ECJ stresses flexibility for subcontracting and teaming in the 2014 EU Public Procurement Package (C-298/15)

In its Judgment of 5 April 2017 in Borta, C-298/15, EU:C:2017:266, the European Court of Justice (ECJ) largely followed the Opinion of AG Sharpston (commented here) and ruled on the incompatibility with EU law of a national rule that partially prohibited subcontracting by establishing that, where subcontractors are relied on for the performance of a public works contract, the tenderer is required to perform itself the main works, as defined by the contracting entity.

The ECJ also established that, even if there can be good reasons to ensure a correspondence between the parts of the works to be carried out by the members of a joint bid and their individual professional, technical and economic standing, EU procurement law is not compatible with a rule that imposes an arithmetic correspondence between the contribution of each of the tenderers and the share of the works that that tenderer undertakes to perform if the contract is awarded.

This is an interesting Judgment because it assesses issues around subcontracting and reliance on third party capacities in the area of utilities procurement and by reference to general free movement provisions in the TFEU. In my view, the line of reasoning followed by the ECJ in Borta offers good indications of the way in which subcontracting and teaming provisions in the 2014 EU Public Procurement Package will be interpreted.

The following is a summary of the reasons provided by the ECJ to determine the incompatibility with EU law of rules prohibiting subcontracting the main works involved in any project (a), as well as those requiring arithmetic correspondence between share of professional, technical (and economic) capacity and share of works to be carried out by members of a joint tender (b). A few common trends and future challenges are identified by way of conclusion (c).

It is worth noting that the ECJ also assessed issues concerning the modification of the tender documents after their publication in the light of the fundamental rules and general principles of the TFEU, among which are the principles of non-discrimination and equal treatment and the obligation of transparency which derive, in particular, from Articles 49 and 56 TFEU (see paras 62-77). However, those issues are not discussed in this post.

(a) Flexibility for subcontracting

The ECJ assessed the compatibility with Arts 49 and 56 TFEU of a national procurement rule prohibiting the subcontracting of the 'main works' in a project, as defined by the contracting authority. The ECJ determined that such a measure " is liable to prohibit, impede or render less attractive the participation of economic operators established in other Member States in the award procedure or the performance of a public contract..., since it prevents them either from subcontracting to third parties all or part of the works identified as the ‘main works’ by the contracting entity, or from proposing their services as subcontractors for that part of the works" (para 49).

Once the restriction on free movement was established, the ECJ proceeded to assess its possible justification. To that end, the ECJ considered the reasons given for the adoption of this rule, which mainly intended to "ensure that the works are properly executed" and was, more specifically, aimed at "preventing a current practice which consists in a tenderer claiming to have professional capacities solely in order to win the contract concerned, not with the intention of performing the works itself, but of entrusting all or most of those works to subcontractors, a practice which affects the quality of the works and their proper performance. Second, by limiting the reliance on subcontractors to works identified as ‘subsidiary’, [the rule aimed] to encourage the participation of small and medium-sized undertakings in public contracts as joint-tenderers in a group of economic operators rather than as subcontractors" (para 52). The ECJ dealt with these are three grounds for justification.

1. The ECJ accepted that aiming to ensure the proper execution of the works is a legitimate goal, but considered the measure disproportionate. Both because it "applies whatever the economic sector concerned by the contract at issue, the nature of the works and the qualifications of the subcontractors. Furthermore, such a general prohibition does not allow for any assessment on a case-by-case basis by that entity" (para 55); and because it prohibits subcontracting "in situations in which the contracting entity is able to verify the capacities of the subcontractors concerned and to take the view, after that verification, that such a prohibition is unnecessary for the proper execution of the works having regard, in particular, to the nature of the tasks that the tenderer plans to delegate to those subcontractors" (para 56). The existence of less restrictive measures also contributed to this finding of disproportion (para 57).
2. The ECJ did not make an explicit finding on the legitimacy of aiming to prevent 'front tendering' and subsequent subcontracting of most of the contract (which can be assumed to be a legitimate goal), but established that the measure is not suited and/or disproportionate to that goal because "it prohibits the tenderer from delegating the performance of all the works identified as the ‘main’ works by the contracting entity, including the tasks which represent, proportionally, only a small part of those works. Therefore, that provision goes beyond what is necessary to prevent the abovementioned practice" (para 58).

3. The ECJ finally accepted that, as a matter of principle, it is conceivable that "the encouragement of small and medium-sized undertakings to participate in a contract as tenderers rather than subcontractors" can, "in certain circumstances and under certain conditions, constitute a legitimate objective" (para 59). However, it found no evidence that this was the case in the specific situation.

Therefore, having rejected all possible justifications, the ECJ determined that "Articles 49 and 56 TFEU must be interpreted as precluding a provision of national law ... which provides that, where subcontractors are relied on for the performance of a public works contract, the tenderer is required to carry out the main works itself, as defined by the contracting entity" (para 61).

(b) Flexibility for (asymmetrical) joint tendering

The ECJ assessed a second substantive issue concerning joint tendering and, in particular, the imposition of the requirement that "in circumstances in which a common tender is submitted by several tenderers, ... the contribution of each of them in order to satisfy the requirements applicable with regard to professional capacities corresponds proportionally to the share of the works they will actually carry out if the relevant contract is awarded to them" (para 78).

It is interesting to note that, despite the inapplicability of the 2004 Utilities Directive to the award of the contract (which was below thresholds), the ECJ assessed the compatibility of such requirements with the Directive because the domestic law had made "those provisions have ... applicable ... in a direct and unconditional way" and did that "in order to ensure that internal situations and situations governed by EU law are treated in the same way" (see paras 33-34). Therefore, the ECJ's analysis was carried out "in the light of Article 54(6) of Directive 2004/17" (para 84) and is thus relevant for the future interpretation of Art 78 of Directive 2014/25--as well as, I would argue, Art 58(4) of Directive 2014/24.

I also find it interesting to note that the ECJ sets out the general framework for assessment by reference to the recent Judgment in PARTNER Apelski Dariusz, C-324/14, EU:C:2016:214 (for discussion, see here) and in the following terms (paras 85-86): 

• EU public procurement law "recognises the right of every economic operator, where the contracting entity lays down a qualitative selection criterion consisting of requirements relating to technical or professional abilities, to rely for a particular contract upon the capacities of other entities, regardless of the nature of the links which it has with them, provided that it proves to the contracting authority that it will have at its disposal the resources necessary for the performance of the contract"
• "that right extends to groups of economic operators submitting a common tender, which may, under the same conditions, rely on the capacities of their participants or of other entities."
• EU public procurement law "does not preclude the exercise of the right ... from being limited in exceptional circumstances".

The ECJ recognises that restrictions on the possibility to rely on third party capacities could be justified on the need to "avoid the situation in which, in order to win the contract, a tenderer relies on capacities that he does not intend to use or, conversely, that a tenderer may be awarded a contract and perform part of the works without having the capacities and resources necessary for the proper performance of those works" (para 90).

However, , the ECJ ends up concluding that (paras 92-94):

• the clause that requires "an arithmetic correspondence between the contribution of each of the tenderers concerned to satisfy the requirements applicable with regard to professional capacity and the share of the works that that tenderer undertakes to perform and that it will in fact perform if the contract is awarded", however, "does not take account of the nature of the tasks to be carried out or to the technical capacities specific to each of them" and, consequently, "does not prevent one of the tenderers concerned from carrying out specific tasks for which it does not in fact have the experience or capacities required".
• Furthermore, if subcontracting of some ('subsidiary') works is possible and the professional capacities of the subcontractors are not verified (which is for the referring court to ascertain), then the requirement "does not guarantee that the tenderers will actually use the capacities that they have declared in the procurement procedure and which were taken into consideration" by the contracting authority; and "it does not prevent works defined as ‘subsidiary’ from being carried out by subcontractors without the professional capacities required".
• Ultimately, then, the requirement is not appropriate to ensure the attainment of the objectives pursued.

(c) Common trends and future challenges

Taken together with previous case law in the area of exclusion, qualitative selection and subcontracting--such as Ostas celtnieks, Partner Apelski Dariusz and Wrocław — Miasto na prawach powiatu, the Borta Judgment seems to reaffirm an approach whereby the ECJ is pushing against general rules excluding or restricting teaming and subcontracting, as well as aiming to ensure that, where the contracting authority engages in a case-by-case analysis of the economic operators' capabilities, this is guided by a (strict?) proportionality assessment. In general, this should be a welcome (pro-competitive) direction of development of the case law.

However, the evil is in the detail and there are emerging issues that will require further fine tuning, such as:

• the extent to which the contracting authority can engage in a substantive assessment of the economic operators' teaming or subcontracting arrangements prior to the award of the contract (cf Partner Apelski Dariusz and Ostas celtnieks), as well as the consequences of disputes concerning post-award structuring of their legal or functional relationships; or
• the technical reasons that can justify a prohibition to subcontract specific parts of the work or service (see Wrocław and Borta, but also Hörmann Reisen), in particular where the economic operators have assumed joint and several liability and/or have furnished extensive insurance to the contracting authority; or 
• the extent (and practicalities) of the integration of competition law considerations in the assessment of teaming and subcontracting arrangements by the contracting authorities (eg to avoid situations such as those raised by MT Højgaard and Züblin.

Overall, it seems fair to say that the case law and new rules on exclusion, qualitative selection and subcontracting raise significant practical challenges and that contracting authorities will need to treat lightly (and document extensively) the reasons why they create restrictions on teaming or subcontracting, as well as be ready to provide reasons for these decisions with a view of their administrative or judicial review (specially after the Marina del Mediterráneo Judgment).

Can a requirement to furnish financial guarantees (performance bonds) be considered a selection criterion based on economic and financial standing (C-76/16)?

In his Opinion of 21 March 2017 in INGSTEEL and Metrostav, C-76/16, EU:C:2017:226, Advocate General Campos Sánchez-Bordona addressed the compatibility of tender requirements aimed at ensuring the (future) provision of performance guarantees related to the execution of a works contract with the rules of the 2004 EU public procurement directive (Dir 2004/18). He submitted to the European Court of Justice (ECJ) that such requirements are compatible with EU law and, in particular, with the rules on selection criteria based on the economic and financial standing of economic operators seeking to be awarded public contracts under Art 47 Dir 2004/18. In doing so, he rejected the European Commission’s submission that such requirements, inasmuch as they affected the phase of execution of the contract, ought to be assessed in accordance with the rules on the setting of conditions for the performance of contracts under Art 26 Dir 2004/18.

AG Campos also addressed a point on the time-sensitivity of remedies’ availability (ie whether challenges by disappointed tenderers are barred where the performance of the contract by the awardee is almost complete) under the EU Remedies Directive (Dir 89/665 as amended by Dir 2007/66). He considered that, as interpreted in connection with Art 47 of the European Charter of Fundamental Rights, the procedural rights created by the Remedies Directive do not lapse simply due to the fact that the successful tenderer has almost completed performance of the contract at the time the disappointed tenderer launches its challenge, or the review authority or court is to issue its ruling.

While I fully agree with AG Campos concerning the procedural aspects of his Opinion (which I would have thought both clear and uncontroversial), I think that his analysis of the substantive issues improperly characterises the requirement for the (future) provision of a performance guarantee as a valid selection criterion based on the economic operator’s economic and financial standing. On that point, I consider the analytical framework proposed by the European Commission (partially) preferable. This post develops the reasons why I think the ECJ should not follow AG Campos on the substantive points of his INGSTEEL and Metrostav Opinion.

In the case at hand, “the contract notice required a ‘statement by the bank (loan agreement or credit facility agreement) recording the bank’s undertaking to the effect that the tenderer, in the event of acceptance of its tender, will be in a position to provide a guarantee of EUR 3,000,000 to ensure performance of the contract. The evidence must show that the funds will be available to the tenderer after conclusion of the contract. The evidence must be certified by a person authorised by the bank for that purpose.’” (para 15, emphasis added).

It is hard to make sense of the requirement (which may be a translation issue), but this seems to concern the need to provide a stand-by financial guarantee to the benefit of the contracting authority, which the issuing bank commits to firm up upon award of the contract.

Be it as it may, the disappointed tenderer did not provide such a bank statement, but rather proof of the opening of a current-account credit facility for an amount exceeding EUR 5,000,000 and a sworn statement that, if awarded the contract, they would keep a minimum of EUR 3,000,000 for the duration of the contract (para 17). It is not clear from the factual description in the Opinion whether there was any commitment to provide a guarantee using those funds as collateral, but it does not seem to be the case.

The contracting authority did not accept these documents as evidence of the economic and financial standing of the tenderer and thus excluded it from further participation. 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.

It is important to note here that the European Commission has challenged the legal subsumption of the material facts under Art 47 Dir 2004/18 and submitted that “Article 47 of Directive 2004/18 relates to the economic and financial standing of the tenderer at the time of award of the contract. However, the tenderer’s economic and financial standing during performance of the contract is governed by Article 26 of that directive, concerning conditions for performance of the contract. At all events, in the light of the wording of the question, the Commission suggests that the condition imposed on the tenderer should be examined under both Article 26 and Article 47 of Directive 2004/18” (para 28).

Further, the Commission indicated that “Article 26 of Directive 2004/18 provides that the conditions for performance must appear in the contract notice, a requirement fulfilled in this case, and must be compatible with EU law. Citing the case-law of the Court, the Commission argues that, as Directive 2004/18 does not exhaustively govern the special conditions for performance, those conditions may be assessed in accordance with primary EU law” (para 29, emphasis added).

AG Campos disagreed with the Commission and considered that the approach of assessing the requirement as a performance clause was incorrect. He emphasised that Art 26 Dir 2004/18 is concerned with other issues “and applies, in particular, to social and environmental objectives” (para 43). More importantly, he considered that “in requiring certain minimum levels of economic and financial standing, the presumption in Articles 44 and 47 of Directive 2004/18 is that the proof of that standing must refer to the period of performance of the contract. It would not be reasonable to require economic and financial standing only at the time of award of the contract and for the contracting authority not to have the right to request guarantees that the future successful contractor will retain its economic and financial standing during the period of performance of the contract” (para 44 emphasis added).

Furthermore, after creating an analogy with the case law concerned with reliance on third party capacities, he gave significant weight to the functional criterion that “[w]hen financial or economic resources are concerned, it is reasonable that these should not be ephemeral but should last until the contractual obligations have been performed” (para 48). In any case, AG Campos explicitly saved the requirement due to the fact that the value (EUR 3,000,000) “was related and proportionate to the subject-matter of the contract” and that the duration of the financial guarantee “was the same as the period of performance of the contract” (para 50). However, he did not provide any reasons for the finding that a 12% financial guarantee is proportionate (the estimated value of the contract was just above EUR 25,000,000), or why a duration of 48 moths without a reduction in the value of the guarantee did not need to be assessed in relation to the potential evolution (ie reduction) of risk as the completion of the contract progressed.

In my view, even if the outcome of the analysis may be seen as defensible (of which I am not convinced), the analysis itself is technically flawed. Put simply, the EU public procurement directives (both the 2004, as well as the 2014 generation) 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]. This 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 would create significant distortions in the system created by EU public procurement law, as well as potentially make it impossible to assess.

In the absence of rules on financial guarantees in the relevant EU public procurement directives (ie Dir 2004/18), the analysis of requirements for economic operators to furnish them to the contracting authority should be analysed in accordance with primary EU law – as the Commission rightly stressed, although on the basis of the applicability of Art 26 Dir 2004/18, with which I disagree. In that context, the AG (and in the immediate future, the ECJ) should have assessed whether the requirement of providing a 12% financial guarantee for a duration of 48 months is a barrier to free movement – which I think it is – and whether it can be justified – which I am not sure it can be, as both (i) the public interest in reducing the financial exposure of contracting authorities engaging in public contracts is questionable, and (ii) it may well be (strictly) disproportionate due to the impact it can have on SME access to procurement.

Therefore, the analysis of proportionality need not be intra-tender or confined to the terms of the contract (which could already make it fail), but rather of a higher level of generality, concerning the policy of demanding financial guarantees and its justification from a public interest perspective. Given its detrimental effects for competition, I would not think that demanding these guarantees is necessarily exemptable under free movement rules, at least in relation with contracts that do not raise specific or extraordinary risks.

From that perspective, the proportionality assessment carried out by AG Campos in INGSTEEL and Metrostav almost obiter may not necessarily cover all bases, as it is carried out from the perspective of the link of the requirement to the subject matter of the contract, rather than the perspective of seeking to justify a restriction of a fundamental internal market freedom. But, even if the same result was to be achieved, the analytical path would still be important—ie the limited scope of the exercise of assessing economic operators’ economic and financial standing should not be unduly extended.

This can have major relevance, not least because of the change that the consolidation of the principle of competition in Art 18(1) Dir 2014/24 has brought about. In the future (ie, where Dir 2014/24 is applicable to the case), in my opinion, the inclusion of requirements to provide financial guarantees should be subjected to assessment from the perspective of a potential artificial narrowing of competition. If, in a case such as INGSTEEL and Metrostav, the contracting authority excludes a tenderer on the basis of some (seemingly) formal deviation of the way in which it proposes to provide financial assurance to the contracting authority, this is bound to infringe the requirements of the competition principle. Surely, this analysis could be carried out even if the requirement was considered to pertain to the assessment of the economic operator’s economic and financial standing, but the consolidated recognition of the contracting authorities’ discretion to set those requirements in the first place may muddy the analysis. It seems conceptually preferable to consider it an independent issue, and thus subject to general principles.

Therefore, I would urge the ECJ not to follow AG Campos’ Opinion in INGSTEEL and Metrostav and rather determine that the requirement of financial guarantees was not covered by the 2004 EU public procurement rules and must thus be subjected to a standard assessment under primary EU law (and a strict proportionality test). I would also submit that, under those rules, the requirement was contrary to EU law.

CJEU clearly indicates total lack of will to effectively become EU's constitutional court (C-206/13)

In its Judgment of 6 March 2014 in case C-206/13 Siragusa, the Court of Justice of the EU has continued developing its case law on the lack of applicability / jurisdiction to interpret the Charter of Fundamental Rights of the EU (CFREU) in purely domestic situations (which it had, amongst other instances, already indicated in Romeo).

In my view, the approach adopted by the CJEU is prone to create potential situations of reverse discrimination and may end up creating multiple (and possibly conflicting) standards of protection of fundamental rights in the EU with significant constitutional implications.

 

In the case at hand, the CJEU was presented with a question on the interpretation of the right to property recognised in article 17 CFREU and, more specifically, on whether it could be constructed as a limit against certain landscape protection rules applicable in Italy. The issue was raised by an Italian court hearing a dispute between an Italian citizen and an Italian public authority. Despite the efforts in trying to connect the situation with the (indirect) application of EU environmental law, the CJEU was not persuaded that there was a sufficient connection and, therefore, rejected to provide a substantive interpretation. The main argument of the CJEU was indeed that

30 [...] there is nothing to suggest that the provisions of Legislative Decree [...] fall within the scope of EU law. Those provisions do not implement rules of EU law [...].

31 It is also important to consider the objective of protecting fundamental rights in EU law, which is to ensure that those rights are not infringed in areas of EU activity, whether through action at EU level or through the implementation of EU law by the Member States.

32 The reason for pursuing that objective is the need to avoid a situation in which the level of protection of fundamental rights varies according to the national law involved in such a way as to undermine the unity, primacy and effectiveness of EU law (see, to that effect, Case 11/70 Internationale Handelsgesellschaft [1970] ECR 1125, paragraph 3, and Case C‑399/11 Melloni [2013] ECR, paragraph 60). However, there is nothing in the order for reference to suggest that any such risk is involved in the case before the referring court.

33 It follows from all the foregoing that it has not been established that the Court has jurisdiction to interpret Article 17 of the Charter (see, to that effect, Case C‑245/09 Omalet [2010] ECR I‑13771, paragraph 18; see also the Orders in Case C‑457/09 Chartry [2011] ECR I‑819, paragraphs 25 and 26; Case C‑134/12 Corpul Naţional al Poliţiştilor [2012] ECR, paragraph 15; Case C‑498/12 Pedone [2013] ECR, paragraph 15; and Case C‑371/13 SC Schuster & Co Ecologic [2013] ECR, paragraph 18) (C-206/13 at paras 30-33, emphasis added).

In my view, this line of reasoning (acknowledgedly, rather in line with art 51 CFREU and art 6 TEU) is clearly problematic. To begin with, because it clearly disconnects (implicitly, at least) the protection of the CFREU rights from EU citizenship (art 20 TFEU, coupled with the general prohibition of discrimination on the grounds of nationality in art 18 TFEU). The CJEU has clearly considered it insufficient that EU citizens can be granted different levels of protection of their CFREU rights at domestic level as a result of the application of the domestic laws as sufficient justification for intervention (i.e. to assume jurisdiction and provide legal interpretation). By restricting the goal of a common level of protection of CFREU rights to cases in which 'the unity, primacy and effectiveness of EU law' is affected and excluding its competence, the CJEU seems to forget that the CFREU is in itself EU law and, consequently, that it should be afforded the same treatment as the other Treaty provisions.

 

Secondly, the CJEU is laying down too strong foundations for unresolved problems of reverse discrimination. If the claimant in Siragusa had not been Italian and, consequently, a (very loose) connection to free movement rights could be established, the CJEU may have been willing to assess the intervention by the Italian State on the property of a (moving) EU citizen under a different light (worse still, that challenge could be easier for corporate claimants than for individuals, at least if they do not engage in an economic activity, since 'corporate citizens' could also be potentially protected by freedom of establishment).

 

In such a case, the trigger for the application of the CFREU would be equally unrelated to the content of the rights of the CFREU themselves and, sometimes, the trigger for CJEU intervention may simply result from the fact that the EU citizen affected exercised or not free movement rights--which, in my view, continues to create an unjustifiable discrimination between moving (proper) EU citizens and non-moving (unaware) EU citizens that can only continue to erode the potential development of the EU.

 

 

Finally, this line of reasoning may end up creating a situation where the (constitutional) courts of the Member States may be obliged to enforce at the same time conflicting standards of substantive protection for a given fundamental right, depending on the 'sorce of law' that controls it in a given situation. And that will surely be difficult to understand. How could 'my' right to private property be different under 'my' domestic constitutional law protection or under 'my' CFREU protection, depending on factors unrelated to me, my property, or the rules (primarily) applicable? Surely the compatibility between the CFREU and competing (superior) standards of protection (those derived from the European Convention on Human Rights) have (somehow) been ironed out in art 52(3) CFREU. However, the situation is not the same with (lower-ranking?) domestic standards of protection [art 52(4) CFREU is clearly insufficient for that task] and, in my view, the CJEU approach is not helpful in that regard either.

 

Therefore, the continued rejection of its role as a constitutional court of the EU and the increasing restriction of the scope of application of the CFREU in which the CJEU is engaged are, in my view, undesirable developments in EU law.

AG Cruz Villalon opposes Italian minimum #tariffs for #publicprocurement #certification (C-327/12)

In his Opinion of 5 September 2013 in case C-327/12 Soa Nazionale Costruttori (not available in English), AG Cruz Villalon analyses the compatibility with EU free movement (ie freedom of establishment as per art 49 TFEU) and competition rules (arts 101, 102 and 106 TFEU) of the Italian system of tenderers' certification whereby private certification bodies are legally required to charge minimum mandatory tariffs to the companies seeking to obtain certificates of viability in order to participate in public tenders (as foreseen in art 52 dir 2004/18). 

The most controversial aspect of the system is that it includes a tariff calculation formula that automatically multiplies the rate payable for the certification activities according to the number of tenders for public works for which the applicant company seeks verification. This system was challenged under both competition and free movement rules.

Under the competition analysis, AG Cruz Villalon considers that art 106 TFEU is inapplicable, given that the private certification bodies are not entrusted with 'special or exclusive rights', as defined in Ambulanz Glockner (C-475/99). According to the AG, in Italy, private certification bodies

operate in a market strongly limited, in the sense that there is no cross competition with similar services. That is, the certification of public works companies is a service that, as such, does not compete directly or indirectly with any other, since there are no similar services that a company can use in order to compete in a tender for Italian public works. In such a context, that of a market that could be qualified as "captive", the fact that all [private certification bodies] exercise the special powers that the legislature has decided to entrust the private sector with, excludes any risk of competitive advantage over another market operator. There is no sector that is harmed by allotting ex lege to the [private certification bodies] the power to issue certifications as raised here. Thus, it is not possible to conclude that the Italian State has attributed to [private certification bodies] "special or exclusive rights" within the meaning of Article 106 TFEU. This conclusion implies, obviously, that  that provision is inapplicable to the present case (para 35, own translation from Spanish).

In my view, the argument is rather counterintuitive (since, precisely only private certification bodies can carry out these activities and, consequently, the system does have an element of protection granted to a limited? number of companies that can substantially affect the ability of other undertakings to perform the economic activity in question in the same territory in conditions essentially equivalent, as required in Ambulanz Glockner) but it makes sense (only) on the working condition that any undertaking can request and obtain authorisation to act as a private certification body (as is indeed the case, see para 57 of the Opinion). 

In this scenario, it is the absence of a numerus clausus, rather than the inexistence of an impact on potential competition (which can be highly doubted, as the inexistence of substitutive services is a mere artificial result of the reserve of activity to the benefit of the private certification bodies), that would justify the non-existence of an exclusive or special right under Article 106 TFEU. In my view, hence, the analysis carried out by the AG is blurred and should have been limited to the fact that there is no predetermined (limited) number of authorisations to act as a private certification body and, as a consequence, that market can be considered open and (somehow) competitive.

The AG equally dismisses that the setting of minimum tariffs runs contrary to the State action doctrine on the basis of Articles 4(3) TEU and 101, 102 and 106 TFEU (as described in Arduino C-35/99, and Cipolla C-94/04), given that there is no trace of active involvement of the private certification bodies in the setting of those tariffs (which, in my view, tends to perpetuate the lack of teeth of this theory and continues to significantly restrict the ability of the CJEU to set limits on anticompetitive market behaviour imposed by public authorities--such as setting floors to price competition by way of minimum tariffs...).

In any case, the AG moves past the analysis from the competition law perspective and engages in an assessment of the Italian rules on minimum tariffs for public procurement certification purposes under Article 49 TFEU. After dismissing that private certification bodies exercise public powers (or public authority, which would activate the derogation in art 51 TFEU, but is excluded on the basis of the case law in Commission v Portugal C-438/08, and Commission v Germany C-404/05), the AG clearly considers the minimum tariff system as a restriction of the freedom of establishment and assesses its compatibility with the internal market on the basis of its potential justification on grounds of general public interest (which is accepted) and its proportionality. It is interesting to note that the AG takes into consideration the specific circumstances of the market in order to accept the suitability of the tariffs

the adequacy of mandatory minimum rates must be determined, in this case, in the context of a small size market and in which it is necessary to safeguard the [private certification bodies'] decisional autonomy against possible requirements or interests of their clients. Seen this way, the imposition of a binding mandatory minimum tariff regime by the State is a measure consistent with the purpose of ensuring the quality of the service and the independence of the companies responsible for the certification (para 58, own translation from Spanish).

The analysis of necessity and proportionality of the minimum tariffs as measures designed to ensure the quality and independence of the certification service is then carried out in somehow surprising terms. The AG considers (at paras 61 and 62) that the requirement of independence of the private certification bodies is of such a nature that it justifies the coexistence of a very strict oversight and disciplinary regime enforced by the public contracts authority (Autorità per la vigilanza sui contratti pubblici di lavori, servizi e forniture) AND the minimum tariffs--which, in my view, is clearly excessive, because the element of price negotiation should not affect the regulatory controls in any relevant manner. In my view, the considerations of the AG would justify the existence of minimum tariffs in a multiplicity of markets (such as audit services, for instance), and this should not be accepted as a matter of principle.

However, the AG does take issue with the proportionality of the tariffs and, more specifically, with the fact that they are automatically multiplied (i.e. collected) every time the undertaking seeks to participate in a public contract. According to the AG

65. [...] this system raises serious questions concerning the need of the measure, where certification is requested for various public work tenders. As I said, it is justified that bidders pay a minimum fee required at the time of undergoing certification [...] What does not seem to have enough explanation [...] is that [a private certification body] can automatically multiply the amount of its fees simply because a firm aims to participate in different tenders. The structure, activities, staff, physical, and other features of the company are usually the same, and it is normal that a company with sufficient resources is able to perform various public works at a time, either of low or high values.

66. It is true that in the event that a company aims to participate in several public works the [private certification body] should appreciate its individual situation in the light of the several contracts. Logically the workload of the [private certification body] is increased and it is acceptable that in such circumstances the required minimum rate reflects this increased responsibility. However, a system that automatically multiplies the amount of the required minimum rate depending on the number of works for which undertakings are competing does not respond objectively to the greater burden borne by the [private certification bodies]. On the contrary, the [...] system allows for an evaluation of a single company but applying a mandatory minimum rate much higher than required in the event that it had aimed to submit a single bid.

67. Therefore, and in view of the above, a calculation formula as presented, which in the case of an application for certification for various public works automatically multiplies the amount of the fee depending by the number of intended bids, goes beyond what would be necessary to achieve the pursued objectives of quality and independence. Consequently, I understand that in this specific point the mandatory minimum tariff regime applicable to [private certification bodies], and in particular the calculation formula applicable in case of seeking certification for various public work tenders is not justified by overriding reasons of general interest and therefore not compatible with Article 49 TFEU (paras 65 to 67, own translation from Spanish).

In my view, the conclusion that the AG reaches is appropriate. However, I would rather have the CJEU determining that, in the presence of a sound oversight and disciplinary regime, no minimum tariffs are justifiable, regardless of the proportionality or lack thereof in their calculation.

A further step towards effective free movement of corporations

In its Judgement of 12 July 2012 in case C-378/10 VALE Építési Kft. (http://tinyurl.com/CJEUVale), the Court of Justice of the EU has extended its doctrine on the applicability (and limits) of the freedom of establishment (and movement) of corporations in cases of conversion (ie the changing of the seat of a company, together with the national law applicable to it). 

In my view, VALE goes further than the prior string of case law in Centros (Case C-212/97, 9 March 1999), Überseering (Case C-208/00, 5 November 2002), and Inspire Art (Case C-167/01; 30 September 2003) but follows the same logic of dismantling domestic corporate law systems based on connection points closely linked to the "real seat theory"; and pushes strongly in favour of mutual recognition of corporate forms (and, potentially, for harmonisation of the regulation of a true 'standard' EU corporation or partnership).

In VALE, the CJEU notes that, in the absence of a uniform definition of companies in EU law, companies exist only by virtue of the national legislation which determines their incorporation and functioning. Thus, in the context of cross-border company conversions, the host Member State may determine the national law applicable to such operations and apply the provisions of its national law on the conversion of national companies that govern the incorporation and functioning of companies. However, national legislation in this area cannot escape the principle of the freedom of establishment from the outset and, as a result, national provisions which prohibit companies from another Member State from converting, while authorising national companies to do so, must be examined in light of that principle (paras. 27 to 33).

In conducting that analysis, the CJEU has found that "in so far as the national legislation at issue in the case in the main proceedings provides only for conversion of companies which already have their seat in the Member State concerned, that legislation treats companies differently according to whether the conversion is domestic or of a cross‑border nature, which is likely to deter companies which have their seat in another Member State from exercising the freedom of establishment laid down by the Treaty and, therefore, amounts to a restriction with the meaning of Articles 49 TFEU and 54 TFEU" (para. 36, emphasis added). Moreover, "differences in treatment depending on whether a domestic or cross‑border conversion is at issue cannot be justified by the absence of rules laid down in secondary European Union law. Even though such rules are indeed useful for facilitating cross-border conversions, their existence cannot be made a precondition for the implementation of the freedom of establishment" (para. 38, emphasis added). 

Therefore, it seems cleat that the CJEU once again uses the principle of non-discrimination on the basis of nationality as a lever to push for new developments in EU company law (even in cases where there is limited cross-border effect because only one small company is concerned, and a matter of principle).

In the remainder of the VALE Judgment, the CJEU finds, firstly, that the application to the foreign converted company of the provisions of a national law on domestic conversions governing the incorporation and functioning of companies, such as the requirements to draw up lists of assets and liabilities and property inventories, cannot be called into question. Further than that, where a Member State requires, in the context of a domestic conversion, strict legal and economic continuity between the predecessor company which applied to be converted and the converted successor company, such a requirement may also be imposed in the context of a cross-border conversion (paras. 42 to 55).

However, the CJEU finds that EU law precludes the authorities of a Member State from refusing to record in its commercial register, in the case of cross-border conversions, the company of the Member State of origin as the predecessor in law of the converted company, if such a record is made of the predecessor company in the case of domestic conversions (paras. 55 and 56). And, finally, the CJEU finds that, when examining a company’s application for registration, the authorities of the host Member State are required to take due account of documents obtained from the authorities of the Member State of origin certifying that, when it ceased to operate, that company did in fact comply with the national legislation of that Member State (paras. 57 to 61). Therefore, the CJEU further pushes for mutual recognition of documents and mutual reliance on domestic laws concerning conversion of companies.

I think that, overall, VALE is an important Judgment in the general area of EU company law and goes further than the specifics of corporate conversion, as it seems clear that the Court remains strongly committed to spur change and harmonisation of domestic rules.