No obligation to revise prices payable under public contracts. OK, but for the wrong reasons? (C-152/17)

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In its recent Judgment of 19 April 2018 in Consorzio Italian Management e Catania Multiservizi,
C-152/17, EU:C:2018:264, the Court of Justice of the European Union (CJEU) clarified that EU public procurement law (in this case, the 2004 Utilities Directive) does not create an obligation to review prices after the award of a public services contract. This seems largely uncontroversial, not least due to the lack of concern of the pre-2014 EU procurement rules with contract execution. However, the reasons given by the CJEU to exclude mandatory price revision and, beyond that, the mistrust it places on price review clauses, are dubious. The way in which the CJEU refers back to Finn Frogne (see here) should also set off some alarm bells.

The case at hand (N.B. Defective English version of the Judgment)

In this case, Rete Ferroviaria Italiana (RFI) had awarded a services contract to Consorzio Italian Management and Catania multiservizi (CIMCM) for the cleaning, maintenance and ancillary services at stations, installations, offices and workshops at various sites throughout the region of Cagliari. The contract included a clause limiting price review. Despite that, and as a result of increasing staff costs, CIMCM requested RFI to review the prices payable under the contract (ie the claim seemed to be a statutory claim contra the explicit terms of the public contract). RFI rejected the request for the price revision, which triggered the underlying dispute. Establishing the legal architecture underlying the claim requires some legal funambulism.

The award of the contract had been subject to the rules of the 2004 Utilities Directive, as well as domestic law transposing it. At the relevant time, the Italian procurement code (Legislative Decree No 163/2006) established that in 'the absence of any express provisions' in the procurement rules, the Italian Civil Code (Codice Civile, CC) would provide default rules for contractual arrangements between contracting authorities or entities and their contractors. It is important to clarify that the Italian procurement code had a two-tier approach whereby it established a full regime applicable to general procurement (tier 1) and then specified a sub-set of rules applicable to utilities procurement (tier 2, Art 206 Legislative Decree No 163/2006). Tier 2 set a numerus clausus of provisions applicable to contracts linked to the activities referred to in Articles 3 to 7 of the 2004 Utilities Directive.

Concerning the review of contractual prices, Art 115 of the Italian procurement code established that '[a]ll contracts for the supply of goods or services on an ongoing basis must include a clause providing for periodic review of the price'. This provision was however inapplicable to public contracts in the utilities sectors [N.B. despite the English version of the Judgment (para 11), where it is indicated that 'Article 115 of that Legislative Decree was one of the provisions which, under Article 206 thereof, were applicable to public contracts', this is contradicted by eg the French ('L’article 115 de ce décret législatif ne figurait pas ...') and Italian ('L’articolo 115 di tale decreto legislativo non era indicato ...') versions of the Judgment, as well as the logic of the decision]. It is thus worth taking into account that, where Art 115 was not applicable, the default rule in the Italian Civil Code would provide for price revision linked to circumstances of 'hardship' (ie cost increases above 10% of the overall price agreed; Article 1664 CC).

The dispute between CIMCM and RFI is fundamentally concerned with a domestic issue of contractual and statutory interpretation. However, given that the scope of application of the domestic rules is pegged to the scope of application of the 2004 Utilities Directive, it acquired EU relevance.

At first instance, the challenge was dismissed by the regional administrative tribunal on the basis that 'the supply of cleaning services at stations, installations, offices and workshops was ancillary to the performance of activities covered by special sectors, in that those services related to elements forming an essential part of the rail transport network' (C-152/17, para 16, emphasis added). This justified the subjection of the contract to the tier 2 procurement regime, and thus excluded the mandatory price review clause of Art 115 of the Italian procurement code. Beyond that, the regional administrative court reached the additional finding that 'price review was not mandatory under Article 1664 of the Civil Code, as the parties to a contract may derogate from that provision by inserting in the contract a contract term limiting price review, which was the case in the main proceedings' (ibid). 

Given the implicit reference to Art 5 of the 2004 Utilities Directive in terms of scoping the applicability of the relevant rules, which was challenged in the appeal of the first instance decision, the dispute required clarification from the CJEU. Moreover, the claimants raised a challenge of validity against the 2004 Utilities Directive by arguing that, should it allow for the award of contracts excluding price revision, it would infringe Articles 3(1) TEU, Articles 26, 56 to 58 and 101 TFEU, and Article 16 of the Charter, ‘in the light of the unfairness, disproportionality and distortion of contractual balance and, therefore, of the rules governing an efficient market’ (C-152/17, para 19). The reasoning of the CJEU on these two matters (scope of application and validity of the 2004 Utilities Directive) is interesting.

Functional scope of application

The issue here seems simply to require an understanding of the functional approach followed b y the CJEU in determining the scope of application of the 2004 Utilities Directive. In that regard, the CJEU stressed that

... as regards the interpretation of Directive 2004/17 and of the underlying general principles, the referring court considers that the contract at issue in the main proceedings falls within the scope of that directive, since it was awarded by a contracting authority within the meaning of that directive, namely RFI, and that it is functionally linked to rail transport operations falling within the scope of that directive.

In that regard, it follows from the Court’s case-law that Directive 2004/17 in fact applies not only to contracts awarded in the sphere of one of the activities expressly listed in Articles 3 to 7 thereof, but also to contracts which, even though they are different in nature and could as such normally fall within the scope of Directive 2004/18/EC ..., are used in the exercise of activities defined in Directive 2004/17. Consequently, where a contract awarded by a contracting entity is connected with an activity which that entity carries out in the sectors listed in Articles 3 to 7 of that directive, that contract is subject to the procedures laid down in that directive (C-152/17, paras 25-26, references omitted and emphasis added).

This creates the functional criterion that ancillary activities are covered by the Utilities procurement regime because, as a matter of determining the scope of the activities listed in Arts 3 to 7 of Dir 2004/17, EU procurement law also comprises ancillary activities.

No 'EU law' obligation to revise prices

Beyond that, the CJEU also stressed that 

... it is not apparent from any provision of that directive that it must be interpreted as precluding rules of national law, such as Article 115, in conjunction with Article 206, of Legislative Decree No 163/2006, which do not provide for periodic review of prices after contracts are awarded in the sectors covered by the directive, since the latter does not impose any specific obligation on Member States to lay down provisions requiring the contracting entity to grant its contractual partner an upwards review of the price after the contract has been awarded (C-152/17, para 29, emphases added)

In my view, this is correct, and there is no question that the 2004 Utilities Directive did not create an 'EU law' obligation to include contract review clauses. However, the reasons given by the CJEU on the basis of the general principles of procurement should raise some eyebrows. Indeed, the CJEU found that

... the general principles underlying Directive 2004/17, in particular the principle of equal treatment and the consequent obligation of transparency enshrined in Article 10 of that directive do not preclude such rules either. On the contrary, it cannot be ruled out that a price review after the contract has been awarded may run counter to that principle and that obligation (see, by analogy, judgment of 7 September 2016, Finn Frogne, C‑549/14, EU:C:2016:634, paragraph 40). Indeed, as the Commission points out in its written observations, the contract price is an element of great importance in the assessment of tenders by a contracting entity, as well as in its decision to award the contract to an operator. This is also clear from the reference to the price in both of the criteria for the award of contracts mentioned in Article 55(1) of Directive 2004/17. In those circumstances, rules of national law which do not provide for periodic price review after the award of contracts in the sectors covered by that directive are, in fact, likely to encourage compliance with those principles.

It follows from those considerations that Directive 2004/17 and the general principles that underlie it are to be interpreted as not precluding national rules, such as those at issue in the main proceedings, which do not provide for periodic price review after a contract has been awarded in the sectors covered by that directive (C-152/17, paras 30-31, emphases added).

Wrong reasons?

The reasoning of the CJEU is certainly hard to share, in particular in view of the precise reasoning of Finn Frogne--unless read in an extreme manner. It is also hard to reconcile with Art 72(1)(a) of Directive 2014/24 and Art 89(1)(a) of Directive 2014/25.

The reasoning of the CJEU is hard to reconcile with the fact that the relevant Italian rules (Art 115) established that price revision clauses had to be included in the relevant contract (but did not prescribe their content) and had to establish that the price 'revision shall be carried out on the basis of an investigation by the managers responsible for the acquisition of goods and services on the basis of the data' regulated in other parts of the Italian procurement code (C-152/17, para 11). How this is incompatible with Finn Frogne is beyond me, as the Court stated there that the position that 'following the award of a public contract, a material amendment cannot be made to that contract without a new tendering procedure ... would be different only if the contract documents provided for the possibility of adjusting certain conditions, even material ones, after the contract had been awarded and fixed the detailed rules for the application of that possibility' (C-549/14, para 40, emphasis added). Two thoughts come to mind here. First, that a review clause compliant with Art 115 of the Italian procurement code would meet precisely the requirements of Finn Frogne. Second, that the issue whether the exclusion or limitation of price review under the specific contract was allowable rested solely on the point of determination of the scope of application of the 2004 Utilities Directive, so why did the CJEU feel the need to include this obiter dictum?

Looking forward, it is difficult to understand what the CJEU has in mind concerning equal treatment, transparency and price revision clauses. While in Finn Frogne --and, incidentally, in Art 72(1)(a) of Directive 2014/24 and Art 89(1)(a) of Directive 2014/25-- the position is that contractual price revision clauses are perfectly compliant with EU procurement rules and the principles of transparency and equal treatment; in Consorzio Italian Management the CJEU seems to be of the opposite view and stress that 'rules of national law which do not provide for periodic price review after the award of contracts ... are, in fact, likely to encourage compliance with those principles' (C-152/17, para 30). Of course, taken in isolation, both approaches make sense, but I would struggle to reconcile them if there was a claim that a contractual price revision clause was discriminatory because it either had different impact on different potential contractors, or because its interpretation could favour some suppliers over others. What is more objective, to have a contractual price review clause or not to have it? In addition, what is the problem with having legislative requirements for those clauses, as was the case in Art 115 of the Italian procurement code?

What about Art 16 of the Charter?

Another point worth mentioning is the CJEU's approach to the analysis of the compatibility of the inexistence of a right to price revision with Art 16 of the Charter, enshrining the freedom to conduct a business. Here, it would seem possible to expect from the CJEU an analysis of whether the inexistence of such a right as a matter of EU law is in compliance with the Charter. However, the CJEU refused to answer that question on the grounds that it was hypothetical (see paras 37-40). However, the CJEU did engage on the analysis of compatibility within the context of the first question, and almost as a matter of jurisdictional rather than substantive analysis. In that regard, the CJEU stressed that

... as regards the interpretation of Article 16 of the Charter, it must be recalled that, under Article 51(1) of the Charter, its provisions are addressed to the Member States only when they are implementing EU law. Under Article 51(2) of the Charter, the Charter does not establish any new power or task for the Union, or modify powers and tasks as defined in the Treaties. Accordingly, the Court is called upon to interpret EU law, in the light of the Charter, within the limits of the powers conferred on it ...

In that regard, it should be borne in mind that the concept of ‘implementing Union law’ within the meaning of Article 51 of the Charter presupposes a degree of connection between the measure of EU law and the national measure at issue. In particular, the Court has ruled that fundamental European Union rights could not be applied in relation to national legislation because the provisions of EU law in the area concerned did not impose any specific obligation on Member States with regard to the situation at issue in the main proceedings ...

In the present case, since it is apparent from paragraphs 29 and 30 above that neither Directive 2004/17 nor its underlying general principles impose on Member States a specific obligation to lay down provisions requiring the contracting entity to grant its contractual partner an upwards price review after the award of a contract, the provisions of Legislative Decree No 163/2006 at issue in the main proceedings, in so far as they do not provide for periodic price review within the sectors covered by that directive, do not have any connection with that directive and cannot, therefore, be regarded as implementing EU law (C-152/17, paras 33-35, references omitted and emphases added).

First, it is worth stressing that it is hard to imagine a legal strategy that will make the CJEU engage with the compatibility of secondary EU legislation with the Charter, in particular in relation to the absence of guarantees, as compared to its review concerning positive obligations for the addressees of the domestic implementing measures. Normatively, this is undesirable for the limited engagement the CJEU shows with substantive Charter-based analysis. And even from a positive perspective, this approach is criticisable. I find the CJEU's logic puzzling.

In a situation (maybe different from the case at hand, where the absence of the price revision guarantee ultimately results from a rule on the delimitation of applicable EU law regimes, rather than the direct implementation of a specific, single regime) where the claim was that the domestic rules implementing EU law failed to create a Charter-compliant (or rather Charter-mandated) guarantee not imposed by the implemented Directive, the CJEU would probably also take this route and argue that the absence of creation of an obligation at domestic level which is not required by EU rules is not connected with the EU rules in a manner that triggers the analysis of compatibility with the Charter. Would this make sense? I would not think so, but I guess we will have to wait for the relevant case to see whether the CJEU sticks to this analysis.

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.