ECJ deviates from AG Sharpston’s Opinion and accepts use of “sure-refund” good conduct guarantees in public procurement litigation (C-439/14 and C-488/14)

In its Judgment of 15 September 2016 in Star Storage, joined cases C-439/14 and C-488/14, EU:C:2016:688, the European Court of Justice (ECJ) has deviated from the Opinion of AG Sharpston (see here) and ruled that, read in the light of Article 47 of the Charter of Fundamental Rights of the European Union, the Remedies Directives must be interpreted as not precluding national legislation that makes the admissibility of any action against an act of the contracting authority subject to the obligation for the applicant to constitute a good conduct guarantee if that guarantee must be refunded to the applicant whatever the outcome of the action.

I find this Judgment seriously troubling for two reasons: (a) it goes against basic intuitions of the effect of financial requirements on access to justice and (b) I do not grasp the purpose of “sure-refund” good conduct guarantees, which seem to be useless procedural hurdles. I develop these points below.

The main legal issue in Star Storage

The legal issue raised by the joined cases decided in Star Storage has been a rather moving target because the underlying Romanian rules have been altered in the period between the referral of the question to the ECJ and its Judgment. The initial question concerned the compatibility with EU law of requirements to furnish a good conduct guarantee in order to challenge procurement decisions under the risk that the guarantee would be executed in case of negative results for the litigant.

The forfeiture of the guarantee was later declared unconstitutional by the Romanian Constitutional Court and, as a result, the only question left for the ECJ to consider revolved around the compatibility of such good conduct guarantees in the scenario where they would be refunded to the challenger of the procurement decision, whatever the outcome of the review process.

So, in short, the ECJ had to consider whether the Remedies Directives and Art 47 CFR excluded the possibility to require the provision of a “sure-refund” good conduct guarantee in order to challenge public procurement decisions under Romanian law (C-439/14, para 38).

After rehearsing its standard case law concerning the Remedies Directives’ objective of ensuring the effectiveness of the substantive EU public procurement rules (paras 41-44) and stressing that the 2007 review of those rules aimed at ensuring ‘full respect for the right to an effective remedy and to a fair hearing, in accordance with the first and second paragraphs of Article 47 of the Charter’ (para 45), the ECJ focuses on the specific assessment of the “sure-refund” good conduct guarantee and follows the analytical framework proposed by AG Sharpston in her Opinion, which started from the position that

the good conduct guarantee … constitutes, as a pre-condition for getting any challenge examined, a limitation on the right to an effective remedy before a tribunal within the meaning of Article 47 of the Charter which, in accordance with Article 52(1) of the Charter can therefore be justified only if it is provided for by law, if it respects the essence of that right and, subject to the principle of proportionality, if it is necessary and genuinely meets objectives of general interest recognised by the EU or the need to protect the rights and freedoms of others (see judgment of 4 May 2016, Pillbox 38, C-477/14, EU:C:2016:324, paragraph 160) (C-439/14, para 49, emphasis added).

In assessing this test, the ECJ considers that the first requirement of explicit legal basis is met (para 50). This does not seem controversial. However, and this is where the ECJ starts to deviate from the analysis of AG Sharpston, the Court also considers that ‘the fact that the good conduct guarantee may reach the substantial amount of EUR 25 000 or EUR 100 000 cannot lead to the conclusion that the obligation to give such a guarantee undermines the fundamental content of the right to an effective remedy since, in any event, that guarantee, cannot be kept by the contracting authority, whatever the outcome of the action’ (C-439/14, para 50, emphasis added).

The ECJ further considers the measure adequate because the aim of the good conduct guarantee is justified by the legislative aim of avoiding the abuse of the remedies system so as to ensure the administrability of the procurement process (paras 52 and 53), and that ‘A financial condition such as the good conduct guarantee … is a measure liable to discourage frivolous challenges and ensure that all individuals have their actions dealt with as rapidly as possible, in the interest of the proper administration of justice, in accordance with Article 47, first and second paragraphs, of the Charter’ and that this is so even if ‘the obligation to provide a good conduct guarantee is a less dissuasive measure in its current version than in its initial version, since it can no longer be automatically and unconditionally kept by the contracting authority in the case that the appeal is rejected or withdrawn, [because] that obligation is still able to achieve the objective of combating frivolous actions pursued by the Romanian legislation’ (C-439/14, paras 54 and 56, emphasis added).

It finally considers the measure proportionate, mainly because ‘The good conduct guarantee of 1% of the value of the public contract, limited in accordance with the type of contract remains modest (see judgment of 6 October 2015, Orizzonte Salute, C-61/14, EU:C:2015:655, paragraph 58), in particular for tenderers which must normally demonstrate a certain financial capacity. That guarantee may, next, and in any event, be constituted in the form of a bank guarantee. Finally, it has to be constituted only for the period between the filing of the application and final judgment’ (C-439/14, para 61, emphasis added).

Issues around access to (administrative) justice

The first aspect in which I find the Star Storage Judgment criticisable concerns the analysis of proportionality. I think that the imposition of financial requirements and costs in order to challenge procurement decisions—including the payment of (non-negligible) courts fees—should be considered more clearly contrary to Art 47 CFR and the Remedies Directives. These rules require the recognition of standing to challenge procurement decisions ‘at least to any person having or having had an interest in obtaining a particular contract and who has been or risks being harmed by an alleged infringement’, and not only to those that can foot the bill of a (bank-issued) financial guarantee or absorb the opportunity cost of having a significant amount of money idle for the duration of the review procedures. Moreover, the assessment of proportionality in the terms carried out by the ECJ in the Star Storage Judgment can be particularly burdensome for SMEs, for whom the effects of a financial requirement proportional to the value of a contract they were not awarded can be clearly disproportionate, or at least imply an excessive risk.

Also, an assessment of proportionality should include a consideration of whether less restrictive measures are available. In the specific setting of aiming to discourage frivolous litigation, it would seem that the creation of a system of court-administered fines would be superior and reduce the ex ante restriction of access to review procedures. Moreover, that system could include provisions allowing the review body or court to ask for financial guarantees as interim measures only where they are necessary to ensure the possibility of the fine having to be paid at the end of the procedure (although I am not sure that this mechanism to avoid bankruptcy proofness is necessary).

It would also be possible to create a domestic discretionary exclusion ground for spurious litigants on the basis that this conduct makes ‘the economic operator … guilty of grave professional misconduct, which renders its integrity questionable’ [Art 57(4)(c) Dir 2014/24]. In my view, the existence of these potential alternatives should have been taken into account and this could have led to a finding that the upfront requirement of good conduct guarantees is in itself disproportionate.

However, this is not the weakest point of the Judgment.

Uselessness of “sure-refund” good conduct guarantees

Rather, in my view, the weakest and most criticisable aspect of the Star Storage Judgment is that it fails to recognise the futility of “sure-refund” good conduct guarantees. As simply and clearly put by AG Sharpston in her Opinion,

such a procedural requirement does not protect contracting authorities adequately from frivolous challenges … the contracting authority has to return the good conduct guarantee to the applicant within five days following the date on which the decision ... or the judgment has become final, even where the applicant manifestly abused his right to access review procedures. The costs which the … regime involves may therefore not be such as to discourage an economic operator from lodging a challenge that pursues an objective other than those for which the review procedures are established — for example, harming a competitor. They may nevertheless prove an obstacle to an economic operator with an arguable claim but limited means (Opinion of AG Sharpston, para 56, emphasis added).

It is surprising that the ECJ diverges from this assessment. In general terms, the ECJ implicitly dismisses it by stressing that ‘although the obligation to provide a good conduct guarantee is a less dissuasive measure in its current version than in its initial version, since it can no longer be automatically and unconditionally kept by the contracting authority in the case that the appeal is rejected or withdrawn, that obligation is still able to achieve the objective of combating frivolous actions pursued by the Romanian legislation’ (C-439/14, para 56). The rationale for this assessment is developed in the following terms:

Mobilising a sum of that amount by bank transfer, like the requirement to take the steps necessary to constitute a bank guarantee and pay the fees relating to it are such as to encourage applicants to carefully consider bringing an action. Furthermore, in so far as it undermines the applicant’s resources or, at least, its ability to obtain credit until that guarantee is refunded, the good conduct guarantee is of such a nature that it encourages applicants to act prudently in the proceedings they bring, consistent with the requirement … that the review procedures … are conducted as rapidly as possible. … it is conceivable that such a financial condition will encourage potential litigants to seriously evaluate their interest in bringing legal proceedings and their chance of winning and thereby dissuade them from bringing claims which are manifestly unfounded or which only seek to delay the award of a contract (C-439/14, para 59).

In my view, the ECJ fails to address AG Sharpston’s concerns. There is indication of the cost of such a financial guarantee, but it is certainly easy to foresee that (especially for large contracts), it may well be a minor amount for resourceful litigants willing to incur that cost in order to obtain some competitive advantage.

On the contrary, it is surprising that the ECJ does not use the exact same reasons detailed in para 59 of the Star Storage Judgment to acknowledge the barrier that the guarantee represents, which it ‘saves’ by indicating that the absolute value of the guarantees remains ‘modest’ (para 61). In my view, it is not possible to have it both ways. Either the requirement is modest and, therefore, unable to provide sufficient deterrence for resourceful litigants, or it is a serious barrier to the exercise of legal actions (whether legitimate, which should overcome the barrier, or illegitimate, which should not) and, consequently, it cannot overcome an analysis of strict proportionality in the terms discussed above.

Overall, once more, I find the judgement of the ECJ lacking commercial and financial realism and I start to wonder whether we will see a reversal of this trend any time soon—which seems unlikely, particularly when the ECJ deviates from the well thought-through proposals of some of its Advocates General, such as Sharpston’s in the Star Storage case.