No special rules for calculation of value thresholds for the tendering of 'light-touch' public contracts

A Swedish colleague recently got in touch and told me that there is an on-going debate on how to deal with contracts for social services and other services below the €750,000 (£ 589,148) value threshold of Art 4(d) of  Dir 2014/24. In particular, there seems to be a discussion on whether the general rules for the calculation of value thresholds [Art 5 Dir 2014/24]--and, in particular, the anti-circumvention prohibition of splitting contracts to avoid their subjection to the EU public procurement rules [Art 5(3) Dir 2014/24]--apply to the new light regime for social services and other services.

My colleague gave me a specific example to illustrate the point:

Lets imagine that there is no regulation for contracts for social services and other services below the threshold of €750,000 in national law.
Contracting authority A decided to sign an agreement with non-profit organization X for the delivery of social services (let’s say for a cultural service) with a value of €500,000 (direct award). The contract is signed for 2 years starting 1 July 2017. Three months later, contracting authority A decides to sign an agreement for the delivery of the same service with another non-profit organization Y for 2 years and with a value of €500,000. Would this mean that contracting authority A has exceeded the threshold stipulated in Art 4(d) of Dir 2014/24? Must the contracting authority add the value of the above mentioned service contracts together? Or should the contracts be seen as separate contracts in the sense that both contracts are below the threshold of €750,000?
Ultimately, how should the value of several contracts, with different service providers, for the same type of social service (each of them below the threshold of €750,000) be considered? This question is quite crucial for the practical implications and scope of the new provisions on social services, and we would appreciate very much if you could share any of your ideas on this issue.

In my view, the answer is very simple. There is nothing in the light-touch regime of Arts 74-77 of Dir 2014/24 that indicates that the rules in Art 5 Dir 2014/24 do not apply to these contracts. On the contrary, it is a logical requirement for the application of the light-touch regime that the contracts need to have a value above the threshold of €750,000 established in Art 4(d) Dir 2014/24. A basic systematic interpretation of the Directive clearly determines that such value needs to be established in accordance with the rules of Art 5 thereof, which sets out explicit rules for that purpose.

Then, it is also clear to me that the anti-splitting prohibition of Art 5(3) Dir 2014/24 applies to the award of these contracts. In that regard, it is important to refresh our knowledge of the case law of the Court of Justice of the European Union in that respect. There are two important aspects to consider: first, the objective requirement to aggregate the value of contracts that are economically, technically or temporarily connected; and, second, the strict rules applicable to the assessment of de facto splits of contracts.

General requirement to aggregate contract value for the purpose of compliance with EU public procurement rules

As I discuss in A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 262-264, 

Specific rules have been developed to deter such strategic use of public procurement thresholds, or the unjustified resort to ‘unregulated’ public procurement activities. As regards the strategic conduct of public procurement below the thresholds set by the EU directives on public procurement, article 5(3) of Directive 2014/24 expressly states that the object of public contracts may not be subdivided to prevent its coming within the scope of the directive. More specifically, it establishes that the choice of the method used to calculate the estimated value of a procurement shall not be made with the intention of excluding it from the scope of this Directive,[1] and that a procurement shall not be subdivided with the effect of preventing it from falling within the scope of this Directive, unless justified by objective reasons.
The latter caveat allowing for the objective justification of a subdivision of a contract that makes it fall below the relevant thresholds was not present in the equivalent rule of art 9(3) dir 2004/18 (‘No works project or proposed purchase of a certain quantity of supplies and/or services may be subdivided to prevent its coming within the scope of this Directive’). It is submitted that this new caveat is prone to create significant litigation, particularly if the European Commission identifies numerous instances of recourse to ‘objective reasons’ on the part of the Member States and the latter argue for a broad interpretation of the exception—which should be rejected.[2] However, given the additional explanation provided in recital (20) of Directive 2014/24, it is submitted that the addition of the caveat is largely irrelevant and only aimed at a further prevention of the artificial split of contracts in the framework of centralised procurement. In that regard, it is important to take into account that, according to the recital, the rationale for the ‘objectiev reasons’ caveat is that
For the purposes of estimating the value of a given procurement, it should be clarified that it should be allowed to base the estimation of the value on a subdivision of the procurement only where justified by objective reasons. For instance, it could be justified to estimate contract values at the level of a separate operational unit of the contracting authority, such as for instance schools or kindergartens, provided that the unit in question is independently responsible for its procurement. This can be assumed where the separate operational unit independently runs the procurement procedures and makes the buying decisions, has a separate budget line at its disposal for the procurements concerned, concludes the contract independently and finances it from a budget which it has at its disposal. A subdivision is not justified where the contracting authority merely organises a procurement in a decentralised way (emphasis added).
In my view, then, the caveat should be interpreted as creating a strengthened requirement for a justification that intends to escape the rule on prohibited division of contracts on the basis of (allegedly) objective reasons and, particularly, aims to anticipate and prevent potential infringements of the EU rules by contracting authorities that manage (de)centralised procurement systems. Generally speaking, however, the discussion seems to need being re-oriented towards the definition of contracting authority and the recourse to collaborative procurement ...
Generally, though, the anti-split or anti-circumvention rule is clear and establishes a prohibition of strategic use of public procurement thresholds. To be sure, these rules do not prevent contracting authorities from splitting or dividing the contracts into as many lots as they deem fit or objectively justified ..., but rather focus on their obligation to take the aggregate value of those lots into consideration when determining whether the relevant thresholds are met—and, hence, whether their award should be conducted pursuant to the rules of the EU directives on public procurement (see art 5(8) and 5(9) dir 2014/24).[3] Consequently, the prohibition on circumventing the application of the directives is not violated per se by dividing the contracts in lots, but only by failing to treat those lots as a single economic and technical unit and, consequently, by failing to award them in compliance with public procurement rules.[4]
This prohibition has also been clearly interpreted by the EU judicature, which has provided guidance as to what constitutes an ‘artificial’ division of the object of a contract to circumvent public procurement rules—by putting emphasis on the criterion of the economic and technical unity of the object of the various contracts whose award should have been conducted jointly.[5] Therefore, a public buyer that artificially divided into separate contracts or purchases certain of its requirements that should objectively be considered to constitute a single economic and technical unit would be found in breach of the EU directives on public procurement. A different dimension is that of the temporal compatibility between the spread of the needs and the periodicity of the contracts or purchases conducted by the public buyer.[6] Where a significant mismatch can be identified—ie, when purchases below the thresholds occur too often—the public buyer should equally be found in breach of the EU public procurement rules, since the conduct of an excessive number of purchases or the conclusion of an excessive number of contracts should equally be considered an artificial split of the object of the contract in circumvention of the EU rules.
[1] For a discussion on the very problematic use of intentional elements in the 2014 Directives and, in particular, in the context of the principle of competition embedded in art 18 dir 2014/24, see above ch 5, §III.
[2] Case C-394/02 Commission v Greece [2005] ECR I-4713 33; Case C-337/05 Commission v Italy [2008] ECR I-2173 57; C-250/07 Commission v Greece [2009] ECR I-4369 17.
[3] It is important to stress that the system allows for certain flexibility and that, despite the rules preventing the artificial split into lots in art 5(8) and 5(9) dir 2014/24, contracting authorities may award contracts for individual lots without applying the procedures provided for under the Directive, provided that the estimated value net of VAT of the lot concerned is less than EUR 80 000 for supplies or services or EUR 1 million for works. However, the aggregate value of the lots thus awarded without applying the Directive shall not exceed 20 % of the aggregate value of all the lots into which the proposed work, the proposed acquisition of similar supplies or the proposed provision of services has been divided (art 5(10) dir 2014/24).
[4] Along the same lines, although with reference to the equivalent provisions in Directive 93/38, see Opinion of AG Jacobs in case C-16/98 Commission v France 34–37. From the opposite perspective, analysing whether the improper or artificial aggregation of contracts that do not constitute a single economic and technical unity could result in a breach of the same provisions, see Opinion of AG Mischo in case C-411/00 Swoboda 53–64. In very clear terms, the ECJ concluded that the purpose that inspires these provisions ‘(the concern to avoid any risk of manipulation) also precludes a contracting authority from artificially grouping different services in the same contract solely in order to avoid the application in full of the directive to that contract’; see Case C-411/00 Swoboda [2002] ECR I-10567 58.
[5] Case C-16/98 Commission v France [2000] ECR I-675; and Case C-412/04 Commission v Italy [2008] ECR I-619 72. See also Opinion of AG Jacobs in case C-16/98 Commission v France. Similarly, albeit in less elaborated terms, see Opinion of AG Kokott in case C-220/05 Auroux 65 fn 58; Opinion of AG Ruiz-Jarabo Colomer in Case C-412/04 Commission v Italy 85–88; and Opinion of AG Mengozzi in case C-237/05 Commission v Greece 76–79. See also Opinion of AG Trstenjak in Case C-271/08 European Commission v Federal Republic of Germany 165. For recent cases discussing the splitting of contracts, see T-384/10 Spain v Commission [2013] pub. electr. EU:T:2013:277 and T-358/08 Spain v Commission [2013] pub. electr. EU:T:2013:371. Both of them respectively appealed as C-429/13 and C-513/13, which will give the ECJ an opportunity to update its doctrine on the artificial split of contracts.
[6] The temporal dimension was also analysed, although in a limited way, in the Opinion of AG Jacobs in case C-16/98 Commission v France 71.

Strict rules applicable to the assessment of de facto contract splitting

Additionally, it is also worth stressing that the assessment of whether a contracting authority has artificially split contracts and thus excluded them from compliance with the EU public procurement rules is subjected to a strict objective test. As I develop in A Sanchez-Graells,  'Assessing the Public Administration’s Intention in EU Economic Law: Chasing Ghosts or Dressing Windows?', in KA Armstrong (ed), Cambridge Yearbook of European Legal Studies 2016 (Cambridge, CUP, 2017) forthcoming, the case law has been very clear in establishing an objective test to determine infringements of the anti-circumvention rules now located in Art 5(3) Dir 2014/24. In that regard, it is worth stressing that:

Under the applicable rules, it is clear that ‘[t]he choice of the method used to calculate the estimated value of a procurement shall not be made with the intention of excluding it from the scope of this Directive and, in particular, that a ‘procurement shall not be subdivided with the effect of preventing it from falling within the scope of this Directive, unless justified by objective reasons’.[1]
In that regard, it is important to stress that the CJEU departed from the literal wording of that provision—which requires an intentional element identical ...—and clearly adopted an objective assessment based on the effects and consequences of the contracting authorities’ decisions concerning the estimation of the value of contracts that should have been tendered under the applicable EU rules. In a consistent line of case law, the CJEU stressed that the analysis needs to be based on objective elements that create indicia of the intentional artificial split of the contract, such as ‘the simultaneous issuance of invitations to tender … similarities between contract notices, the initiation of contracts within a single geographical area and the existence of a single contracting authority’ all of which ‘provide additional evidence militating in favour of the view that, in actual fact, the separate works contracts relate to a single work’.[2] Indeed, the intentional element has been excluded where, on the basis of such analysis, there were objective reasons that justified the decision adopted by the contracting authority.[3] Moreover, the prohibition of artificially splitting the contract with the intention of circumventing the application of the EU procurement rules has been applied directly to determine the incompatibility of legal rules that objectively diminished the applicability of the relevant directives, without engaging in any sort of subjective assessment (which would have been impossible).[4] ...
It is true that the CJEU has not gone as far as simply presuming the existence of the intention to avoid the applicability of the EU procurement rules in all cases. As aptly put by Advocate General Trstenjak,
Although the Court is decidedly strict in its examination of that prohibition, such intention to circumvent cannot be presumed without more. Each individual case in which a contract was split for the purposes of an award must be examined according to its context and specificities and, in that regard, particular attention must be given to whether there are good reasons pointing in favour of or, on the contrary, against the split ...[5]
However, the need to carry out a case by case analysis does not detract from the fact that the CJEU has excluded any consideration of the subjective intention of the contracting authority or any of its members. This was made exceedingly clear in a recent Judgment, whereby the General Court (GC) stressed that
a finding that a contract has been split in breach of European Union procurement legislation does not require proof of a subjective intention to circumvent the application of the provisions contained therein … it is irrelevant whether the infringement is the result of intention or negligence on the part of the Member State responsible, or of technical difficulties encountered by it … the Court considered that for the purpose of finding [an infringement] it was not necessary … to show beforehand that the Member State concerned intended to circumvent the obligations … by splitting the contract.[6]
Overall, thus, when it comes to the assessment of the seemingly subjective element included in the anti-circumvention provisions in the successive generations of procurement Directives, the existing case law of the CJEU clearly established that the analysis solely needs to be conducted on the basis of objective evidence and arguments regarding two aspects: firstly, whether objectively the conduct of the contracting authority created the effect proscribed by the rule and, secondly, whether there were objective good reasons for such behaviour (ie, an alternative explanation to the then presumed intention to circumvent). It could not be more objective and, clearly, no further proof of a subjective intention to circumvent the application of the EU public procurement rules is required.
[1] See Article 5(3) of Directive 2014/24, which absorbed the content of Article 9(7) of Directive 2004/18 of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts [2004] OJ L 134/114. Previously, see Article 6 of Council Directive 93/37/EEC of 14 June 1993 concerning the coordination of procedures for the award of public works contracts [1993] OJ L 199/54.
[2] As stressed very recently, see Spain v Commission, T-384/10, EU:T:2013:277, paras 65-68 (emphasis added); the Judgment has, however, been set aside on appeal by CJEU on procedural issues (disregard of a time limit by the Commission); see Spain v Commission, C-429/13 P, EU:C:2014:2310. Nonetheless, the same wording had been used in Commission v France, C-16/98, EU:C:2000:541; Commission v Italy, joined cases C-187/04 and C-188/04, EU:C:2005:652; Auroux and Others, C-220/05, EU:C:2007:31; and Commission v Germany, C-574/10, EU:C:2012:145.
[3] Swoboda, C-411/00, EU:C:2002:660, paras 57-60.
[4] Commission v Italy, C-412/04, EU:C:2008:102, paras 72-74.
[5] Opinion of AG Trstenjak in Commission v Germany, C-271/08, EU:C:2010:183, para 165 (emphasis added and references omitted). cf Opinion of AG Jacobs in Commission v France, C-16/98, EU:C:2000:99, para 38, where the AG stresses that the intentional or subjective element cannot be eliminated, but suggests that the applicable test still lies on whether the decision under assessment can be ‘justified on objective grounds’.
[6] Spain v Commission, T-384/10, EU:T:2013:277, para 95 (references omitted).

Overall assessment

Taking all of this into account, it seems clear to me that, unless there are objective (good) reasons for the sequential award of contracts for the provision of social and other specific services, the scenario suggested above would clearly constitute an infringement of EU public procurement law--and, in particular, Art 5(3) Dir 2014/24. In my view, the test applicable to the assessment of any objective reasons provided by the contracting authority cannot cover situations of lack of planning / foresight, purely economic reasons, or the pursuit or any horizontal policies.

Post script. If my intuition is correct and the discussion is catching up in Sweden because these sequential contracts are justified by a claim of emergency / force majeure / imprevisibility linked to the need to tackle the refugee crisis (which has triggered significant issues in Sweden and where the Swedish National Agency for Public Procurement has been issuing relevant guidance, unfortunately not in English), then it would seem clear to me that an overall assessment needs to be carried out of the situation and that it is not acceptable to allow each contracting authority to claim protection from the need to tender those contracts on the basis of unforeseeability and (con)sequential development of new or additional needs. Once the situation has been a source of general concern and operational difficulty across the country, a more general solution needs to be pursued, possibly on the basis of the rules for dynamic purchasing systems. However, this may require further analysis.