and modifications, which may trigger litigation down the line. The fact that a single contract has such a large scope creates legal risks of its own, in particular if it was to be set aside or terminated in the future. I am sure that there will be contractual provisions aiming to minimise disruption in the provision of such crucial health and social care services should contract execution run into serious difficulties, but it is hard to see that all contingencies can be covered.

Overall, I do not think that EU law (or domestic law) opposes or prevents the end result that the Manchester (and other) STPs aims to achieve. However, they do oppose and raise significant issues in the way that this very fundamental change (ie reversion) of the NHS internal market model is being delivered. Before the Manchester strategy is rolled over or mimicked in other areas, I would suggest that a deeper rethinking and a commensurate reform of the applicable legal framework is necessary. It is clear that the Government is not in the best position to undertake such a large scale project in the context of the Brexit negotiations and the aftermath of the June General Election, but allowing for such reform to be carried out under the radar of Parliamentary scrutiny seems to me both politically wrong and legally risky.

 

Scoping the impact of Brexit for NHS procurement

NHS England spends over £20 billion every year on goods and services, which typically accounts for around 30% of the operating costs of each hospital. A significant part of the remainder of NHS non-salary budget involves the commissioning of health care services. This expenditure and commissioning is controlled by NHS procurement rules, which in part derive from EU law. Different procurement rules apply in different countries within the UK, and both Scotland and Northern Ireland both have separate regulatory schemes. Even though this post only focuses on the situation in England, some issues reflect broader concerns in the UK context. Generally, NHS procurement rules are regularly criticised for imposing excessive red tape and compliance costs on the NHS, and calls for NHS procurement reform to free it from such strictures are common.

In this context, Brexit could be seen as an opportunity to overhaul NHS procurement and to move away from the perceived excesses of EU law (see eg Cram: 2016). However, I think that it is far from clear that such reform could not fit within the blueprint of EU law, and that most of the constraints on NHS procurement rather derive from independent decisions adopted by the UK over the last 25 years. Moreover, from an economic perspective, Brexit will probably hurt the functioning of the NHS (including its procurement), with or without significant regulatory reforms.

This post is based on my presentation at the event Brexit, Regulation and Society, held by ManReg: The Manchester Centre for Regulation, Governance and Public Law (slides at the bottom of this post), and concentrates on two issues. First, does EU law prevent significant reforms of NHS procurement and, if so, can Brexit suppress such constraints? Second, is the way the Brexit process is unfolding conducive to an improvement of NHS procurement, both from an economic and a regulatory perspective?

Starting point, where were we before Brexit?

Since the 1990s, in England, the activities of the NHS have been characterised by a peculiar purchaser-provider split. Some branches of the NHS act as purchasers or commissioners of health care services (currently, clinical commissioning groups, or CCGs), while other branches of the NHS (trusts and foundation trusts) act as providers of health care services and compete with private providers in some markets. The activities of these entities are overseen by NHS Improvement as sector regulator.

The purchaser-provider split policy was introduced with the aim of creating an “NHS internal market” to generate competition-based incentives for the improvement of service delivery and cost management. However, the system has been permanently evolving (a ‘continuous revolution’, Maynard:2016), and this has both created increased scope for public-private competition (Odudu: 2012; Hunter: 2016), and notable difficulties in keeping pace with the successive waves of NHS procurement re-regulation.

Currently, NHS procurement is primarily covered by two sets of domestic rules (as well as a large volume of soft law). The core bodies of rules applicable to NHS procurement are:

Additionally, given the organisation of the system as a mixed market with public and private suppliers in different forms of competition for different services, NHS procurement is also subject to a host of EU and UK competition rules, such as:

  • The Competition Act 1998 and the Enterprise Act 2002 (as domestic statutes that replicate, to a large extent, substantive EU law prohibitions); and the
  • Treaty on the Functioning of the EU, including State aid rules – and in particular those for the financial support to the provision of Services of General Economic Interest.

On the whole, this results in a rather complex regulatory setting that is commonly criticised as imposing significant constraints on the way NHS procurement is carried out. However, it is important to stress that these constraints ultimately depend on the existence of the purchaser-provider split and the establishment of a mixed market for health care services—which are decisions independently made by successive UK governments rather than an EU imposition. There is nothing in EU law that obliges member states to open up public services to competition, and the UK could move back to a fully integrated public system without infringing EU law. In other words, EU law is not the cause of any shortcomings identified in the existing regulation of NHS procurement of health care services.

Could Brexit alter the situation?

Given the above, in regulatory terms, the short answer is that Brexit should mostly not have any meaningful effect on the regulation of NHS procurement. Significant reforms are possible under current EU law. They would however require political drive and changes in funding schemes. Indeed, already before the referendum, it was clearly stressed that “leaving the EU is an irrelevance when it comes to what many regard as the creeping marketisation of the NHS” (Hunter: 2016; and in similar terms, later reiterated by McKenna: 2016; Taylor: 2016).

Leaving the single market would not lift constraints on the reform of NHS procurement, or NHS governance more generally, but it could affect it in practical terms. Indeed, it was clear that Brexit could have negative operational impacts for NHS procurement. This would be the case both if: (1) the “NHS internal market” was kept, because exiting the EU’s single market could have negative impacts on private competition in health care provision, including in the market for health care insurance in the UK; or (2) if the “NHS internal market” was to be dismantled, since the acquisition of equipment and supplies from outside the UK would face barriers and additional costs (Hall: 2017), which can only be exacerbated by the negative impact of Brexit on the economy, both in terms of economic slowdown and inflation (which are now materialising; ONS: 2017).

NHS (procurement) in the Brexit and general election campaigns

NHS funding featured prominently in the political campaign leading to the Brexit vote. Most discussion concentrated on the level of funding for a cash-strapped NHS. However, the deeper impacts of Brexit on the NHS – in particular those of a hard Brexit that implied the UK’s exit from the EU’s single market and customs union – received much less attention (not least because leaving the single market was back then explicitly rejected as an option for the future).

Nonetheless, it was clear that any impact of Brexit on NHS procurement was compounded by the uncertainty surrounding the framework for UK-EU trade post-Brexit. This was not clarified during the Brexit campaign, and the following plans unveiled by the UK Government failed to provide any further specifics. Neither the Brexit White Paper nor the Great Repeal White Paper reduced such uncertainty. The Brexit White Paper simply stated that the Government’s intention is to “not be seeking membership of the Single Market, but … pursue instead a new strategic partnership with the EU, including an ambitious and comprehensive Free Trade Agreement and a new customs agreement.” The Great Repeal White Paper only included one mention of procurement as an example of a ‘negative procedure’ for the adjustment of EU-derived law post-Brexit.

This situation continued during the recent electoral campaign, where issues around NHS funding were more prominent than issues surrounding reform of the NHS system, including NHS procurement. However, there seemed to be some commonality to the long-term strategic goals of both main political parties around a correction (to different degrees) of the current market-based purchaser-provider split system. Both the Conservative and the Labour manifestos pledged more funding for the NHS. Both alluded to a change of system.

Labour promised to “reverse privatisation of our NHS and return our health service into expert public control [including the] repeal [of] the Health and Social Care Act  … and [making] the NHS the preferred provider”. The contours of this proposal are rather vague. However, in terms of NHS regulation, this would seem to suppress public-private competition for the provision of health services (possibly excluding the application of competition law) and the NHS procurement regime, by mandating provision of services by the NHS (at least as preferred provider).

The Tories indicated that they would “consult and make the necessary legislative changes. This includes the NHS’s own internal market, which can fail to act in the interests of patients and creates costly bureaucracy. So we will review [its] operation … and, in time for … the 2018 financial year, we will make non-legislative changes to remove barriers to the integration of care”. This seems even less clear, but could imply a simple reform of NHS procurement policy with the aim of maximising the effectiveness of the concept of ‘patient interest’ under the NHS Regulations (No 2) 2013.

Interestingly, both changes to the purchaser-provider split seem possible within the constraints of the existing EU regulatory framework, and they seem to require political choices unaffected by Brexit – with the obvious exception of funding, which is directly (and negatively) affected.

Brexit … one year on – What now?

Almost a year after the UK’s vote to leave the EU, and after the surprising result of the General Election, the only thing that can be said with a minimum of confidence about the impact of Brexit on NHS procurement is that uncertainty prevails (similarly, Simpkin & Mossialos: 2017), and the economic impacts are probably going to be both negative and severe. This seems to run in the opposite direction of the aims (and promises) of those supporting Brexit.

The situation may have been worsened as a result of the General Election, as the Tory government is seeking to reach an agreement with the DUP for support of a minority Conservative government. Either way, this seems likely to require concessions in terms of funding for public services in Northern Ireland, which could impact plans to boost investment in the NHS in England. However, there is no clear indication that other reforms of NHS procurement should necessarily be altered. The question thus remains: Will NHS procurement be reformed along the lines of the Conservative manifesto and, if so, what will that entail?

On-going reforms and uncertainties

Assuming continuity of recent policy developments, it is worth stressing that, since the adoption of the Five Years Forward View for the NHS in England in 2014, the system has been progressively reoriented. Current reforms are geared towards experimentation with the so-called sustainability and transformation plans (STPs), which aim to suppress the purchaser-provider split, including through the creation of accountable care organisations (ACOs). Recently, Stevens (CEO NHS England) clearly indicated this goal by stressing that STPs “will for the first time since 1990 effectively end the purchaser-provider split, bringing about integrated funding and delivery for a given geographical population”. The strategy is still not clearly spelled out and there are open questions concerning its feasibility and/or desirability (Hare:2017).

However, even if this strategy was completely carried out, it seems unlikely that the NHS would not have to comply with procurement rules at all. While a suppression of the purchaser-provider split would potentially allow for a derogation from the NHS Regulations (No 2) 2013, the NHS would still need to buy a number of goods and services from the market. Thus, the reforms to NHS procurement refer to the suppression of a layer of complication and constraints in NHS governance (that derived from the purchaser-provider split), but not a complete shielding of the NHS from procurement and competition rules.

These would remain particularly relevant in terms of new investments in physical and IT architecture for the NHS, which have been pledged by the Conservatives (and by Labour). Expenditure of NHS funds would remain subject to the strictures of the Public Contracts Regulations 2015, which could only be reformed or derogated post-Brexit in the absence of a UK-EU free trade agreement covering procurement.

Overall assessment

In view of all this, I would reach two conclusions. First, that the discussion surrounding the regulation of NHS procurement needs to concentrate on the fundamentals of the potential alternative models: ie a system of integrated NHS governance subject only to public law checks and balances, vs a mixed market system for the provision of health care services for the purposes of the NHS (including some form of purchaser-provider split) subject (also) to market regulation. Most of the pre-Brexit and current discussion conflates elements of both models without acknowledging that both fit within the EU regulatory framework and, consequently, decisions on the model that should be adopted (and the regulatory implications that follow) exclusively depend on UK political decisions.

Second, that the broader economic context in which NHS procurement takes place has a deep influence on the ability of the NHS procurement function to support the provision of high quality health care services. From that perspective, the deterioration of the economic climate created by Brexit and the uncertainty surrounding the future UK-EU trading framework are damaging NHS procurement as much as they are damaging the UK’s economy and public sector more generally. In this context, whichever reforms of the NHS model that may follow from the above will be negatively affected by Brexit. In these circumstances, I find limited space for hope for an improvement in the functioning of the NHS, including its procurement function, at least in the medium term.

Interesting Opinion on duty of EU constitutional courts to refer questions for preliminary ruling to ECJ (C-322/16)

In his Opinion of 8 June 2016 in Global Starnet, C-322/16, EU:C:2017:442, AG Wahl has addressed the extent to which "the fact that a constitutional court of a Member State has declared a national measure compatible with the constitution has any bearing on the obligation, imposed on national courts of last instance under Article 267 TFEU, to refer a question concerning the interpretation of EU law to the Court, when the national rules forming the basis of the constitutional court’s assessment are similar to the relevant EU rules."

AG Wahl's answer to that question is negative, and for very clear reasons, which I consider fully adequate. I recommend reading paras 13-23 of his Opinion, which provide a concise and useful summary of the ECJ's case law on the scope and limits of the obligations imposed by Art 267 TFEU on the highest domestic courts of the Member States.

Some thoughts on procurement flexibility and accountability after the 2014 EU Public Procurement Package & recent trends in case law

I had the honour of being invited to deliver a keynote presentation at the annual conference on procurement organised by FCG in Helsinki on 2 June. The organisers invited me to address two topics: first, an overview of the 2014 reform of EU public procurement rules from the perspective of flexibility, discretion and checks and balances. Second, a more focused discussion of recent ECJ case law in three areas of relevance for the Finnish practice after the transposition of the EU rules: the exemption for in-house provision and public-public cooperation, the requirements derived from general principles of procurement law, and the rules on discretionary exclusion and self-cleaning.

These are the two sets of presentations I used, which I hope reflect some of the ideas I presented, and which gave rise to very stimulating debate.