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

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

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

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

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

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

CJEU continues reducing the scope of minimum wage laws when public contracts are subcontracted (C‑549/13)

In its Judgment in Bundesdruckerei, C-549/13, EU:C:2014:2235, the CJEU continued the development of its case law on the interaction between public procurement and labour law. In this area that was revolutionised by the Viking and Laval cases (although Viking was not about procurement), and then expanded in Rüffert and Luxembourg (idem), every decision of the CJEU is highly sensitive and likely to be received with as much praise as criticism [see, eg, Zimmer, 'Labour Market Politics through Jurisprudence' (2011) 7(1) German Policy Studies 211-234, or Bücker and Warneck, 'Viking-Laval-Rüffert: Consequences and policy perspectives' (2010) 11 European trade union institute report].
The Bundesdruckerei Judgment will surely be no exception, given that the CJEU has ruled that if a tenderer intends to carry out a public contract by having recourse exclusively to workers employed by a subcontractor established in a Member State other than that to which the contracting authority belongs, article 56 TFEU precludes the application of legislation of the contracting authority's Member State that requires the subcontractor to pay a minimum wage to its workers.
It specifically determines the incompatibility with EU law of the Law of the Land of North Rhine-Westphalia on compliance with collective agreements, social norms and fair competition in the award of public contracts of 10 January 2012 and, particularly, its paragraph 4(3), which foresaw that:
Public service contracts which are not covered by [rules on posted workers, or on the public transportation of passengers by road and rail] may be awarded only to undertakings which, at the time of the submission of the tender, have agreed in writing, by means of a declaration made to the contracting authority, to pay their staff …, for the performance of the service, a minimum hourly wage of at least EUR 8.62. The undertakings shall, in their declarations, state the nature of the commitment adopted by their undertaking in the context of the collective agreement and the minimum hourly wage which will be paid to the staff engaged for the performance of the services. The amount of the minimum hourly wage may be adapted in accordance with Paragraph 21, by means of a regulation adopted by the Ministry of Labour.
Hence, Bundesdruckerei is different from previous cases because it does not involve posted workers, but exclusively the recourse to a fully-owned subsidiary in a different Member State by the main contractor. Hence, the relevant situation is that in which ‘the subcontractor is established in another EU Member State and the employees of the subcontractor carry out the services covered by the contract exclusively in the subcontractor’s home country’ (para 26).
Issues of abuse of internal market rules aside [for a very interesting discussion, see Sayde, Abuse of EU Law and Regulation of the Internal Market (Oxford, Hart Publishing, 2014)], the legal question was relatively straightforward: does 'Article 56 TFEU preclude the application of legislation of the Member State to which that contracting authority belongs which requires that subcontractor to pay those workers a minimum wage fixed by that legislation'? (para 29).
The CJEU had no doubt about the incompatibility of the minimum wage requirement, even if it could be considered a 'contract compliance clause' under article 26 of  Directive 2004/18, which foresaw that
Contracting authorities may lay down special conditions relating to the performance of a contract, provided that these are compatible with Community law and are indicated in the contract notice or in the specifications. The conditions governing the performance of a contract may, in particular, concern social and environmental considerations (emphasis added).
The CJEU hence focussed on the compatibility with EU law of the minimum wage requirement. In very clear terms, the CJEU has ruled that
By imposing, in such a situation, a fixed minimum wage corresponding to that required in order to ensure reasonable remuneration for employees in the Member State of the contracting authority in the light of the cost of living in that Member State, but which bears no relation to the cost of living in the Member State in which the services relating to the public contract at issue are performed and for that reason prevents subcontractors established in that Member State from deriving a competitive advantage from the differences between the respective rates of pay, that national legislation goes beyond what is necessary to ensure that the objective of employee protection is attained (C-549/13, at para 34, emphasis added).
This is bound to be a truly relevant case, as it can effectively deactivate all attempts by Member States to impose minimum wages being paid in public procurement settings, even under the revised rules for 'contract compliance clauses' in art 70 of Directive 2014/24. This provision has now substituted art 26 of dir 2004/18 and indicates that
Contracting authorities may lay down special conditions relating to the performance of a contract, provided that they are linked to the subject-matter of the contract within the meaning of Article 67(3) [ie linked to the specific process of production or a specific process in another stage of the life-cycle] and indicated in the call for competition or in the procurement documents. Those conditions may include economic, innovation-related, environmental, social or employment-related considerations (emphasis added).
There are two important changes to note in the Drafting of art 70 dir 2014/24 when compared to art 26 of dir 2004/18.
The first one is that art 70 dir 2014/24 attempts to swap the general criterion of compatibility with EU law with a requirement for the conditions to be linked to the subject-matter of the contract. Generally, this is simply laughable, as the general obligation to comply with EU law does not need to be written in a Directive, but derives generally from the supremacy of EU law and, in particular, of TFEU provisions (as art 56). However, in a more possibilistic reading, the requirement of link to object of the contract may be reinterpreted as establishing a tight proportionality test, in which case the change of drafting will not have any meaninguful legal consequences (either).
The second change is the explicit inclusion of employment-related considerations, as a specification of social issues. This change is also bound to be significantly ineffective, as the CJEU did not contend that employment-related considerations could be the object of contract compliance clauses.
Generally, I think that the case law of the CJEU is consistent and very clear in imposing restrictions to any deactivation of (labour) competitive advantages. And I think that it will be very difficult to avoid that approach under art 70 dir 2014/24, unless contracting authorities smarten up in the way they impose minimum wage conditions [for a general discussion on the likelihood of this, see Jaehrling, ‘The state as a “socially responsible customer”? Public procurement between market-making and market-embedding’ (2014) European Journal of Industrial Relations (forthc)]. More generally, this could put pressure on the development of a European minimum wage (see discussion here), but the analysis of the (undesirable) effects of such policy exceed our time and space.
However, as public procurement is concerned, the Judgment of the CJEU in Bundesdruckerei should be welcome, as it stresses that the main goal of public procurement rules are to ensure economic efficiency by a deepening of the internal market and a protection of undistorted competition (even by means of regulation). Some may like it (I do), and some may hate it (as Arrowsmith and, particularly, Kunzlik seem to do), but this is what it is.