AG Sharpston rightly opposes use of financial guarantees as pre-requisite for procurement challenges (C-439/14 and C-488/14)

In Opinion of 28 April 2016 in joined cases Star Storage and Max Boegl România and Construcții Napoca, C-439/14 and C-488/14, EU:C:2016:307, AG Sharpston considered 'whether EU law precludes a Member State from requiring an applicant to lodge a ‘good conduct guarantee’ in order to access review procedures for public procurement decisions by contracting authorities' or,  'how far can the Member States set up financial requirements for challenging contracting authorities’ decisions in order to reduce the risk of frivolous challenges, that is to say, challenges that are inherently likely to be unsuccessful and whose purpose is merely to impede the public contract award procedure?'.

The case comes on the back of a challenge against Romanian procedural rules whereby undertakings seeking the review of procurement decisions need to lodge such a 'good conduct guarantee' of 1% of the estimated value of the contract (with progressive caps at €10k, €25k and €100k), and contracting authorities retain the good conduct guarantee where the body competent to review their decisions rejects the challenge or where the applicant abandons it. For the sake of completes, the Opinion also assesses whether a guarantee that was returned to the applicant regardless of the outcome of the case would be compatible with EU law.

AG Sharpston's Opinion is interesting because it covers arguments linked both to the right to an effective remedy before a tribunal recognised by Article 47 of the EU Charter of Fundamental Rights (which is clearly of prominence in this area; see Fastweb, C-19/13, EU:C:2014:2194), and to the more precise rights to access to rapid and effective review procedures and remedies in the field of public procurement under the Remedies Directive (and the identical provisions of the Utilities Remedies Directive).

After a very detailed assessment (see below), AG Sharpston unsurprisingly concludes that the Remedies Directive and the Utilities Remedies Directive, 'read in the light of Article 47 of the Charter, preclude national legislation ... which requires an applicant to lodge a ‘good conduct guarantee’ in order to obtain access to review of a contracting authority’s decisions relating to public procurement and under which the contracting authority must retain that guarantee if the challenge is rejected or withdrawn, regardless of whether or not the challenge is frivolous'. Equally, that 'the same provisions of EU law also preclude national legislation which requires an applicant to lodge a ‘good conduct guarantee’ in order to obtain access to review of a contracting authority’s decisions and under which that applicant automatically gets back the guarantee at the end of the challenge, whatever its outcome'.

These issues generally concern the delineation of the locus standi to challenge procurement decisions, which I have submitted needs to be interpreted in broad terms because 'the adoption of open or broad rules on active standing is a crucial element—particularly because, in this area, one of the major problems is the reluctance of public contractors and offerors to initiate litigation' [see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 439-441]. AG Sharpston's Opinion is clearly in line with such general expansive interpretation of rules recognising active standing in procurement review procedures. Therefore, her Opinion must be welcome and it is submitted that the Court of Justice should follow it. However, I also submit that she could have been bolder in assessing these issues in the broader context of the use of financial guarantees in public procurement. From this perspective, I think that some of the specific elements of Sharpston's analysis are interesting in their detail.

AG Sharpston's analysis on the basis of art 47 charter

When setting the legal background to the dispute, AG Sharpston emphases that the right under Art 47 of the Charter is not absolute, but that it can only be limited subject to the principle of proportionality and only if the limitation is necessary and genuinely meets objectives of general interest recognised by the EU, or the need to protect the rights and freedoms of others [as per Art 52(1) Charter]. She also stresses that under Art 1(1) of the Remedies Directive, Member States must 'ensure that ... decisions taken by the contracting authorities may be reviewed effectively and, in particular, as rapidly as possible ... on the grounds that such decisions have infringed [EU] law in the field of public procurement or national rules transposing that law', and that under Art 1(3) of the Remedies Directive, 'the review procedures [shall be] available, under detailed rules which the Member States may establish, 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'.

AG Sharpston also clearly stresses that the Remedies Directive only sets 'minimum conditions which the review procedures under domestic law must satisfy in order to comply with EU public procurement law [so that if] no specific provision governs the matter, it is for each Member State to lay down the detailed rules of administrative and judicial procedures governing actions for safeguarding rights which individuals derive from EU public procurement law' (para 30, references omitted). Thus, given that the Remedies Directive 'contains [no] rules on financial requirements which economic operators may have to fulfil in order to obtain access to review procedures against decisions of contracting authorities. National provisions ... fall within the procedural autonomy of the Member States, subject to the principles of equivalence and effectiveness' (para 31).

However, AG Sharpston raises two relevant issues: 'First, can [the principle of effectiveness] be limited to verifying that a national procedural requirement ... renders practically impossible or excessively difficult the exercise of the right to review procedures set out in [the Remedies Directive]? Or is it broader in that it requires any national rule which undermines those provisions to be set aside?' (para 33, emphasis in the original). To which she answers that 'what matters ultimately is to ensure that the rights which EU law confers on individuals receive more, rather than less, protection. [The Remedies Directive gives] specific expression to the right to an effective remedy. It is therefore not possible to limit the analysis of the principle of effectiveness to whether a procedural requirement such as that in issue in the main proceedings is liable to render practically impossible or excessively difficult the exercise of that right. Rather, in that specific context, the effectiveness test must surely involve examining whether such a requirement is liable to undermine the right to effective review procedures which those provisions guarantee' (para 35, emphasis in the original).

'Second, what impact does the fundamental right to an effective remedy under Article 47 of the Charter have on the principle of effectiveness as a limit to the procedural autonomy of the Member States?' (para 36). And, in that regard, she clearly explains that 'Article 47 of the Charter applies in the main proceedings. Providing the good conduct guarantee is a pre-condition for getting any challenge examined. That requirement therefore constitutes a limitation on the right to an effective remedy before a tribunal within the meaning of Article 47. Such a limitation 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. That test is similar to the test that the Strasbourg Court applies when it examines whether financial restrictions on access to courts are compatible with Article 6(1) of the ECHR' (para 37, references omitted).

This is an interesting analytical approach, which leads to the further consideration that the rules are underpinned by a legitimate purpose. In Sharpston's words, 'the national provisions establishing the good conduct guarantee are intended in essence to protect ... from frivolous challenges which economic operators (including those who are not tenderers) might initiate for purposes other than those for which the review procedures were established. Such an objective is undeniably legitimate. In particular, discouraging frivolous challenges enables the bodies in charge of reviewing decisions of contracting authorities to concentrate on ‘genuine’ challenges. That is likely to contribute to satisfying the requirement that Member States must ensure that decisions of contracting authorities may be reviewed effectively and, in particular, as rapidly as possible where it is claimed that such decisions infringe EU public procurement law or national rules transposing that law' (para 44, references omitted).

AG Sharpston also considers that the possibility of loosing significant amounts (up to €25k or €100k depending on the type of contract) meets the requirement that the rules are capable of achieving that objective because 'costs of that magnitude are such as to deter the lodging of frivolous challenges because the latter are, by their very nature, likely to be rejected and, therefore, to result automatically in loss of the entire good conduct guarantee and the associated costs' (para 47).

However, she submits that the rules on 'good conduct guarantees' do not meet the requirements of the principle of proportionality as derived from Art 52(1) of the Charter because there is no indication that they do no go further than is necessary to attain their objective. She assesses the situation in two scenarios. First, where the guarantee is automatically forfeited in case the challenge is rejected or withdrawn. In this case, there is no question that the rule is not proportionate because '[w]here a challenge was rejected or withdrawn, the ... competent court might for example have been given latitude to ascertain whether that challenge was frivolous or not, taking into account all relevant circumstances, and to decide in consequence whether retaining (all or part of) the good conduct guarantee was justified' (para 50, references omitted). Second, where the the applicant gets back the good conduct guarantee irrespective of the challenge’s outcome (which was a transitional regime proposed by Romania), AG Sharpston considers 'that such a procedural requirement does not protect contracting authorities adequately from frivolous challenges. Under the transitional regime, 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 transitional 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' (para 56). Therefore, she also considers it contrary to EU law.

scope for a bolder approach?

In my view, AG Sharpston is right on all issues she discusses, particularly given the framework of analysis she creates. However, the Opinion leaves space for Member States to still develop mechanisms whereby they require the submission of 'bid protest guarantees' that will only be forfeited in case of spurious litigation and on a case by case assessment. Broadly, this is not in line with the normative position that the use of financial guarantees in public procurement (primarily, at bidding stage, but also at review stage) needs to be minimised and only used where there is an actual risk against which the contracting authority cannot (self)protect by other means--which will very rarely be the case [see my Public procurement and the EU competition rules (2015) 326-327 & 425-426]. In my view, the risks derived from litigation are a given for the public sector and, consequently, unless there is a special circumstance that raises the possibility of damage to the public sector above abnormal levels, the need for the financial guarantee can be doubted.

A less restrictive alternative would be to devise a system of penalties which public procurement review bodies and courts could apply in case of spurious litigation. That would avoid front-loading the financial burden and would dissipate negative effects on access to review procedures. Conversely, it would leave the public sector exposed to bankruptcy risk in case the frivolous challengers did not have the ability to pay the fine. But this is not different from the general risk the public sector (and society at large) faces in terms of the effects of bankruptcy on the effectiveness of administrative sanctions. Thus, once more, the risk does not seem to be specific enough as to justify the requirement of specific 'bid protest guarantees' and, from that perspective, I submit that AG Sharpston could have been bolder in her Opinion in Star Storage and Max Boegl România and Construcții Napoca. However, on balance, her Opinion is certainly a positive step.