Interesting clarification (and broadening) of the Foster test on 'emanation of the State' for purposes of direct effect of EU Directives (C-413/15)

In its Judgment of 10 October 2017 in Farrell, C-413/15, EU:C:2017:745, the Court of Justice of the European Union (CJEU) has followed the Opinion of AG Sharpston (here) and provided some clarity on the test initially created in Foster and Others v British Gas, C-188/89, EU:C:1990:313 to establish when an entity can be considered an 'emanation of the State' and, consequently, be subjected to the consequences of the direct effect of EU Directives. The CJEU has clarified that the conditions set out in the so-called Foster-test are not cumulative and, in any event, that it suffices for an entity (even a private law one, not necessarily subjected to State control) to have been delegated the performance of a task in the public interest by the Member State and to possess for that purpose special powers.

The test, as applied in Foster, was formulated in the following terms: 

... a body, whatever its legal form, which has been made responsible, pursuant to a measure adopted by the State, for providing a public service under the control of the State and has for that purpose special powers beyond those which result from the normal rules applicable in relations between individuals is included in any event among the bodies against which the provisions of a directive capable of having direct effect may be relied upon (C-188/89 at [20], emphasis added).

However, also in Foster, the CJEU had offered a broader formulation of the test, indicating that:

a directive [capable of direct effect] could be relied on against organisations or bodies which were subject to the authority or control of the State or had special powers beyond those which result from the normal rules applicable to relations between individuals (C-188/89 at [18], emphasis added).

The interpretation of the Foster-test has been a relatively contentious issue in EU scholarship since its formulation in 1990. In particular, there have been opposing views on whether the conditions in which the test breaks down are cumulative or not and, in case they are cumulative, whether they include three conditions (entrustment of public service, State control and special powers), or only two (thus suppressing the requirement to provide a public service) [cfr eg M Bobek, 'The effects of EU law in the national legal systems', in C Barnad & S Peers (eds), European Union Law (Oxford, OUP, 2014) 140, 151 (two conditions, non-cumulative), TC Hartley, The Foundations of European Union Law, 7th edn (Oxford, OUP, 2010) 232 (identifying four conditions, cumulative, but indicating that the test is non-exhaustive), K Lenaerts & P Van Nuffel, European Union Law, 3rd edn (London, Sweet & Maxwell, 2011) 903-04 (two conditions, including public service provision, cumulative), or R Schütze, European Union Law (Cambridge, CUP, 2015) 100 (equally, two conditions, including public service provision, cumulative)]

Uncertainty about the exact limits and implications of the Foster-test have remained for a surprisingly long time, and the CJEU had so far only provided limited and piecemeal clarifications--most recently, in its Judgment of 12 December 2013 in Portgás, C-425/12, EU:C:2013:829, where the CJEU still referred in less than clear-cut terms to 'bodies which, under the control of [the] authorities [of a Member State], have been given responsibility for a public-interest service and which have, for that purpose, special powers' (at [34], for discussion, see here).

In Farrell, the CJEU has now clarified that, in Foster, 'the Court was not attempting to formulate a general test designed to cover all situations in which a body might be one against which the provisions of a directive capable of having direct effect might be relied upon' (at [26]) and, consequently, that '[p]aragraph 20 of [Foster] must be read in the light of paragraph 18 of the same judgment, where the Court stated that such provisions can be relied on by an individual against organisations or bodies which are subject to the authority or control of the State or have special powers beyond those which result from the normal rules applicable to relations between individuals' (at [27]). Ultimately, then, the CJEU has clarified that the Foster-test is actually formulated at [18] (see also Farrell at [33]) and, consequently, that

... the conditions that the organisation concerned must, respectively, be subject to the authority or control of the State, and must possess special powers beyond those which result from the normal rules applicable to relations between individuals cannot be conjunctive (C-413/15 at [28], emphasis added).

Adding some further clarity, the CJEU explained that the 'emanations of the State' that are relevant for the purposes of ensuring direct effect of EU Directives after the expiry of their transposition period

... can be distinguished from individuals and must be treated as comparable to the State, either because they are legal persons governed by public law that are part of the State in the broad sense, or because they are subject to the authority or control of a public body, or because they have been required, by such a body, to perform a task in the public interest and have been given, for that purpose, such special powers.

Accordingly, a body or an organisation, even one governed by private law, to which a Member State has delegated the performance of a task in the public interest and which possesses for that purpose special powers beyond those which result from the normal rules applicable to relations between individuals is one against which the provisions of a directive that have direct effect may be relied upon (C-413/15 at [34]-[35], emphasis added).

In my view, this is a welcome clarification and one that can potentially catalyse a higher level of effectiveness of secondary EU law. It comes to clearly establish three prongs for the test of whether an entity is an emanation of the State (shall we re-label it the Farrell-test, for clarity?), which the entity will be if either (1) it is governed by public law, (2) it is subject to the authority or control of a public body, or (3) it performs a public interest task on the basis of special powers. This can have interesting implications in areas other than general EU law (eg in State aid law, to the effect of reducing the scope of the Judgment of 30 May 2013 in Doux Élevages and Coopérative agricole UKL-AREE, C-677/11, EU:C:2013:348--as criticised here) and, more generally, follows a welcome functional approach.

I envisage that the next potential frontier for litigation will concern what should be considered special powers, and whether they have to be substantial for an entity carrying out tasks in the public interest by delegation of the State to be considered 'emanations of the State' for these purposes. In Farrell, the special powers consisted in statutory powers 'to require [private entities] to become members of [the entity considered an emanation of the State] and to contribute funds for the performance of the task conferred on it by the [the Member] State' (C-413/15 at [40]). This seemed like a clear instance. However, there may be more difficulties in drawing clear lines where the powers are exercised in the context of a situation of a relationship of special dependence from the State, where the special powers form part of the task delegated to the entity. This can be particularly relevant in the context of contracted-out public services in sectors such as care, corrections or education, where the existence or not of special powers (eg to discipline) will trigger complex issues in the future.

On the whole, however, it seems to me that Farrell resolves one of the important areas of uncertainty in the area of the effectiveness of EU secondary legislation. It should thus be welcome.

The Commission's procurement mechanism for large infrastructure projects, soft law with a new twist, or catch 22?

On 3 October 2017, the European Commission launched a strategy aimed at "Making Public Procurement work in and for Europe". As the accompanying press release indicates, the strategy has four main strands: (i) the definition of priority areas for improvement at Member State level; (ii) voluntary ex-ante assessment of large infrastructure projects; (iii) a Recommendation on professionalisation of public buyers; and (iv) a consultation on stimulating innovation through public procurement.

The first initiative consists in a policy push to prompt Member States to concentrate efforts on six priorities: "greater uptake of innovative, green and social criteria in awarding public contracts; professionalisation of public buyers; improving access by SMEs to procurement markets in the EU and by EU companies in third countries; increasing transparency, integrity and quality of procurement data; digitisation of procurement processes; and more cooperation among public buyers across the EU". None of the priority areas concern issues that I would consider of immediate practical relevance, in particular in terms of legal clarification of the 2014 Public Procurement Package (see here), but rather reflect issues that have been at the top of procurement policy-making agendas at least for the last 10 years, and where all efforts (and gains) are at best incremental. I find the push for further 'strategic' use of procurement particularly interesting, as well as the push for more procurement collaboration, including centralised and cross-border procurement. These are issues that will deserve further discussion some time soon.

The third initiative on professionalisation will also be the object of a future post, while I will aim to submit my views on the use of procurement to foster innovation in the context of the official consultation. Here, I am particularly interested in the second initiative, the voluntary ex-ante assessment of large infrastructure projects (already announced in the 2015 Strategy on Upgrading the Single Market), which is described in more detail in the accompanying Communication "Helping investment through a voluntary ex-ante assessment of the procurement aspects for large infrastructure projects".

The initiative is structured around three main elements: (i) a helpdesk where the Commission can provide clarifications on issues of interpretation of the EU procurement rules or their application to a specific case within one month, and which answers (once anonymised) will be published for more general use; (ii) a notification system aimed to apply to broader procurement plans, where Member States can ask the "Commission services [to] express their views on whether the procurement plan complies with EU procurement rules, without prejudice to any future legal interpretation or assessment"; and (iii) an information exchange mechanism meant to be a knowledge management tool for use by national authorities and contracting authorities/entities, ultimately geared towards building up reference classes of similar projects as a means of sharing experience, and to serve as a platform for exchanges on different aspects related to projects.

There are significant practical issues, in particular concerning the third strand, and especially concerning the utility of a collection of past projects where there is no indication that the information will be checked from a legal compliance perspective by the Commission (!), and where "[d]ocuments can be provided in any of the official languages of the EU [and] [t]he database will include a machine translation facility". That can significantly reduce the practical relevance of this part of the initiative, in particular given the significant difficulties in obtaining accurate machine translation of eg technical specifications or complex contract clauses.

More importantly, however, I think that this mechanism, and in particular the notification system, raise issues as to the legal nature of the assessments and clarifications obtained from the Commission, as well as some more practical issues concerning the resourcing of the helpdesk on which the mechanism relies. I will solely concentrate on the first issue for now, as the challenge of ensuring sufficient human capital to field all questions and notifications potentially coming from the Member States is ultimately a managerial issue dependent on budget availability.

Non-bindingness of specific legal assessments?

In simple terms, the Commission describes the mechanism as follows:

Complex projects can go wrong right from the beginning if the project managers do not fully grasp the complex rules that apply to large-scale procurement. The Commission will set up a helpdesk that can answer specific questions at an early stage related to projects with an estimated value over €250 million. For projects of high importance for the Member State concerned or with a total estimated value above €500 million, relevant authorities can ask the Commission to check the complete procurement plan for compatibility with the EU procurement legislation, significantly reducing uncertainties and the risk of delays and legal challenges. The mechanism is voluntary, the Commission's advice is non-binding, and information will be handled subject to strict confidentiality requirements (emphasis added).

This is also highlighted at the start of the fuller description of the mechanism, where the Commission indicates that "[n]ational authorities and contracting authorities/entities have the option to use the mechanism on a voluntary basis to raise questions with the Commission and receive an assessment of a project’s compatibility with the EU regulatory framework before taking important steps", but that the "views expressed by the Commission services in their assessment are not legally binding on those using the mechanism or on the Commission, and are without prejudice to the interpretation of the relevant rules by the Court of Justice of the European Union" (COM(2017) 573, at 4, some footnotes omitted, except footnote 10).

Already at this level of design of the mechanism for ex-ante assessment of the procurement, EU lawyers will probably raise their eyebrows in surprise, wondering how is it possible that a specific review by the Commission, where it issues a specific opinion on the compliance or not with EU law, can be considered non-binding. In my view, and particularly if there are EU funds involved in a project which risk being withdrawn, this will certainly end up being litigated on the basis of the principle of legitimate expectations (or administrative estoppel). On that note, it is worth recalling that, in its latest formulation, the Court of Justice has reiterated that, in accordance with its settled case-law,

the right to rely on the principle of the protection of legitimate expectations extends to any person whom an institution of the European Union has caused, by giving him precise assurances, to entertain justified hopes. Information which is precise, unconditional and consistent, in whatever form it is given, constitutes such assurances (Judgment of 13 September 2017, Pappalardo and Others v Commission,  EU:C:2017:672, para 39; see also references cited therein).

I would have thought that a contracting authority (and winning tenderer) that had obtained a document from the Commission indicating that the project complied with EU law could, at the very least, wave it against the Commission in case of a subsequent infringement procedure. Conversely, where the Commission issued a negative opinion and the contracting authority decided to carry on regardless, that document could end up being used against the contracting authority in domestic litigation and prove rather persuasive to review boards or domestic courts. Additionally, it is hard to see how the pre-existence of the negative opinion would not be used against the Member State in a potential infringement procedure, and how this would not raise due process claims on the Member State's side. All in all, then, this seems like another instance of soft law bound to harden, but this time with a twist, because it would be the result of a specific procedure created by the Commission to that effect--rather than as a byproduct or unintended consequence of regular administrative procedures subject to EU administrative law.

The Commission could, of course, argue that they will couch their views in such terms as to avoid a level of detail specific enough to create legitimate expectations (which would however empty this mechanism of any effectiveness or appeal), and that they will resist public disclosure of these assessments to avoid these effects (which I do not really think possible, given the duty to grant access to documents under Regulation 1049/2001, discussed here). That would not be very convincing, though. Each of these issues requires some further assessment, because none of them seem to hold much water.

Precision and legal effects

In trying to make the mechanism attractive to the Member States which it sets out to support, in the Communication, the Commission indicates that, the helpdesk can deal with rather particular and potentially complicated issues, such as

• the applicable EU legal framework governing the project: classic procurement or utilities directives; concessions directive, etc.
• conditions for exclusions from the directives;
• procurement procedures to be used and their specific features;
• selection and award criteria;
• inclusion of green, social and innovative considerations;
• how to implement joint procurement under Article 39 of Directive 2014/24/EU.

Regardless of the nature of the question, an within one month from the time when the Commission has all the information it considers necessary to answer it, the Commission will aim to provide a specific reply. That reply will later be anonymised and published on the website of the ex-ante mechanism. However, at this point and probably in awareness (and worry) of the potential legal effects of such answers to specific and potentially rather complex and tricky questions, the Communication contains a cross-referential footnote that indicates again that "[t]he views expressed by the Commission services in their assessment are not legally binding on those using the mechanism or on the Commission, and are without prejudice to the interpretation of the relevant rules by the Court of Justice of the European Union".

Similarly, concerning the notification of a procurement plan by the relevant authority, or issues specific contract amendments, and within a period of three months, "[t]he Commission services will then provide an assessment, in which the Commission services express their views on whether the procurement plan complies with EU procurement rules, without prejudice to any future legal interpretation or assessment." Interestingly, once more, at this point the Communication contains another cross-reference to the by now famous footnote 10, which indicates that "[t]he views expressed by the Commission services in their assessment are not legally binding on those using the mechanism or on the Commission, and are without prejudice to the interpretation of the relevant rules by the Court of Justice of the European Union".

At this point, one will be forgiven for wondering whether contracting authorities will have any incentive to raise issues with the Commission knowing that they will have to wait for a month (helpdesk) or three months (full-fledged notifications of procurement plans) and that all they will obtain is a view from the Commission that the Commission itself is not willing to be bound by, and at the risk of being faced with specific recommendations or warnings on how to carry out the procurement. There seems to be an opposing incentive for contracting authorities to ignore these mechanisms and the delay they imply altogether, except where they cannot afford independent legal advice (which seems rare where there is a project budget of €250 mn or €500 mn) and may see the Commission as the only source of available (free) expertise.

How confidential is confidential?

The second important issue concerns potential difficulties in preserving the confidentiality of the documents exchanged with the Commission. Indeed, as the Commission itself reminds (in another footnote!, n 23), "Regulation (EC) No 1049/2001 of the European Parliament and of the Council of 30 May 2001 regarding public access to European Parliament, Council and Commission documents applies to all documents drawn up or received by the Commission and in its possession".

This means that, even where the Commission and the contracting authority share a view on whether a piece of information is confidential or not, the fact that the Commission holds the documentation triggers a risk of disclosure (or, at least, of disclosure-related litigation) under the EU rules. This may be particularly challenging for contracting authorities in Member States imposing lower levels of transparency than the European standard. It also means that, where the Commission and the contracting authority do not share a view on the confidentiality of some information, there is additional potential for litigation. Even if the Commission was willing to defer to Member States and reassure them that the second type of problem will not arise, the first one is unavoidable.

Even if there are good reasons to think that Reg 1049/2001 (Art 4) contains sufficient exceptions to disclosure of information of the type that can worry a contracting authority, the simple fact that the Commission has felt the need to introduce specific references to those rules in relation to every document that could include confidential or sensitive information indicates that the Institution, itself, is in no position to ensure watertight confidentiality.

The devil is in the footnotes, or catch 22?

All in all, then, the mechanisms included by the Commission in its initiative on the voluntary ex-ante assessment of large infrastructure projects, including its related helpdesk and information exchange mechanism, seem to be affected by two main issues: first, an unavoidable tension between, on the one hand, the need to provide detailed assessments that make consulting the Commission worth the contracting authorities' while (in particular, in terms of time) and, on the other, the belt and braces approach to disclaiming any legal effectiveness of those assessments. Second, a risk of public exposure of all or parts of a project that can have highly sensitive implications (in political and commercial terms).

The Commission seems to have relied on the existence of a large amount of (good) willingness from contracting authorities, and the hope that the mechanism will be perceived and understood as soft (also by economic and political agents with other agendas). However, as PhD supervisors and peer-reviewers will know well, the devil is in the footnotes, where we all tend to hide those arguments that we know will be more controversial or those issues that we want to avoid having to deal with more openly. In my view, footnotes 10 (no legal effects) and 23 (confidentiality warning) and the multiple cross-references, are good indicators that this mechanism will be problematic. And this is simply because, even if it is clear that contracting authorities will always benefit from additional expertise and (good) free legal advice (in particular, but not only, when they deal with complex projects), the simple fact is that the Commission is not in a position to provide it. First, structurally, because of the legal framework within which it operates--which questions its ability to engage in this type of advocacy plus initiative at all. Second, because of important resourcing constraints, which may well become obvious rather soon if the mechanism is used.

On the whole, I think that this voluntary ex ante mechanism is the paradigm of a catch 22 for the Commission. What is noticeable is that this is one that the Commission has created for itself (ignoring the lessons of the now long-abandoned notification mechanism in the context of Article 101(3) TFEU). And what saddens me personally is that I know for a fact that the Commission heard all of these arguments long before publishing the Communication--as evidenced by the minutes of the meeting of the Stakeholder Expert Group on Public Procurement of 17 February 2016 (note the last two bullet point of para 2).

Recent case law on EU Institutional Procurement

These are the slides of the talk I gave to the 2017 Annual Meeting of the Network of Agencies Procurement Officers, which took place in Parma on 28-29 September (unfortunately, I could only participate via skype, so I missed out on the local cuisine ...).

The slides discuss recent cases that I find relevant for procurement officers of the EU Institutions and raise some issues of broader relevance. The specific topics include: jurisdictional issues, transparency, debarment and rejection of offers, abnormally low tenders and contract modifications.

 As always, comments most welcome: a.sanchez-graells@bristol.ac.uk.

reasons for the deduction of points at tender evaluation must be fully disclosed to their last detail: AG MENGOZZI ON DUTY TO MOTIVATE PROCUREMENT DECISIONS (C-376/16 P)

Image: Sébastien Thibault.

AG Mengozzi has put pressure on the Court of Justice (ECJ) to continue pushing for excessive transparency in the context of procurement litigation. On this occasion, the AG has invited the ECJ to establish an extremely stringent requirement for the disclosure of detailed comparisons of the evaluation reports to the level of award sub-criteria, without assessing the extent to which the contracting authority can have legitimate reasons to withhold parts of the evaluation.

In my view, this approach would create significant imbalances between the duty to provide reasons to disappointed tenderers and the duty to preserve competition for public contracts and sufficient protection of business and commercial information, which is problematic [for discussion, see K-M Halonen, 'Disclosure Rules in EU Public Procurement: Balancing between Competition and Transparency’ (2016) 16(4) Journal of Public Procurement 528; A Sanchez-Graells, ‘The Difficult Balance between Transparency and Competition in Public Procurement: Some Recent Trends in the Case Law of the European Courts and a Look at the New Directives’ (2013) Univ. of Leicester School of Law Research Paper No. 13-11]. Therefore, I argue that the ECJ should deviate from the Opinion of AG Mengozzi in its final Judgment in this case.

It is worth noting that the case is subjected to a previous version of the procurement rules in the EU Financial Regulation, but the ECJ's Judgment will be more generally relevant, both in the context of the current Financial Regulation controlling EU Institutional procurement and, more generally, for procurement controlled by the rules in the 2014 EU Public Procurement Package.

The AG Opinion

In his Opinion of 28 September 2017 in case EUIPO v European Dynamics Luxembourg and Others, C-376/16 P, EU:C:2017:729, AG Mengozzi has once more attempted a delineation of the obligation to state reasons for a decision to reject a tender and, in particular, "with regard to the correlation between the specific negative assessments set out in the evaluation report and the deductions of net points made by the contracting authority" (para 19). Or, in other words, AG Mengozzi has indicated the way in which the case law of the Court of Justice (ECJ) on the duty to provide justifications in the context of procurement debriefing applies to the reasons for the deduction of points on the basis of negative judgements of the evaluation committee [for general discussion of this obligation, see A Sanchez-Graells, “Transparency in Procurement by the EU Institutions”, in K-M Halonen, R Caranta & A Sanchez-Graells (eds), Disclosure Rules within Public Procurement Procedures and During Contract Period, vol 9 EPL Series (Edward Elgar, forthc.)].

This point of law was raised by EUIPO against the previous finding of the General Court (GC) that, despite the fact that contracting authorities are not required to provide unsuccessful tenderers with a detailed summary of how each aspect of their tenders was taken into account for its evaluation, however,

when the contracting authority makes specific assessments as to the manner in which the tender in question fulfils or otherwise [award] criteria and sub-criteria, which are clearly relevant to the overall score of the tender, the duty to state reasons necessarily includes the need to explain how, in particular, negative assessments gave rise to the deduction of points (Judgment of 27 April 2016 in European Dynamics Luxembourg and Others v EUIPO, T-556/11, EU:T:2016:248, para 250).

In the specific case, the GC considered it particularly important because the evaluation method included relative measures, so that "any deduction of net points in respect of certain sub-criteria automatically resulted, under the formula applied by the contracting authority, in the increase in the number of gross points to be allocated to the successful tenderers’ tenders in respect of their technical quality" (AGO C-376/16 P, para 24 & T-556/11, para 251).

The circumstances of the case where such that EUIPO disclosed the overall score for each of the three technical or qualitative criteria used in tender evaluation, but not the detailed breakdown for each of the award sub-criteria taken into consideration by the evaluation committee. In those circumstances, the GC found that "it was impossible, both for [the disappointed tenderer] and for the Court, to understand the calculation or precise breakdown of the points deducted for each sub-criterion, or even for each of the sub-points, and that it was therefore also not possible to verify whether and to what extent those deductions actually corresponded to the negative assessments made in the evaluation report and, accordingly, whether they were justified or not, or, at the very least, sufficiently plausible" (AGO C-376/16 P, para 26 & T-556/11, para 252).

EUIPO opposed that finding, and the more general point of law made by the GC, on the basis that neither the applicable rules, nor the case law of the CJEU required the debriefing information provided to a disappointed tenderer to include a demonstration of "which negative comment led to which deduction of points for each specific sub-criterion or sub-point" (AGO C-376/16 P, para 28 - for details of the reasons, see paras 29-31).

Thus, the main point of contention concerns the limits of the duty to disclose details of the evaluation process and report. Or, as AG Mengozzi put it, the question is "in essence, whether the [GC] was right in holding that the decision to reject the tender did not satisfy the requirements to state reasons stemming from [the applicable rules], as interpreted by the case-law, or whether the [GC] applied an overly strict test compared with the aforementioned provisions and the relevant case-law of the [ECJ]" (AGO, C-376/16 P, para 32). 

After a short restatement of the ECJ case law on the limits of the obligation to provide reasons and disclose relevant parts of the evaluation report, and despite stressing that "the contracting authority [is not] under an obligation to provide an unsuccessful tenderer, upon written request from it, with a full copy of the evaluation report" (AGO, C-376/16 P, para 36), in short, AG Mengozzi has invited the ECJ to establish that the right disclosure standard is one where

(i) the extracts of the evaluation reports disclosed by the [contracting authority] [make] it possible to deduce the number of points obtained by the appellant in question in comparison with the successful tenderer, broken down each time for each sub-criterion, and the weight of each sub-criterion in the overall evaluation, and (ii), the comments of the evaluation committee which [are] disclosed [explain], for each award criterion, on the basis of which sub-criteria the [contracting authority] had found the tender of the successful tenderer or that of the appellant in question to be the best (AGO C-376/16 P, para 47, emphases in the original).

AG Mengozzi suggests that this would have already been implicitly established in the Judgment of 4 October 2012 in Evropaïki Dynamiki v Commission, C-629/11 P, EU:C:2012:617, para 11, where the circumstances of the case reflected this level of disclosure.

Criticism

In my view, this is not an adequate test.

First of all, I struggle to see where the boundary lies between having to disclose the evaluation report in full and having to provide an absolutely broken down comparative assessment of the evaluation of the disappointed tenderers' tender and that of the preferred tenderer. To be fair, the previous case law is riddled with such tensions and it is difficult to establish clear boundaries on the obligation to disclose information contained in the evaluation report. However, in my view, the step taken by AG Mengozzi (and previously by the GC) comes to nullify the general (minimum) safeguard that contracting authorities are not required to disclose the evaluation report in full.

Secondly, I am not sure that in the assessment of these issues enough consideration is given to the fact that the relevant rules allow contracting authorities not to disclose certain details where disclosure would hinder application of the law, would be contrary to the public interest or would harm the legitimate business interests of public or private undertakings or could distort fair competition between those undertakings. In my view, there is a clear case to be made for restricting the level of disclosure of the points given to competing tenderers to a level of generality (eg award criteria rather than sub-award criteria) that strikes a balance between allowing for the review of the procurement decision while preserving competing interests. If the case law of the ECJ develop in the direction suggested by AG Mengozzi, it will be almost impossible for contracting authorities to protect legitimate interests in the context of procurement, and this will have chilling effects on participation.

Third, such a test would potentially make sense in terms of disclosure between the contracting authority and the review body or court, but not in relation to the disappointed tenderer. It would make much more sense to allow for disclosure limited to the level of award criteria at debriefing stage and, only in case the disappointed tenderer is not satisfied and launches an administrative or judicial review, for that information to be released to the review body of court, with stringent rules on access to that confidential information (for example, along the lines of the guidelines recently adopted in England). In the absence of this differential access to sensitive information, the adoption of the test proposed by AG Mengozzi is excessive and creates structural risks for abuse and competitive distortions--which makes it an undesirable test.

On the whole, I think that this Opinion and the previous decision by the GC show that the logic and operation of the rules on disclosure of information in the context of procurement litigation require a careful reassessment. In a case such as this one, where the record shows that EUIPO made significant efforts to disclose information to the disappointed tenderer, while still (maybe implicitly) aiming to protect sensitive information, the imposition of higher levels of disclosure obligations seems to me excessive. Once more, this militates in favour of the regulation of specific procedural steps to assess issues of confidentiality and, in particular, the need to create some asymmetrically opaque review mechanisms that allow for proper scrutiny of procurement decisions in a way that does not jeopardise competition in the market or anyone's legitimate business and commercial interests.

Interesting report on CJEU case handling by the EU Court of Auditors

The European Court of Auditors has published today a report on the handling of cases by the Court of Justice of the European Union (see report here and press release from the Court of Justice here). The report is interesting in many respects.

In terms of CJEU activity linked to EU economic law, I find it interesting that, in the sample taken for the report, competition and procurement cases requiring a preliminary ruling tended to take between 2 years and 2 years and a half. This likely places them towards the top right corner of the complexity/duration chart created by the Court of Auditors (below).

In not too dissimilar a fashion, it is also interesting to stress that the lengthier cases before the General Court involve competition and State aid issues.

Taken together, these seem to be signs of the need for the creation of a specialised chamber for economic law to absorb part of the workload and try to deliver judgments within a timeline better adjusted to the needs of market dynamics.

In that connection, it is worth stressing that the Court of Auditors reminds us that:

By 26 December 2020, the Court of Justice must report to the European Parliament, the Council and the Commission on the functioning of the General Court, covering its efficiency, the necessity and effectiveness of the increase to 56 Judges, the use and effectiveness of resources and the further establishment of specialised chambers and/or other structural changes (see Article 3(1) of Regulation (EU, Euratom) 2015/2422).

In my view, that will be an adequate moment to propose the delegation of preliminary rulings to the General Court in matters of EU economic law and the creation of a specialised court.

A couple of papers on procurement and discretion

I am preparing a paper on discretion and competition under the EU public procurement rules for a workshop at Lady Margaret Hall (Oxford) in November. In looking for new ideas and making sure I cover the necessary background, I have been reading recent economics and political science papers on the topic.

After a few reads, I think I am starting to identify an emerging trend of support for both (i) expanded use of discretion and (ii) claims of positive effects of the exercise of that discretion on procurement outcomes. I think both issues are interesting and tricky, and have found the two papers below thought-provoking (even if not entirely convincing). I would recommend reading them if you are interested in this topic.
 

• J Gutman, 'Is there room for discretion? Reforming public procurement in a compliance-oriented world' (2014) Brookings Global Economy and Development Working Paper No 74 (published online June 2016).

This is a political science paper aimed for a non-academic audience and it maps the discussions behind the choice on whether to promote or constrain discretion by procurement officers. It follows the US discussion and goes back to the arguments developed by Kelman in 1990. However, the paper largely ignores the ensuing discussion in the US where, primarily Schooner (2001, 2004), raised important issues around the oversight of the exercise of discretion. The interested reader would be well advised to incorporate Schooner's insights in the mix.

Gutman also stresses the need to extend procurement regulation and the possibility to exercise discretion to the execution phase. In that, he raises issues that are currently being asked across the EU, in particular concerning oversight of contractual modifications (see here). A reader familiar with these issues will not find much new in Gutman's paper, but it offers a good entry point for newcomers to the issue.

• D Coviello, A Guglielmo & G Spagnolo, 'The effect of discretion on procurement performance' (2017) Management Science (published in advanced access in February 2017).

This is an econometrics paper that uses an interesting (and rather large) database of Italian contracts to 'document the causal effect of increasing buyers’ discretion on procurement outcomes'. They design their study around two different procedures for the award of works contracts: 'Works with a value above a given threshold have to be awarded through an open auction. Works below this threshold can be more easily awarded through a restricted auction, where the buyer has some discretion in terms of who (not) to invite to bid.' Or, in other words, they compare situations where the contracting authority is free to engage in a negotiated procedure with situations where a restricted procedure was mandated. In that regard, they consider that the contracting authority has a larger ability to exclude tenderers from the negotiation than from restricted procedures. I am not convinced about this, as the screening for a restricted procedure under the EU rules is rather strict and contracting authorities are not prevented from adopting any controls they would in a choice of negotiating partners. However, even with that in mind, reading the paper is interesting.

Coviello, Guglielmo & Spagnolo claim that 'Our main result is that discretion increases the probability that the same firm wins repeatedly, and it does not deteriorate (and may improve) the procurement outcomes we observe. The effects of discretion persist when we repeat the analysis controlling for the geographical location, corruption, social capital, and judicial efficiency in the region of the public buyers running the auctions'. I think that the first part of their findings is rather important, as they find discretion to entrench incumbents, either as a result of corruption or any other unobservable incumbency or first mover advantages. It is important to stress that this result is not affected by any assumptions or qualified by causality claims, as this is the straightforward result of crunching the numbers.

On the contrary, the claims of causality of discretion over improved procurement outcomes is affected by assumptions and their claims are weaker and depend on counter-explanations for the same results. On that, I am not sure that the authors carried out all controls that would be necessary or possible in terms of the advantages they find (which are small in scale, in any case), as a control by complexity of the project seems a rather clear missing piece in their testing strategy. Therefore, their results need to be taken with a pinch of salt.

As mentioned above, I think that these two papers reflect a broader trend of support for the exercise of discretion in the context of procurement -- in particular during the execution phase -- and emerging evidence (or at least claims to that evidence) that the exercise of such discretion can result in positive effects beyond the procurement phase of the public expenditure cycle. On the whole, this could push for reduced controls on the exercise of that discretion (or a lax approach to it) and a move of the focus on the design and award of the contract towards its execution.

This triggers me to think about the constraints on the exercise of that discretion (during the execution phase, but also in earlier procurement stages) that can be necessary to ensure that only positive results are achieved. Not surprisingly, I think that the key will be in the principle of competition and a pro-competitive orientated application of the proportionality principle. Roughly, that is what I will try to do in my forthcoming paper. I will post it here when ready. In the meantime, comments are most welcome.

In-depth discussions on contract modifications at the Danish Association for Public Procurement

I had the honour of being invited to speak at the workshop on "Contract Changes in a European Perspective" organised by the Danish Association for Public Procurement (Dansk Forening for Udbudsret), where I shared thoughts with academic colleagues that have been researching on the topic for a long time--such as Prof Steen Treumer, Dr Piotr Bogdanowicz and Dr Carina Risvig Hamer--as well as with practitioners, such as Erik Kjær-Hansen, facing the increasingly complex task of advising contracting authorities and economic operators.

In my presentation, I covered general issues concerning the interaction between contract modifications and competition for public contracts (slides below), Piotr concentrated on specific interpretive difficulties raised by Article 72 of Directive 2014/24/EU, and the general discussion raised interesting topics based on Danish practice--which is rather sophisticated, and also in a state of shock after the CJEU's Finn Frogne decision of last year (see here).

In my view, there are significant challenges derived from the extension of EU rules to the execution phase of public contracts and the pro-competitive logic that generally inspires the rules in Article 72 of Directive 2014/24/EU, as well as the previous case law of the CJEU, is limited and bound to continue hitting the wall of unnecessary inflexibility of procurement procedures unless some more commercially-oriented sophistication is introduced in future case law (which should limit, if not reverse, Finn Frogne).

In the meantime, there is notable pressure on lawyers involved in the drafting of contract modification clauses, which are after an impossible mix of flexibility and predictability. Definitely an area where further discussions are needed. If you want to get involved in the conversation, please feel free to email me at a.sanchez-graells@bristol.ac.uk (or comment below).

When does competition end? A staged approach to procurement modifications from Albert Sanchez Graells

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

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?

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.

Procurement issues SCF unfair competition from the public sector (glasgow, sept 2017) from Albert Sanchez Graells

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

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

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

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).

* * * * 

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

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

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)

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.