Restrictions on subcontracting under EU public procurement rules: à-propos the Opinion of AG Sharpston (C-406/14)

(c) Gregory Fox
In her Opinion of 17 November 2015 in Wrocław - Miasto na prawach powiatu, C-406/14, EU:C:2015:761, Advocate General Sharpston assessed to what extent contracting authorities tendering contracts under the EU public procurement rules can limit the percentage of the contract that the winning tenderer can subcontract to third parties. The Judgment in this case will be important because it addresses an area of EU public procurement law bound to be of growing relevance, particularly if Member States develop the supply-chain related tools that Directive 2014/24 has created in Art 71 (see here). It will also be important because it technically deviates from previous cases on reliance on third party capacities (comments here).

In the case at hand, the contracting authority imposed a requirement whereby '[t]he economic operator is required to perform at least 25% of the works covered by the contract using its own resources'. In her Opinion, AG Sharpston proposes that the Court of Justice of the European Union (CJEU) declares that such requirement runs contrary to EU public procurement law--ie that Directive 2004/18 on public procurement precluded a contracting authority from stipulating in the tender specifications of a public works contract that the successful tenderer is required to perform part of the works covered by that contract, specified in abstract terms as a percentage (in that case, 25%), using its own resources.

Given that the specific circumstances of the case did not allow for an assessment of the subcontracting requirement at the stage of qualitative selection (which was the approach followed by previous case law, see paras 36-37), AG Sharpston's analysis rests heavily on Art 25 of Directive 2004/18, according to which
In the contract documents, the contracting authority may ask ... the tenderer to indicate in his tender any share of the contract he may intend to subcontract to third parties and any proposed subcontractors. This indication shall be without prejudice to the question of the principal economic operator's liability.
The reasoning of AG Sharpston would apply equally to Directive 2014/24, which Art  71 reiterates the same rules in paras 2 and 4. In that regard, it is interesting to stress how, in AG Sharpston's view,
30 Directive 2004/18 is designed not only to avoid obstacles to freedom to provide services in the award of public service contracts or public works contracts but also to guarantee the opening-up of public procurement to competition. Recital 32 in the preamble to that directive states that the possibility of subcontracting is liable to encourage small and medium-sized undertakings to get involved in the public contracts procurement market. Subcontracting enables such undertakings to participate in tendering procedures and to be awarded public contracts regardless of the size of those contracts. Subcontracting thus contributes to achieving the directive’s objectives by increasing the number of potential candidates for the award of public contracts.
31. Accordingly, Article 25 of Directive 2004/18 not only envisages that a tenderer may subcontract part of the contract but also sets no limit in that regard. Indeed, Directive 2004/18 confirms explicitly that an economic operator may, where appropriate and for a particular contract, rely on the economic, financial, technical and/or professional capacities of other entities, regardless of the legal nature of the links which it has with them. Consequently, a party may not be eliminated from a procedure for the award of a public service contract solely because it proposes, in order to carry out the contract, to use resources which are not its own but belong to one or more other entities. 
32. That said, contracting authorities do have a legitimate interest in ensuring that the contract will be effectively and properly carried out. Where an economic operator intends to rely on capacities of other economic operators in a tendering procedure, it must therefore establish that it actually will have at its disposal the resources of those operators which it does not itself own and whose participation is necessary to perform the contract. A tenderer claiming to have at its disposal the technical and economic capacities of third parties on which it intends to rely if it obtains the contract may be excluded by the contracting authority only if it fails to meet that requirement. 
33. The contracting authority may not always be in a position to verify the technical and economic capacities of the subcontractors when examining the tenders and selecting the lowest tenderer. The Court has held that in such cases Directive 2004/18 does not preclude a prohibition or a restriction on subcontracting the performance of essential parts of the contract. Such a prohibition or restriction is justified by the contracting authority’s legitimate interest in ensuring that the public contract will be effectively and properly carried out. Directive 2004/18 does not require a contracting authority to accept performance of essential parts of the public contract by entities whose capacities and qualities it has been unable to assess during the contract award procedure.
34. In my view, considering the essential role subcontracting plays in promoting the objectives of Directive 2004/18, no other prohibition or restriction is permissible. It is true that, in Swm Costruzioni 2 and Mannocchi Luigino, the Court considered that there may be works with special requirements necessitating a certain capacity which cannot be obtained by combining the capacities of more than one operator which individually would be unable to perform that work. In those specific circumstances, the Court has held that the contracting authority is justified in requiring that the minimum capacity level concerned be achieved by a single economic operator or, where appropriate, by relying on a limited number of economic operators ... as long as that requirement is related and proportionate to the subject-matter of the contract at issue. However, that is not a specific ground for prohibiting or restricting subcontracting as such. Nothing precludes that ‘single economic operator’ or ‘limited number of economic operators’ from being a subcontractor or subcontractors of the successful tenderer(s).
35. It follows that a stipulation such as that in issue in the main proceedings [ie that the economic operator is required to perform at least 25% of the works covered by the contract using its own resources] is clearly not consistent with Directive 2004/18 (Opinion in C-406/14, paras 30-35, references omitted and emphasis added).
In my view, this proposed interpretation should be generally welcome, not least because the imposition of this sort of requirements could neutralise the open-ended character of the qualitative selection phase through the back door. I developed some thoughts regarding subcontracting in Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 353-355, where I reached the complementary and compatible conclusion that 'contracting authorities should refrain from mandating or inducing subcontracting (in particular, by using the percentage of subcontracted work as an award criterion)'. A contrario, as AG Sharpston proposed, contracting authorities should also be prohibited from imposing a 'ceiling' on the amount of work to be subcontracted.

More generally, I would submit that contracting authorities generally do not have much to say about the distribution of works between a contractor and its subcontractors. They can insist on mechanisms that ensure proper expertise, actual availability of means, proper mechanisms of liability (of the prime contractor and any subcontractors). They can also implement measures to monitor the supply-chain, particularly as legal compliance is concerned (provided they have the expertise and resources to do so). However, they seem not to be in a good position to intervene in the market by choosing some productive structure (of minimum or maximum vertical integration) over others. 

Thus, the CJEU would do well in following AG Sharpston's advice and, more generally, in clarifying the limited role of rules on subcontracting for the purposes of imposing specific productive structures (if they can have any role in that regard at all).