First thoughts on the Commission's bid rigging exclusion guidance -- what difference will it make?

On 18 March 2021, the European Commission officially published its Notice on tools to fight collusion in public procurement and on guidance on how to apply the related exclusion ground (the ‘bid rigging exclusion guidance’). This document has been a long time in the making and officially announced almost four years ago, so it is no exaggeration to say that it was keenly awaited (by competition and procurement geeks like yours truly, at least).

The guidance is clearly addressed to contracting authorities — not economic operators — and is distinctly ‘pro exclusion’ in its minimisation of the practical difficulties and legal constraints inherent in the adoption of exclusion decisions. However, even with such clearly programmatic orientation, after a first reading, I have a few thoughts that do not make for an optimistic assessment of the guidance’s likely practical impact.

Mostly, because I do not think the Commission’s bid rigging exclusion guidance provides much by way of actionable practical advice to contracting authorities—and it certainly does not really go beyond already existing guidance, such as the OECD’s 2009 guidelines for fighting bid rigging in public procurement. By contrast with more general documents e.g. the OECD guidance, the Commission’s bid rigging exclusion guidance intends to concentrate on the possibility to exclude operators engaged in the manipulation of a tender. However, it includes lenghty discussion of measures to prevent collusion, as well as complementary measures such as training and data analysis and, when it comes to the specific issues that the interpretation and application of Art 57(4)(d) of Dir 2014/24/EU generates, it is mainly restricted to setting out issues that Member States’ domestic legislation cannot do — rather than focusing on what contracting authorities can (and should) do.

Moreover, its likely limited practical impact results from the fact that the guidance simply ignores that the EU rules (especially discretionary ones) need to be embedded in the Member States’ administrative/public law system and, in many places, the guidance is at odds with the latter. In that regard, the guidance seems to presume a sort of sphere of subjective rights for contracting authorities that they are capable of exercising even against the decisions of other (superior/centralised) administrative authorities, or in disregard of broader constraints and requirements for administrative action—such as burden of proof, the duty to state reasons, the increasing enforceability of exclusion grounds against other tenderers, or the very practical implications of risking damages compensation for unlawful exclusion—which is (as far as I know) an area of constant interest for tenderers and practitioners alike.

To be fair, this in part follows from the stance of the Court of Justice in some recent cases (referred to in the guidance), but that is still no excuse for the Commission’s guidance not to recognise that Member States retain significant discretion in their administrative self-organisation and that some of the issues raised in the practical implementation of the relevant provisions will be conditioned by pre-existing administrative law doctrines and procedures.

The most glaring example of this approach that sidesteps the difficulties in the domestic implementation of EU procurement law is the fact that the guidance simply states that ‘The possibility to exclude an economic operator for suspected collusion is not construed in the Directive as a penalty for its behaviour before or during the award procedure’ (section 5.2). That is at face value fine. But the Directive also does not say that exclusion is not a penalty or a sanction and, consequently, establishing the legal nature of an exclusion will be dependent on the relevant public/administrative law framework at Member State level. Moreover, exclusion has been framed as a penalty in at least one recent preliminary reference and the Court of Justice has not disabused the referring court from that prima facie legal classification (see eg Tim, C-395/18, EU:C:2020:58). Given the increasing relevance of the Charter of Fundamental Rights in the interpretation of economic operators’ rights in the context of procurement litigation, I think it is far from certain that exclusion will not be construed as a (quasi)penalty, in particular when it is grounded on the infringement of prohibitive legal rules (such as Art 101 TFEU), rather than on shortcomings in the standing of the economic operator or non-compliance of its tender with substantive and formal requirements included in the tender documents.

To my mind, this (ie the nature of exclusion measures) can be one of the thorniest interpretive issues in this area, particularly because of the due process implications of exclusion being treated as a penalty or sanction—which is also not helped by the absence in the Remedies Directive of any procedural requirements applicable to the exclusion stage. The perpetuation of this disconnect with the Member States’ administrative law framework can in itself constitute the quicksands where the bid rigging exclusion guidance disappears, and certainly can continue to prevent an adequate use of the possibility to exclude tenderers suspected of bid rigging, because the fundamental issues raised by Art 57(4)(d) Dir 2014/24/EU remain unresolved — coupled with other sweeping statements concerning e.g. the level of demonstrability of the suspected collusion that contracting authorities need to meet (as discussed below).

For these and the reasons given below, I am afraid that the bid rigging exclusion guidance will not leave up to the expectations. I will carry out a more detailed and formal assessment of the guidance in a future research paper (likely after my shared parental leave… so not until mid summer or so), but here are my further initial observations, which do not attempt to be comprehensive.

Framing the issue

For those interested in understanding how to interpret and apply Art 57(4)(d) and the associated Art 57(6) self-cleaning possibilities, only section 5 and the Annex of the bid rigging exclusion guidance will be relevant. Indeed, the bid rigging exclusion guidance includes a rather lengthy explanation of what the Commission has done and what it expects to do (or for Member States to do) in the broader area of professionalisation and promotion of collaboration between competition and procurement authorities, which makes the document not very practical. This raises some questions on the fitness for purpose of the document, and whether alternative guidance format that had discharged most of sections 1 to 4 onto a different policy document would have been preferable, but perhaps this is mostly just presentational.

One of the most welcome aspects of the bid rigging exclusion guidance is that, in section 5.2, it makes it clear that the ground for exclusion based on suspected ‘contemporaneous’ collusion (or bid rigging) in Article 57(4)(d) of Directive 2014/24/EU is separate from (and compatible with) the possibility of excluding infringers of competition law as economic operators ‘guilty of grave professional misconduct’ under Article 57(4)(c). It is also to be welcome that, also in section 5.2, the Commission shares the view that, despite the different wording of Art 57(4)(d) and Art 101 TFEU, the former needs to be interpreted in a Treaty-consistent manner, which means that the exclusion must be possible for all types of behaviours caught by Art 101 TFEU — notably, concerted practices and decisions by associations of undertakings, in addition to agreements [for discussion, and advancing the positions now confirmed by the guidance, see A Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd edn, Hart 2015) 296 ff].

The Commission also rightly stresses that contracting authorities in principle retain discretion not to exclude economic operators suspected of bid rigging, as the exclusion ground in Art 57(4)(d) is discretionary. However, this obviates not only the possibility for Member States to transpose it as a mandatory exclusion ground, but also more general EU law duties (such as the duty not to deprive Art 101 TFEU of its effet utile), and domestic administrative law duties (such as equivalent duties not to promote or tolerate illegal activity, or duties mandating inter-administrative collaboration with competition authorities). In that regard, the bid rigging exclusion guidance could have usefully developed a checklist of reasons that could (objectively) justify not excluding economic operators despite there being sufficiently plausible indications to conclude that the economic operator had entered into agreements with other economic operators aimed at distorting competition. In the end, it will not (or should not) be entirely up to the contracting authority to decide to turn a blind eye on those indicia.

Lack of practical guidance, or guidance that is impractical

Despite the largely correct framing of the issue, and despite acknowledging that tackling bid rigging in procurement is fraught with difficulties, the bid rigging exclusion guidance fails to deliver the much needed practical orientations on how to identify contemporaneous bid rigging and how to apply (as opposed to interpret) the relevant exclusion ground of Art 57(4)(d) Dir 2014/24.

The guidance does not really provide practical tips on how to identify bid rigging in a single tender scenario (which is the most likely to be faced by most contracting authorities). If indications of the existence of bid rigging that require cross-sectional or time series analysis are left to one side (as those are generally not for contracting authorities, but rather for competition authorities to screen for and analyse), and with the exception of flagging as suspicious unexpected tender withdrawals (annex, section 3), the only indications highlighted in the guidance (section 5.3) are:

• The text of the tenders (for instance, the same typos or phrases in different tenders or comments left by mistake in the text of the tender indicating collusion among tenderers).

• The prices offered in the award procedure (for instance, tenderers who ... offer excessively high or low prices) [although the interaction of this with the rules on abnormally low tenders is not explored]

• Administrative details (for instance, tenders submitted by the same business representative)

This is then slightly expanded in the annex (section 3), which details indicia such as:

• Identical mistakes or spelling errors in different tenders.

• Different tenders drafted with similar handwriting [in 2021!] or typeface [except default in most commonly used software applications, one would hope!].

• Tenders using another tenderer’s letterhead or contact details.

• Different tenders with identical miscalculations or identical methodologies to estimate the cost of certain items.

• Tenders submitted by the same person or with persons having the same contact details.

This can only help contracting authorities identify clumsy economic operators, potentially involved in collusion. However, in all seriousness, this is unlikely to result in much practical results as once these types of issues are included in official guidelines, it is likely that economic operators will make sure to avoid those mistakes when thy submit rigged bids [for discussion, in the context of automated treatment of bids, see A Sanchez-Graells, '"Screening for Cartels" in Public Procurement: Cheating at Solitaire to Sell Fool’s Gold?' (2019) 10(4) Journal of European Competition Law & Practice 199–211].

The guidance also incurs in temporal inconsistencies, such as when it uses as an indication of bid rigging that contracting authorities should take into account for the purposes of exclusion: ‘The selected tenderer subcontracting work to unsuccessful tenderers for the same contract or the selected tenderer not accepting to sign the contract and later found to be a subcontractor of the tenderer that is finally awarded the contract may be considered sufficiently plausible indications of collusion’ (annex). This can well be an indication of bid rigging, but at this stage no exclusion can take place because the contract will have been awarded. Consequently, the relevant consequence here should be reporting this issue to the competition authority as well as, where possible, terminating the contract (which is not, however, explicitly foreseen in the Directive).

The guidance is also somewhat naive or flippant, for example in its remarks concerning the contracting authority’s (potential) knowledge that a tenderer ‘has pre-ordered the material needed to perform the specific contract in question well before the evaluation of the tenders is concluded’. Quite how a contracting authority would get to this knowledge, or how specific the pre-order should be for it not to be susceptible of confusion with just a standard supply of the economic operators is anybody’s guess.

It can also generate confusion when it, on the one hand, recommends resorting to centralised procurement as a way of avoiding collusion and, on the other, stresses that framework agreements managed by central purchasing bodies are more susceptible to collusion than ordinary tender procedures (annex, section 2).

Moreover, the guidance lacks detail in crucial aspects and, in particular, concerning the extremely complex analysis of joint tenders and subcontracting among (potential) competitors (section 5.6). Here, the Commission’s guidance does not even cross-refer to the more detailed guidelines published by some Member States’ competition authorities — notably, the Danish Competition and Consumers Authority. Similarly, the guidance largely brushes over the complex issue of multiple participation by economic operators belonging to the same corporate group (section 5.5), and also sets aside the difficulties of deciding the scope of application of exclusion decisions that need to respect the doctrine of the single economic entity under competition law [for discussion, see K Kuzma and W Hartung, Combating Collusion in Public Procurement (Elgar, 2020)].

Let’s ignore the administrative legal framework

The Commission’s bid rigging exclusion guidance largely ignores the administrative legal framework at Member State level. This is not only in relation to the treatment of exclusion as (not) a penalty, but also in relation to evidentiary requirements and the related duty to provide reasons. In that regard, the literal interpretation of the Directive leading to the conclusion that ‘national rules should comply with both the letter and the spirit of the Directive, which requires only “indications” of participating in illegal agreements that distort competition in an award procedure and not formal evidence, such as a court judgment confirming such participation’ (section 5.4) is misleading and conflates the need for a prior administrative or judicial decision with the existence of ‘evidence’ of collusion.

First, the guidance is right to exclude the need for a previous administrative or judicial decision, but that should not be treated as excluding ‘evidence’ of collusion, but rather as a precedent decision that has the effects of (quasi) res iudicata or, at least, constitutes a legal fact that the contracting authority cannot ignore. It is also wrong to indicate that ‘plausible indications’ of collusion include, for example, ‘information brought to the attention of the contracting authority of an investigation launched by the competition authority or of penal charges brought against the management of the operator for suspected collusion either in the pending award procedure or in other award procedures’, as this raises fundamental issues concerning the presumption of inocence (which treatment will also differ across jurisdictions, depending on e.g. the trigger for the opening of an administrative investigation). Here the guidance makes the reverse mistake of conflating a formal decision with the evidence (presumably) underpinning it.

Second, the guidance ignores the legal meaning of ‘evidence’ when it establishes that ‘contracting authorities are not required to have evidence of collusion in a pending award procedure, as this would contradict the letter of the Directive’. ‘Plausible indicia’ are a type of evidence, falling short of direct (uncontrovertible) evidence, but clearly above the absence of evidence. This should have been clear from the excerpt that the guidance quotes, where the CJEU stressed that ‘anti-competitive behaviour, “may be proved not only by direct evidence, but also through indicia, provided that they are objective and consistent and that the related tenderers are in a position to submit evidence in rebuttal”’ (Specializuotas transportas, C-531/16, EU:C:2018:324, paragraph 37).

Indiciary evidence is still evidence and the unresolved problem is where to draw the line to decide that the contracting authority has enough evidentiary support to adopt an exclusion decision. Moreover, this is of paramount relevance to the adequate discharge of the duty to state reasons. Here, it not only is impossible for a contracting authority to act in the absence of evidence, but the administrative file will usually be accessible to the economic operator for the purposes of its legal defence. This makes the further recommendation for contracting authorities not to disclose to economic operators that they suspect the existence of bid rigging largely impractical, as the contracting authority will only be able to keep this under wraps up to the point where it must make a formal decision and notification to the economic operator affected by the (potential) exclusion.

Some problematic statements

Unfortunately, in addition to the shortcomings stressed above (and some others), the guidance includes some unhelpful statements concerning the interpretation and application of Art 57(7) of Directive 2014/24/EU, in particular when it states that ‘If an economic operator, who has been excluded from award procedures for a certain period under Article 57(7) of the Directive, submits a tender during the period of exclusion, the contracting authority, without any further need for assessment, must automatically reject that tender’ (section 5.9), and when it reiterates that ‘It goes without saying that if the economic operator has been excluded from all award procedures in your country for a period of time and submits a tender during this period, you must exclude it from your award procedure without assessing the tender submitted.’ (section 3 of Annex) (both emphases added).

These statements are, at best, confusing and misleading and, at worse, legally incorrect. In that regard, it should be stressed that Art 57(6) Dir 2014/24/EU is very clear that the conditions for lengthy exclusions stipulated by Member States in the implementation of Art 57(7) are to be applied ‘if no measures as specified in paragraph 6 are taken by the economic operator to demonstrate its reliability’. Therefore, the statements above should have made it clear that further assessment is required and contracting authorities must carry it out where an economic operator, who has been excluded from award procedures for a certain period under Article 57(7) of the Directive, submits a tender during the period of exclusion and it claims to have implemented the sort of measures detailed in Art 57(6).

This is the sort of problematic drafting that should be avoided in official guidance and, in this instance, rectified by the Commission as soon as possible.

Final thoughts

On the whole, a first reading of the guidance does not call for optimism. While the Commission’s bid rigging exclusion guidance does contain some useful information, it is at its weakest in relation to the particularities of the interpretation and application of Art 57(4)(d) and related provisions of Directive 2014/24/EU, which are supposed to constitute its core concentration.

I would not be surprised if contracting authorities found little to no comfort in the guidance when pondering how to address the key issue of how to spot collusion in single-tender settings, how to decide if there are sufficient plausible indications, and how to go about the adoption of an exclusion decision that is, in almost all likelihood, going to be challenged on the basis that it constitutes a sanction/penalty for a (suspected) breach of competition law that the contracting authority has no competence to enforce, or which has not followed the heightened procedural requirements of procedures leading to the imposition of a sanction. It should be obvious that exclusion on these grounds generates the additional risk of a follow-on investigation by the competition authority and/or private litigation, so no economic operator should be expected to just accept an exclusion on grounds of contemporaneous bid rigging under Art 57(4)(d) Dir 2014/24/EU (or, rather, its domestic transposition).

I will continue reflecting on the guidance and its implications, and I am sure there will be a lively debate in the months and years to come. As always, any feedback and comments will be most welcome.

A note on Reg 73 of the Public Contracts Regulations (and by extension Art 73 of the EU Public Procurement Directive) [Guest post* by Dr Aris Christidis]

In this guest post, Dr Aris Christidis follows up on the issue of termination of contracts where the contracting authority has exceeded the limits of permissible contract modifications under Article 72 of Directive 2014/24/EU, focusing in particular on the shortcomings of Art 73 thereof and its transposition in the UK through reg.73 Public Contracts Regulations 2015.

A note on Regulation 73 of the Public Contracts Regulations (and by extension Article 73 of the EU Public Procurement Directive)

In this earlier post about the alleged unlawfulness of the NHSX contract modification, Albert argued that ‘the cause for termination could not be waived because reg.73 is meant as a safeguard against abuses of reg.72 and, thus, is unavoidably triggered the moment the boundaries of reg.72 are exceeded’.

I want to pick up on this point and provide some thoughts on the scope of Regulation 73 and by extension on Article 73 of the EU Public Procurement Directives.

Let me start by examining the position under the EU Directives. The 2014 directives have included a provision (Art 73 of Dir 2014/24/EU and the equivalent of Art 90 of Dir 2014/25/EU and Art 44 of Dir 2014/23/EU) which requires the Member States to empower their contracting authorities, under their national laws with the option of unilaterally terminating a contract during its term at least under the following three situations:

(a) the contract has been subject to a substantial modification, which would have required a new procurement procedure pursuant to Article 72;

(b) the contractor has, at the time of contract award, been in one of the situations referred to in Article 57(1) and should therefore have been excluded from the procurement procedure;

(c) the contract should not have been awarded to the contractor in view of a serious infringement of the obligations under the Treaties and this Directive that has been declared by the Court of Justice of the European Union in a procedure pursuant to Article 258 TFEU.

While such a remedial measure is in the right direction because it allows contracting authorities to correct their violations after a contract comes into effect, it does not address various issues on how this remedy is supposed to operate. These issues are to be determined solely by national laws.

Also, it is not clear why the only option for contracting authorities is to terminate a contract, instead of providing other remedial alternatives such as the shortening of the duration of the contract—similarly with the ineffectiveness remedy.

Surely, even if contracting authorities are under an obligation to terminate a contract, this should not be automatic. Public interest considerations such as the urgency of executing the contract should be carefully considered before any decision to prematurely discharge such a contract is made.

Finally, the EU legislator does not explain convincingly the rationale behind the reason why in the aforementioned violations the contracting authorities should have the right (rather than the obligation – see next section) to terminate an existing contract and why other violations should not necessarily constitute reasons to terminate an existing contract (e.g. finding of conflict of interest or direct awards).

Does Article 73 impose a positive obligation?

Undoubtedly, Article 73 (c) - unlike the other two– has a mandatory effect. This is because it concerns a violation that has been declared under Article 258 TFEU, which Member States must comply with under Article 260 TFEU.

The purpose of this provision seems to be to ensure that a duty of a Member State to terminate a contract is fulfilled as quickly as possible and avoid any possible cumbersome procedural issues that may be imposed under national law.

An issue that requires some consideration is what amounts to a ‘serious infringement’ that may lead to an obligation to terminate a contract (interestingly, the proposal for the 2014 directive (COM (2011) 896) did not refer to the wording ‘serious infringement’ rather it stated: ‘…a Member State has failed to fulfil its obligation under the Treaties…’).

Following the ruling of the CJEU in Waste (C-503/04), which concerned a decision under Article 258 TFEU, a ‘serious infringement’ will constitute any violation that restricts the fundamental freedoms of the internal market, in that case, the fact that an unlawful direct award had the effect of restricting other economic operators from providing the particular service. 

It is submitted that serious breach may constitute any violation that influences the outcome of competition and that termination of an existing contract seems relevant, inter alia, in the following situations: when a tender should have been excluded because of prior involvement of candidates in the submission of bids, when a conflict of interest is found or when a tender should have been rejected because it did not comply with tender conditions.

What seems to be certain is that a ‘serious infringement’ would most probably be regarded by the CJEU as any violation of the other two explicit reasons for termination as provided in the Article at hand - namely, violations with regards to the modification of contracts (see case C-601/10 Commission v Hellenic Republic available in French and Greek) and the entering to a contract with a provider who should have been disqualified from the awarding process.

This argument, in turn, raises the concern on whether the provisions of Article 73 are facultative or in effect contracting authorities are under an obligation to terminate a contract when the prescribed violations take place. In other words, whether EU law raises a positive obligation for contracting authorities.

On the one hand, the wording of this Article is clear: ‘Member States shall ensure that contracting authorities have the possibility… under the conditions determined by the applicable national law, to terminate a public contract during its term…’ (emphasis added).

On the other hand, this wording does not align with the rationale behind the adoption of this measure. According to Recital 112, ‘contracting authorities are sometimes faced with circumstances that require the early termination of public contracts in order to comply with obligations under EU law in the field of public procurement’ (emphasis added).

I lean towards the more formalistic interpretation, that is, there is no positive obligation. In my view, the Directive is not sufficiently clear on this and, as discussed below, the UK has not made termination a requirement but rather an option for the contracting authorities.

The implementation in the UK

Regulation 73 of the Public Contract Regulations 2015 (PCR) has transposed the EU law requirement of empowering contracting authorities to terminate an existing contract. Regulation 73 did not opt to include other violations that could give the right to a contracting authority to terminate an existing contract.

Two things should be noted about this unilateral power. The first is that Regulation 73(1) makes it clear that it is up to the discretion of a contracting authority to terminate a contract or not. It specifically states that ‘…contracting authorities shall ensure that every public contract which they award contains provisions enabling the contracting authority to terminate the contract where…’ (emphasis added; see for example the Model Contract for Services by the Government Legal Department at clause 33). Therefore, contracting authorities can simply refrain from exercising such power even if the relevant violations have taken place.

The second is that Regulation 73(3) clarifies that when provisions for termination are not provided within the terms of the contract, such power shall be an implied term of the contract. In other words, Regulation 73 overrides the absence of express contractual terms by providing a statutory basis for such unilateral power to be exercised.

In my view, Regulation 73 has little practical effect. In principle, it is a very good idea to empower contracting authorities to unilaterally terminate a contract. They are, indeed, in the best position to correct any unlawful acts especially when these are unintentional. Also, the disposal of such power minimises the possibility of litigation by third parties and ensures that any violations are remedied with minimum costs and in the public interest.

However, the way Article 73 was implemented in the UK shows the problematic design of this measure. There is nothing to compel contracting authorities to terminate an existing contract even if, on the face of it, they have violated the relevant rules. To require compliance, you need some form of external enforcement or recommendation. Otherwise, who is to determine whether the prescribed rules have been violated or not and who may induce a contracting authority to terminate a contract?

The only way for the government to be compelled to terminate a contract which is the result of unlawful modification or other serious infringement is if the Commission brought a case before the CJEU under Article 258 TFEU. In the current, COVID-19, and Brexit environment, I very much doubt that this will happen.

What if the government decides to terminate a contract under Regulation 73?

A final issue that perhaps requires some attention, is how are consequential matters between parties treated where the government decides to terminate the contract based on Regulation 73.

The first point to note is that Article 73 Directive 2014/24/EU does not give any indication as to how such consequential matters are to be regulated by the Member States and this is another problematic aspect of the design of this provision at the EU level.

Indeed, if the purpose of this remedial measure is to correct violations by returning a contract to the status quo ante then surely any compensation to the contractor due to early termination should be reasonable and proportionate.

Therefore, any form of redress must in principle be based on restitution, that is, a contractor must not be able to recover anything further that the value of what has been performed and has benefited the contracting authority.

The Commission had indicated that this is a requirement for the ineffectiveness remedy. In particular, Recital 21 of the Remedies Directive states that the objective to be achieved where the Member States lay down the rules which ensure ‘that the rights and obligations of the parties under the contract should cease to be enforced and performed’.

It goes on to say that ‘the consequences concerning the possible recovery of any sums which may have been paid, as well as all other forms of possible restitution, including restitution in value where restitution in kind is not possible, are to be determined by national law’. Similar careful thinking and considerations were not given for Article 73.

In the content of the PCR, Regulation 73(2) provides that consequential matters in case of termination should be regulated by express contractual provisions. Hence, the provisions of a contract itself will stipulate how these matters are to be regulated between parties and not some contract or administrative law principle.

The Model Contract for Services by the Government Legal Department provides some signs as to how the government will treat consequential matters in case of termination pursuant to Regulation 73. For instance, clause 34.5 (b) provides that in case of termination due to a substantial modification any costs from this termination should lie where they fall. This seems to be an appropriate form of compensation.

Some final thoughts

The current crisis has triggered a conversation about the design of the procurement rules all over the world. Perhaps this is also a good time both for the EU and the UK to think harder as to the scope of the exercise of unilateral termination powers by contracting authorities.

This is an excellent remedial tool. It is less costly and more time-efficient than any other form of enforcement when a contract has been concluded unlawfully. However, various issues need to be considered carefully. The following are some suggestions:

1. Careful consideration of the type of violations that should give rise to termination. Legislators could consider the gravity of the violation and perhaps make a distinction between violations that require termination and violations for which a contracting authority can exercise discretion as to whether to terminate or not.

2. An independent body with powers to compel contracting authorities to terminate or at least make suggestions to consider termination. In the UK, for instance, such power may be exercised by the Public Procurement Review Service which current remit does not allow the exercise such powers.

3. Clear indication as to how consequential matters are treated. As argued above, any compensation in case of unilateral termination due to violation of procurement rules should be based on restitution to align with the purpose of this remedy, which is to restore the public contract market in the status quo ante.

Dr Aris Christidis

Dr Aris Christidis is a Lecturer in Law at Newcastle Law School, which he joined in January 2018. He previously taught at the University of Nottingham, where he completed his PhD in December of 2018 (without corrections). He currently teaches Introduction to Business Law and Contract Law. Aris’ current research lies in public procurement law and the interaction of public with private law in the context of public contracts. His research interests are in comparative law, the law of obligations, public procurement law and in the economic analysis of law.

* Guest blogging at HTCAN: If you would like to contribute a blog post for How to Crack a Nut, please feel free to get in touch at a.sanchez-graells@bristol.ac.uk. Your proposals and contributions will be most warmly welcomed!

The public cooperation-saga continues in Irgita [guest post by Dr Willem A Janssen & Erik Olsson, LLM]

Last month, the Court of Justice issued a confusing and potentially revolutionary Judgment in the Irgita case, which concerned the award of a contract to an in-house entity. In this blog post, Dr Willem A Janssen and Erik Olsson, LLM give us a sketch of the deep implications that the case could have and the interpretive complications it is already generating. Their ideas provide plenty food for thought and will probably be expanded in a forthcoming (even) more detailed academic article.

Janssen & Olsson make a very timely reference to another confusing and complicated recent Judgment, that in the TenderNed case, where the position that eProcurement can be classified as an SGEI withstood appeal before the CJEU. Keep an eye on the blog for a comment of that case soon.

The public cooperation-saga continues in Irgita: harmonization, competition & free movement

Many contracting authorities across the European Union (EU) sighed with relief when article 12 of Directive 2014/24/EU was adopted in 2014. After years of lingering uncertainties not solved by the case-law of the Court of Justice of the EU (CJEU), the new rules in article 12 provided more legal leeway and clarity for institutionalized and non-institutionalized cooperation between public authorities. Some perhaps even hoped it would also put an end to legal discussions about in-house and public-public cooperation in the public procurement context. With new laws, however, come new uncertainties. It did not take too long for the CJEU to show that the public procurement law community will still continue to discuss these exemptions in the future—for when a door closes, a window opens. Indeed, the CJEU has once again shaken the foundations of the ‘public house’ exemptions to the EU public procurement rules with its Judgment of 3 October 2019 in the Lithuanian case Irigita (C-285/18, EU:C:2019:829).

After providing a short overview of the Irgita case (Section 1), we scrutinize some of the CJEU’s conclusions and provide an initial mapping exercise to gage their potential implications for future discussions in this post. More specifically, we discuss the third preliminary question about the legality of national rules that limit the scope of the institutionalised exemption of article 12 Dir 2014/24/EU through adjusted or additional criteria (Section 2). We expect, however, that most future discussions will delve into the Court’s answer to the fourth preliminary question, whereby the CJEU’s reasoning seemingly created two new requirements, including that the ‘conclusion of an in-house transaction which satisfies the conditions laid down in Article 12(1)(a) to (c) of Directive 2014/24 is not as such compatible with EU law’, for such provision ‘cannot relieve the Member States or the contracting authorities of the obligation to have due regard to, inter alia, the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency’. This position is far from clear and potentially raises far-reaching consequences for the general functioning of article 12 (Section 3). Hence, we discuss – at least - two interpretative issues, namely what the legal relevance of the impact on competition caused by a cooperation is (Section 3.1), and if the fulfillment of article 12’s criteria provides a general exception from EU law (Section 3.2). We also offer some concluding remarks.

1. A short introduction to the Irgita case

The legal context and circumstances of the Irgita case can be summarized as follows. The Lithuanian legislature implemented article 12 Dir 2014/24/EU through Article 10 of the Law on Public Procurement (as applicable on 1 July 2017). This was not a copy-paste implementation. The legislature clearly limited the application of article 12 through additional criteria in both the Law on Public Procurement and the Competition Act (Irgita, par. 8-10). For instance, the scope of article 12 Dir 2014/24/EU was limited by article 10(2) Law on Public Procurement, which required that:

‘an in-house transaction may be concluded only in an exceptional case, when the conditions set out in paragraph 1 of this article are satisfied and the continuity, good quality and availability of services cannot be ensured if they are purchased through public procurement procedures.’

Article 4 Competition Act also contains an additional criterion:

‘when carrying out the assigned tasks relating to the regulation of economic activities within the Republic of Lithuania, entities of public administration must ensure freedom of fair competition’.

The Lithuanian legislature also banned private capital participation in an institutionalised cooperation entirely (Irgita, par. 9). This is an example of an altered implementation of article 12(1)(c), which contrarily does allow some categories of private participation (‘non-controlling and non-blocking forms of private capital participation required by national legislative provisions, in conformity with the Treaties, which do not exert a decisive influence on the controlled legal person’).

The Irgita case takes place within this legal framework. Shortly said, there are two relevant awards of public contracts in this case. Firstly, the municipality of Kaunus awarded a contract for the maintenance and management of plantations, forests and forest parks following a public procurement procedure to Irgita (a private operator) in February of 2014. Secondly, the municipality decided to directly award a contract for similar services to another entity, the publicly-controlled Kauno švare, in March 2016. This latter contractual relationship fulfilled the control-, activities- and private participation-criteria of the institutionalised exemption (i.e. 100% shares, more than 90% of activities for the municipality, etc.). Irgita challenged the validity of the second award in light of the Lithuanian competition provision, whilst acknowledging that the criteria of the institutionalised exemption were indeed fulfilled.

Following a legal battle trough the national courts, the Lithuanian Supreme Court posed questions to the CJEU [as discussed at the time by Dr Deividas Soloveičik in this same blog]. As mentioned above, we consider the third and fourth preliminary questions particularly relevant. 

2. Harmonization of self-organisation

The third preliminary question (part a) considered the discretionary power of the Lithuanian legislature to implement the additional or altered criteria mentioned above in light of article 12 Dir 2014/24/EU. This is also relevant for other Member States, such as Finland, Italy and Poland, which have in their own way also limited the scope of this provision.

We argue that this question requires scrutiny of the harmonisation method of article 12. Milestone cases, such as Rätti (C-148/78, EU:C:1979:110) and Gallaher (C-11/92, EU:C:1993:262), had clarified that the 1) objective, 2) structure and 3) wording of a legal provision are relevant to determine if it concerns total or minimum harmonisation. The latter would leave discretion for national legislatures to introduce additional and adjusted criteria, whereas the former would not.

Amongst other arguments, we argue that it would, for instance, be relevant to consider that a limited implementation of article 12 in fact aids the coming about of the internal market, thereby implying that this provision concerns minimum harmonisation. This is also the approach taken by Advocate-General Hogan in his opinion of 7 May 2019 in Irgita (C-285/18, EU:C:2019:369) [for such a full analysis based on the Lithuanian and Finnish context, see also W A Janssen, ‘Swimming against the Tide: The Harmonisation of Self-organisation trough Article 12 Directive 2014/24/EU’ (2019) 14(3)  European Procurement & Public Private Partnership Law Review 145-155).

Contrary to the Advocate-General, however, the Court does not mention the relevance of the type of harmonisation in article 12 Dir 2014/24/EU, but instead emphasises the following (Irgita, par. 45-46):

‘The freedom of the Member States as to the choice of means of providing services whereby the contracting authorities meet their own needs follows moreover from recital 5 of Directive 2014/24, which states that ‘nothing in this Directive obliges Member States to contract out or externalise the provision of services that they wish to provide themselves or to organise by means other than public contracts within the meaning of this Directive’, thereby reflecting the case-law of the Court prior to that directive.

Thus, just as Directive 2014/24 does not require the Member States to have recourse to a public procurement procedure, it cannot compel them to have recourse to an in-house transaction where the conditions laid down in Article 12(1) are satisfied.’

Despite the granted clarity on the relevant discretion to legislate, it is unclear why this reasoning would provide a conclusive and final argument for the national legislatures to legislate additional or adjusted criteria. Whereas an analysis of harmonisation would provide it, the CJEU’s arguments seem to only be the first step in a more extensive analysis. It supports the long-standing idea that the EU legislature cannot impinge on the discretion of the Member States to organise themselves as they see fit [in accordance with their chosen socio-economic model, as discussed in detail in A Sanchez-Graells, ‘Against the Grain? Member State Interests and EU Procurement Law’, in M Varju (ed), Between Compliance and Particularism: Member State Interests and European Union Law (Springer 2019) 171-189; see chapter 3, W A Janssen, EU Public Procurement Law & Self-organisation: A Nexus of Tensions & Reconciliations (Eleven Publishers 2018) on the development of a right to self-organisation in article 4(2) TEU]. The subsequent argument to be made would be to consider the discretion of national legislatures to legislate. 

The second paragraph above perhaps attempts to make this explicit, but could also be a response to the Advocate-General’s conclusion. Whilst arguing in favour of minimum harmonisation, the Advocate-General surprisingly stated that article 12 could not concern total harmonisation, because it would mean that contracting authorities would be obliged to apply the institutionalised exemption if the criteria were met (A-G’s opinion in Irgita, par. 46). The Court seems to explicitly take the contrary position. More practically, however, the outcome of the Court’s approach or an argumentation based on harmonisation is still the same: the Member States can in principle limit the scope of article 12.

Finally, the CJEU does rightly emphasise two aspects. Firstly, the Court concludes that additional or adjusted criteria cannot result in a limitation of the internal market, namely a violation of the fundamental freedoms and the derived principles (Irgita, par. 48). Secondly, it concludes that the principle of transparency must be interpreted as meaning that the conditions to which the Member States subject the conclusion of in-house transactions must be made known by means of precise and clear rules of the substantive law governing public procurement, which must be sufficiently accessible, precise and predictable in their application to avoid any risk of arbitrariness (see preliminary question 3b in Irgita, par. 57).

3. Issues of cooperation, competition & free movement

In a rather lengthy fourth preliminary question, the Lithuanian Supreme Court aimed to further inquire if the fulfillment of the criteria of article 12(1)(a-c) Dir 2014/24/EU (i.e. control, activities, and private participation) would deem the entire transaction in the Irgita case compatible with the entire body of EU law. The Supreme Court referred in its question to a variety of legal obligations, including to article 2 of Directive 2004/18/EC and 2014/24/EU, articles 18, 49, 56, 106 TFEU, and the case law of the CJEU on institutionalized cooperation (ANAV, Teckal, Sea, Undis Servizi and others). The general gist of the CJEU’s dictum was not surprising (Irgita, par. 64):

‘The answer therefore to the fourth question is that the conclusion of an in-house transaction which satisfies the conditions laid down in Article 12(1)(a) to (c) of Directive 2014/24 is not as such compatible with EU law.’

This conclusion appears correct, because the institutionalized exemption vested in article 12 only exempts the application of Directive 2014/24/EU in which it is included. However, the Court’s reasoning raises various difficult interpretative issues. We have attempted to categorize them into issues relating to (1) competition and (2) free movement. Furthermore, we aim to shed some light on possible interpretations.

3.1. Competition & cooperation

After the CJEU repeated the relevance of the control-, activities- and private participation criteria as stipulated by article 12(1) Dir 2014/24/EU in its answer to the fourth question (Irgita, par. 59), a seemingly new notion appears on the stage in paragraph 62:

‘It must moreover be observed that recital 31 of that directive states, in relation to cooperation between entities belonging to the public sector, that it should be ensured that any cooperation of that kind, which is excluded from the scope of that directive, does not result in a distortion of competition in relation to private economic operators.’

The question can be raised what the significance of this inclusion is. Two potential interpretations seem to be relevant. One more limited, the other rather open-ended. A third interpretation strikes some sort of balance between the two, but is also linked to the free movement rules, and is thus discussed in Section 3.2 below.

1st interpretation: an existing obligation

Paragraph 62 could be a general reference to the already existing private participation criterion of the institutionalised exemption. A similar consideration was included in light of the non-institutionalised exemption, when the CJEU introduced this criterion in the milestone case of Commission/Germany (C-480/06, EU:C:2009:357, par. 47):

‘the principal objective of the Community rules on public procurement, that is, the free movement of services and the opening-up of undistorted competition in all the Member States’

and the Court continued by stating in the same paragraph:

‘that no private undertaking is placed in a position of advantage vis-à-vis competitors’.

In Stadt Halle (C-26/03, EU:C:2005:5), the CJEU referred to such a consideration in relation to the institutionalised exemption (par. 59):

‘Second, the award of a public contract to a semi-public company without calling for tenders would interfere with the objective of free and undistorted competition and the principle of equal treatment of the persons concerned, referred to in Directive 92/50, in particular in that such a procedure would offer a private undertaking with a capital presence in that undertaking an advantage over its competitors.’

This was also interpreted in an expansive manner in Centro Hospitalar de Setúbal and SUCH (C-574/12, EU:C:2014:2004; as discussed by Sanchez-Graells in this same blog). Article 12 sub 1(c) Dir 2014/24/EU is a codification of this ban on private participation, and could thus be a mere reference to the ratio of this article. If such an interpretation is correct, paragraph 59 merely re-emphasises a current obligation and, thus, provides nothing new under the sun. This is further confirmed again in paragraph 61, which would imply that the private participation criterion is indeed relevant, because the Court refers to these principles prior to its reference to competition:

‘As follows, in essence, from paragraph 48 of the present judgment, the fact that an in-house transaction, within the meaning of Article 12(1) of Directive 2014/24, does not fall within the scope of that directive cannot relieve the Member States or the contracting authorities of the obligation to have due regard to, inter alia, the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency.’

This interpretation would also fit in well with the last part of recital 31 Dir 2014/24/EU, which the Court did not include in paragraph 62 of its Irgita ruling, and which states that:

‘It should be ensured that any exempted public-public cooperation does not result in a distortion of competition in relation to private economic operators in so far as it places a private provider of services in a position of advantage vis-à-vis its competitors.’ (emphasis added)

If the above were correct, paragraph 62 would contain a simple repetition of an existing obligation. Contrarily, it could be argued that the references in Commission/Germany and Stadt Halle are in fact distinct from the notion that is introduced in Irgita. Whereas these cases refer to an economic operator that can benefit from an exempted contract, the Irgita case concerns a scenario in which the exempted contract could affect competition in a different manner. This is supported by the facts of the Irgita case, which do not refer to a scenario in which private participation was included, because the municipality was a 100% shareholder in the in-house entity. Consequently, it questions why the Court would have included this paragraph in the first place and does not explain why the Court would consider competitive concerns in a scenario between a public-public cooperation and an private operator (public-private) in addition to a competitive scenario between economic operators (private-private). 

2nd interpretation: a new general criterion for the institutionalised exemption

Alternatively, paragraph 62 could generate much more significant consequences if it introduces a new criterion for the institutionalised exemption. It could require cooperating public authorities to consider the impact of their cooperation on the market. This introduction of a ‘distortion of competition’ test could require cooperation authorities to analyse if their presence on the market, should they use the discretion granted by article 12 to engage in market activities up to 20% of turnover, would create a distortion of competition. Questionably, however, this test is already covered by the state aid rules (Arts 106 to 108 TFEU), which aim to prevent such distortions—and a straightforward application of the competition rules (Arts 101 and 102 TFEU) to the in-house entity would also serve the same purpose. Furthermore, it could also mean that the use of exemptions like article 12 decreases the potential volume available on the market, thereby also distorting competition.

This interpretation might in fact make the application of the institutionalised exemption entirely impossible, because such distortion would always exist. It seemingly also undermines the standpoint that the Member States are free to organise their public tasks on the national level through cooperation as they see fit, which finds its roots in, amongst other things, article 345 TFEU, art 14 TFEU, article 4(2) TEU and CJEU cases, such as Remondis (C-51/15, EU:C:2016:985) and Stadt Halle  (see reference above in Sanchez-Graells 2019; Janssen 2018). If anything, it definitely feeds into discussion about the existence of a principle of competition and its effects within EU public procurement law (A. Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd ed, Bloomsbury-Hart 2015).

3.2. Free movement & cooperation

In addition to the competition issues, the most pertinent issue is the relationship between article 12 Dir 2014/24/EU and, amongst other things, the free movement rules. In its answer to preliminary question 4, the CJEU considers in paragraph 63:

‘In this case, it is particularly the task of the referring court to assess whether, by concluding the in-house transaction at issue in the main proceedings, the subject matter of which overlaps with that of a public contract still in force and performed by Irgita, as the party to whom that contract was awarded, the contracting authority has not acted in breach of its contractual obligations, arising from that public contract, and of the principle of transparency; whether it had to be established that the contracting authority failed to define its requirements sufficiently clearly, in particular by not guaranteeing the provision of a minimum volume of services to the party to whom that contract was awarded, or, further, whether that transaction constitutes a substantial amendment of the general structure of the contract concluded with Irgita.’

Prior to this paragraph, the CJEU states that article 12 provides an exemption from Directive 2014/24, and that contracting authorities must ‘have due regard to, inter alia, the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency’ (Irgita, par. 61). Again, this paragraph brings about interpretative difficulties for which - at least - two interpretations could be relevant.

1st interpretation: an onerous double test of public-public cooperation

The least favorable interpretation would have a significant legal impact, because it would introduce an onerous double test for public-public cooperation. It would mean that, even though the criteria of article 12 are met, that the first contract awarded to Irgita and the second contract awarded to the in-house entity are still under an obligation to fulfill the requirements of the free movement rules (Irgita, par. 63). One effect of this interpretation would be that an exempted in-house contract would still need to comply with the transparency principle.

This interpretation would go against the idea that the EU Public Procurement Directives, which legal basis is found in the internal market, are in fact a specification of the free movement rules. It is, therefore, often assumed that an exemption of these Directives would automatically also cover the free movement rules. Furthermore, the CJEU clarified already in Parking Brixen (C-458/03, EU:C:2005:605), a case about service concessions, that the criteria of the institutionalized exemption could also be applied under the free movement rules (Parking Brixen, par. 62), thereby implying that this exemption is relevant within and outside Directive 2014/24/EU. Needless to say, this interpretation would defeat the added value of the exemption altogether, because an in-house entity might still not be awarded an in-house contract should a double test indeed exist.

One softer - yet unlikely - interpretation of a double test could be that the principle of transparency would require contracting authorities to announce the fact that they are relying on the institutionalized exemption, and that these entities consider the relevant criteria fulfilled. This would fill a crevice that currently exists, which is the absence of knowledge about exempted contracts, thereby allowing these parties to challenge their legality. It is, needless to say, unknown if this is what the Court intended to refer to as the Irigita case is silent on this issue.

2nd interpretation: a double test only applies where a procurement has been made

A second – and seemingly most favorable - interpretation in which two scenarios are relevant for the free movement principles, would be as follows.

The first scenario in which the free movement principles apply concerns national legislatures that have chosen to limit the scope of the institutionalized exemption at the national level. This has been discussed in Section 2 in relation to preliminary question 3a and b.  Member States can, thus, clearly limit this exemption through national legislation, and will, if they choose to implement such limitations, be subjected to the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency. This appears to be a classic application of the principles underlying the free movement rules to national legislation.

The second scenario relates to the relationship between the two contract awards in the Irgita case, which would integrate free movement and competitive issues discussed in this post. It would first require, however, to establish that the CJEU erroneously introduced the concept of ‘in-house transaction’ (Irgita, par. 58) as a separate concept under EU law. The Court appears to grant individual weight to this concept, because its repeatedly refers to it as a independent concept that includes both awards of contract (1. to Irgita and 2. to the in-house entity). The Court then implicitly poses the question if the fulfillment of the criteria of article 12 would exempt both awards from the scope of EU law. Other than phrasing it under the new umbrella of ‘in-house transaction’, this is not a new conclusion if one agrees that both awards of contract require separate scrutiny of EU law. In this light, it is not surprising that the Court states that, despite the fulfillment of article 12, the other award to economic operator Irgita still needs to uphold the principle of transparency, amongst other things in relation to contract amendments. Hence, this individual analysis per contract is then extended by the Court to the relationship between the two contracts.

Accordingly, the principle of transparency requires that it is made clear to a reasonably informed tenderer what is to be expected if they are awarded a contract.  If the second award of contract to the in-house entity undermines this transparency requirement, it would constitute a sort of “after the fact” breach of this requirement with regards to the first award of contract. Such a breach would be contrary to what can be reasonably expected from an economic operator in the first proceeding and, thus, undermine the effectiveness of Directive 2014/24/EU. Consequently, it could be argued that the national court should interpret and apply national contract law to the first contract that was awarded to Irgita based on the reasonable expectation of transparency based on this Directive.

In a national legal order in which reasonable expectations of the contracting parties are an important tool to interpret a contract, a national court could find that the principle of transparency would require a contracting authority to clearly spell out any right for the contracting authority to choose to purchase the services covered by the contract from a different supplier during the duration of the contract. In fact, Swedish courts have on a few occasions found that there is arguably an obligation for a contracting authority to be clearer and more precise in a contract that has been awarded following a public procurement procedure than what would be the case with a ‘normal’ contract (see Hovrätten för Nedre Norrland, case nr. T-678-14 and Hovrätten över Skåne och Blekinge, case nr. 2798-16).

This interpretation of Irgita’s free movement issue fits in the CJEU’s reasoning, when it focusses on the fact that the scope of the second contract “overlaps with that of a public contract still in force” and on whether the contracting authority has “acted in breach of its contractual obligations” (Irgita, par. 63). As a consequence, this interpretation means that the free movement rules would only apply to a scenario that is similar to the Irgita case in which two overlapping contract awards were made. The double test would in such situations basically be limited to the question of whether the contracting authority was transparent enough when it concluded the first contract about their intent to award a second contract for similar services during the term of the first contract. In other words, this obligation would not preclude the contracting authority from using the institutionalized exemption in the future (see comparatively, and perhaps even contrarily, the General Court’s and the CJEU’s ruling relating to the Dutch TenderNED case (C-687/17, EU:C:2019:932) in which e-procurement was deemed a Service of General Interest, and thus that EU law left room for national organization of procurement functions.)

Finally, it is also possible to construe the same scenario for the competition issues discussed in Section 3.1. Despite the general terminology of the CJEU in its reasoning, it could be that the reference to distortion of competition is solely related to the relationship between the two awards of contract in the Irgita case, making its impact significantly less than discussed in light of potential other interpretative scenarios. No conclusive answers can, however, be given at this point in time.

4. Concluding remarks

The above discussion has shown that the cooperation saga in the procurement context continues. It is clear that the Irgita case provides an interesting stomping ground for discussions about public-public cooperation, harmonization, competition and free movement. We have aimed to provide some initial thoughts on this case. More often than not, it has required us to read between the lines and fill interpretative gaps in an attempt to understand the CJEU’s reasoning.

Overseeing this case and its potential major consequences, we are still uncertain if the Court consciously aimed to change the playing field of cooperation or if the different interpretations have simply arisen due to the Lithuanian case-specific circumstances. Time - and perhaps future CJEU cases - will tell, but for now we are nonetheless left to wonder: is there still room for contractual cooperation between public authorities within EU law?

Dr Willem Janssen

Dr Willem A. Janssen is an Assistant Professor of European and Dutch Public Procurement Law at the PPRC and RENFORCE of Utrecht University’s Law School. He published his monograph on 'EU public procurement law & Self-organisation: a Nexus of Tensions and Reconciliations' in 2018 and has published in various international and national journals about public procurement law. He hosts the first Dutch procurement podcast 'Bestek - de Aanbestedingspodcast', is a monthly columnist at Gemeente.nu and is actively involved in improving public procurement law and practices.

Erik Olsson, LLM

Erik Olsson is an attorney and partner at Advokatfirman Kahn Pedersen in Sweden. He specializes in public procurement law. He regularly gives lectures on public procurement and is also a columnist in the Swedish European Law Review. Erik Olsson is one of the authors of Sweden’s leading book on procedural public procurement law, Judicial Review of Procurement – and other remedies under the LOU and LUF (Sw: Överprövning av upphandling – och andra rättsmedel enligt LOU och LUF).

Competition and public procurement: a mind map

I have been asked to teach a workshop on competition and public procurement for an audience of postgraduate students and practitioners in this week’s session of the Competition Specialist Advanced Degree convened by Prof Antonio Robles Martin-Laborda at Universidad Carlos III of Madrid.

It has been some time since I last taught the topic, so I had to reconstruct my mind map in preparation for the workshop. This is a sketch of what I have come up with (not mind-blowing graphics…). Some additional bullet-points of the key issues in each of the areas of interaction and cross-references to papers where I have developed my ideas regarding each of the topics are below.

Bid rigging

• In principle, this is the least controversial area of competition and procurement interaction; bid rigging being an instance of anticompetitive conduct ‘by object’ (under Art 101(1) TFEU) (see here for discussion)

• Fighting bid rigging in procurement is high on competition authority’s enforcement agendas

• Procurement structurally increases likelihood of collusion; which is partially compensated by the counter-incentive created by the rules on exclusion of competition infringers (Art 57(4)(c) and (d) Dir 2014/24/EU), provided leniency does not negate its effects

Joint tendering

• Analytical difficulties to establish a boundary between bid rigging (object-based analysis) and anticompetitive collaboration for the submission of joint tenders

• Emerging approach to the treatment of joint bidding as a restriction of competition by object (cf EFTA Court Ski Taxi, 2018 Danish guidelines, see also here for analysis of their draft)

• Particular complications concern the analysis of potential competition under Art 101(1) and 101(3) TFEU, in particular in cases where this is both used to subsume the practice under prohibition in Art 101(1) and also to assess whether the restriction is indispensable to the generation of efficiencies (or whether there were less restrictive forms to achieve them) under Art 101(3) TFEU (see here and here).

Exclusion & self-cleaning

• Conceptual difficulties with boundary between Art 57(4)(c) and (d) of Directive 2014/24/EU, as well as applicable tests (see here)

• Application complicated in leniency cases (see eg Vossloh Laeis, C-124/17, EU:C:2018:855, as well as due to different approaches to judicial and administrative finality (see eg Meca, C-41/18, EU:C:2019:507, not available in English)

• These difficulties are particularly complex once the rules are implemented at the national level, as evidenced by the on-going Spanish sainete in the railroad electrification works cartel (see here and here)

Public buyer power

• Inapplicability of EU antitrust rules (ie Art 101 and 102 TFEU) directly to the public buyer, given the FENIN-Selex case law (see here)

• However, potential clawback under EasyPay’s strictest approach to separation test (see here)

CPBs

• Difficult exemption from EU antitrust rules even under FENIN, given exclusive activity (see here and here)

• Very minimal regulation and oversight, especially in the context of their cross-border activities (see here, here and here)

SGEI & In-house

• Interaction complicated in these settings, both in terms of State aid rules (see here), as well as in potential accumulation of conflicting rules under Articles 102 and 106(2) TFEU (ie publicly-mandated or generated abuses of a dominant position)

• Increasingly complicated tests to assess SGEI entrustment (Altmark, Spezzino, German slaughterhouses)

• Move towards declaration of some types of procurement (eProcurement, centralised procurement) as an SGEI themselves

State aid (more generally)

• Difficulties remain after the 2016 Commission notice on the notion of aid (see here)

Abnormally low tenders

• Difficulties also remain after Art 69 Directive 2014/24/EU, in particular concerning those tainted by State aid (see here)

• Mechanism hardly used to monitor ‘adequate competition’ or to prevent predatory pricing

Contract changes

• Difficult analogical application of notice on notion of aid and almost impossible market benchmark in most cases

• Similarly complicated interaction between merger control and public procurement rules on change of contractor, although these are partially alleviated by Art 72(1)(d)(ii) Dir 2014/24/EU (but cfr ‘economic operator that fulfils the criteria for qualitative selection initially established provided that this does not entail other substantial modifications to the contract and is not aimed at circumventing the application of this Directive’)

Principle of competition

• Established in Art 18(1)II Dir 2014/24/EU, has the potential to be the gangway between competition and procurement spheres of EU economic law

• Difficulties in its interpretation (see here), as well as in its application (see here)

Litigation in Spanish railroad electrification cartel highlights further inadequacies of regulation of bid rigger exclusion

In a new episode of the Spanish sainete of the railroad electrification cartel (see here for an overview), it has now emerged that one of the companies affected by the exclusion ground (prohibición de contratar) declared in the resolution of the Spanish National Commission on Markets and Competition (CNMC) of 14 March 2019 subsequently secured interim measures suspending its effectiveness on 19 July 2019.

The freezing order prevents (Spanish) contracting authorities from relying on the exclusion ground and thus shortens the maximum period of (future) exclusion of the colluding companies, unless the CJEU revises its case law on the time-limit calculation for such grounds established in Vossloh-Laeis (24 October 2018, C-124/17, EU:C:2018:855). The decision also highlights issues concerning the cross-border effects of litigation on exclusion grounds. In this follow-up post, I discuss these two issues.

The interim measures decision

Quick recap: it should be stressed that the Spanish transposition of Article 57(4)(d) has resulted in a system whereby the exclusion of economic operators on the basis of previous infringements of competition law is mandatory under Article 71 of Law 9/2017 on Public Sector Procurement (LCSP). However, the scope and duration of such exclusion generates some difficulties, in particular when they are not established in the original decision declaring the infraction and imposing the measure—which is precisely the case of the railroad electrification cartel. In such cases, a further administrative procedure needs to be completed and the scope and duration of the mandatory exclusion (prohibición de contratar) are to be established by decision of the competent Minister.

The effectiveness of the mandatory exclusion ground in the period running from the initial infringement decision and the further Ministerial decision is contested. Two opposing schools of thought exist. One that gives automatic effect to the exclusion ground despite the future specification of its scope and duration, and the opposing view that considers that the measure is incomplete and cannot generate (negative) effects against the sanctioned undertaking until the Ministerial decision is adopted.

The CNMC expressed the first view in its railroad electrification decision, when it stated that ‘regardless of the time limits within which the duration and scope [of the prohibition] must be set [by the Minister of Finance] ... it is possible to identify an automatism in the prohibition of contracting derived from competition law infringements, which derives ope legis or as a mere consequence of the adoption of a decision that declares said infraction, as established in the mentioned Article 71.1.b) of [Law 9/2017]‘ (page 319, own translation full decision available in Spanish).

The Spanish High Court (Audiencia Nacional), in a Judgment of 19 July 2019 (ES:AN:2019:1673A, hat tip to Alfonso Rincón García-Loygorri for posting it on LinkedIn) adopted the same view and recognised that the measure was bound to immediately restrict the affected undertakings’ ability to participate in public tenders. Considering that it is likely that the final decision on the main appeal of the cartel decision arrives after the expiry of the three year maximum duration foreseen for the exclusion ground and that (should the appellant prevail) the effects of such exclusion would be very difficult, if not impossible to correct at that stage, the High Court decided to suspend the effectiveness of the mandatory exclusion ground.

Implications in terms of maximum duration of the exclusion

Quick recap: the CJEU has established that ‘where an economic operator has been engaged in conduct falling within the ground for exclusion referred to in Article 57(4)(d) of that directive, which has been penalised by a competent authority, the maximum period of exclusion is calculated from the date of the decision of that authority‘ (Vossloh Laeis, above, para 42).

I criticised the CNMC for creating legal uncertainty by not establishing the scope and duration of the exclusion ground in its initial decision. I argued that the CNMC knew or should have known that, as a matter of directly applicable EU law, de facto the maximum exclusion period can run for three years, up to 14 March 2022. Therefore, by referring the file to the Minister and creating legal uncertainty as to the interim effects of the prohibition to contract with a yet to be specified scope and duration, the CNMC actually bought the competition infringers time and created a situation where any finally imposed prohibition to contract is likely to last for much less than the maximum three years.

The High Court’s Judgment raises the same criticisms. While the High Court explicitly took into account the fact that the undertakings could find themselves in a position of not being easily compensated for the undue exclusion from public tenders in case of prevailing in their appeal of the CNMC decision, the High Court ignored that its freezing order will create the reverse effect in case the appeal is dismissed. By preventing (Spanish) contracting authorities from excluding the competition infringers from tenders for an indefinite period starting on 19 July 2019, the High Court has created the risk that the undertakings are never excluded from public tenders because such exclusion is time barred by the time the CNMC decision becomes final—which does not solely depend on the outcome of the High Court’s proceedings, but is subject to a potential further appeal to the Supreme Court.

This highlights once again the inadequacy—or, at least, partiality—of the CJEU Vossloh criterion that the maximum period of exclusion starts running at the time of adoption of the initial infringement decision. It seems clear that, where that decision is contested and, in particular, where interim measures are obtained to freeze its effects—the maximum period of exclusion needs to be calculated taking that into account. Otherwise, the simple fact of litigating buys competition infringers immunity from the debarment system foreseen in Directive 2014/24/EU and thus excludes its effet utile. That cannot be right.

Territoriality of effects

The new episode of the Spanish sainete also raises questions concerning the cross-border effects of the CNMC decision. While Spanish contracting authorities are effectively enjoined from giving effect to the mandatory exclusion ground, the situation is by no means necessarily the same in other EU/EEA jurisdictions. Non-Spanish contracting authorities could (justifiably) be tempted to apply domestic mandatory or discretionary exclusion grounds based on the fact that the relevant undertakings were sanctioned for bid rigging by the CNMC. This could be the case whether they are aware or not of the High Court Judgment, in particular where they have discretion in this matter.

Should any such decision be challenged, the issue should make its way to the CJEU, which would have a hard time finding ways of squaring this practical difficulty with the differentiated treatment that Art 57 of Directive gives to grounds based on a ‘conviction by final judgment‘ (Art 57(1)) and those based on decisions and judgments not subjected to that finality requirement (notably, Art 57(4)), as well as with the self-imposed constraint of the way the maximum time-limit is calculated as per Vossloh.

Once again, we are yet to see the final act of this sainete…

The Emergence of Trans-EU Collaborative Procurement: A 'Living Lab' for European Public Law

I have uploaded a new working paper on SSRN: ‘The Emergence of Trans-EU Collaborative Procurement: A “Living Lab” for European Public Law’ (March 14, 2019) https://ssrn.com/abstract=3392228. Its abstract is as follows:

Trans-EU collaborative procurement is a fertile ‘living lab’ for the observation, theorisation and critical assessment of developments in European public law. This paper maps the emergence of this novel type of cross-border administrative collaboration and scrutinises the new rules of Directive 2014/24/EU, which evidence the tension between promoting economic co-operation across borders within the internal market and the concern to respect the Member States’ administrative autonomy. The paper critically assesses the EU legislative competence in this area, extracts consequences for balancing trans-EU collaboration with ‘mandatory public law requirements’ at Member State level and proposes minimum functional guarantees to be expected in the implementation of trans-EU collaborative procurement.

Bid rigging conspiracy in railroad electrification works: A very Spanish 'sainete'

A case of bid rigging in works contracts for high-speed and conventional railroad electrification in Spain evidences a number of shortcomings in the domestic transposition of the 2014 rules on discretionary exclusion of competition law offenders from public procurement tenders, as well as some dysfunctionalities of their interpretation by the Court of Justice of the European Union (CJEU) in its Judgment of 24 October 2018 in Vossloh Laeis, C-124/17, EU:C:2018:855. The unilateral price adjustment of live contracts sought by the main victim of the cartel, the Spanish rail network administrator ADIF comes to raise very significant issues on the limits to the ‘self-protection’ (or private justice) for contracting authorities that are victims of bid rigging. In this post, I point to the main issues that puzzle me in this very Spanish sainete. I am sure there will be plenty debate in Spanish legal circles after the holidays…

Legal background: EU level: Art 57(4)(c) and (d) of Directive 2014/24/EU

As is well known, Article 57(4) of Directive 2014/24/EU establishes discretionary grounds for the exclusion of economic operators from public procurement tenders. In relation to economic operators that have breached competition law, there are two relevant grounds.

First, Art 57(4)(c) foresees the possibility of exclusion ‘where the contracting authority can demonstrate by appropriate means that the economic operator is guilty of grave professional misconduct, which renders its integrity questionable‘. This was interpreted by the CJEU as covering entities that had been sanctioned for breaches of competition law in relation to the earlier rules of Directive 2004/18/EC (Art 45(2)(d)) as an instance of their being ‘guilty of grave professional misconduct proven by any means which the contracting authorities can demonstrate’. The CJEU established in unambiguous terms that ‘the commission of an infringement of the competition rules, in particular where that infringement was penalised by a fine, constitutes a cause for exclusion under Article 45(2)(d) of Directive 2004/18’ in its Judgment of 18 December 2014 in Generali-Providencia Biztosító, C-470/13, EU:C:2014:2469 (para 35).

Second, Art 57(4)(d) allows for the exclusion ‘where the contracting authority has sufficiently plausible indications to conclude that the economic operator has entered into agreements with other economic operators aimed at distorting competition‘. The relationship between both exclusion grounds relating to competition law infringements is somewhat debated. I have argued elsewhere that Art 57(4)(c) should still be used as the legal basis for the exclusion of economic operators that have already been sanctioned for previous bid rigging offences, whereas Art 57(4)(d) creates an additional ground for exclusion based on indicia of contemporary collusion. For details, see A Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd ed, Hart, 2015) 296-301.

Of course, discretionary exclusion on grounds of infringements of competition law can be modulated by the rules on self-cleaning in Art 57(6) Directive 2014/24/EU. It is also important to add that these discretionary exclusion grounds can be applied for a period not exceeding three years from the date of the relevant event, as per Art 57(7) Directive 2014/24/EU. The CJEU has interpreted the ‘relevant event’ in this context, and clarified that ‘where an economic operator has been engaged in conduct falling within the ground for exclusion referred to in Article 57(4)(d) of that directive, which has been penalised by a competent authority, the maximum period of exclusion is calculated from the date of the decision of that authority‘ (Vossloh Laeis, above, para 42)

Legal background: domestic level: the transposition by Law 9/2017

The transposition into Spanish law of these provisions has introduced some important modifications.

First, these exclusion grounds have been made mandatory under Article 71 of Law 9/2017 on Public Sector Procurement, as discussed by P Valcarcel, ‘Transposition of Directive 2014/24/EU in Spain: between EU demands and national peculiarities‘ in S Treumer & M Comba (eds), Modernising Public Procurement: The Member States Approach, vol. 8 European Procurement Law Series (Edward Elgar, 2018) 236-237. For a broader description of the Spanish system of mandatory exclusion (ie through ‘prohibiciones de contratar,’ or prohibitions on contracting), see A Sanchez-Graells, 'Qualification, Selection and Exclusion of Economic Operators under Spanish Public Procurement Law' in M Burgi, S Treumer & M Trybus (eds), Qualification, Selection and Exclusion in EU Procurement, vol. 7 European Procurement Law Series (Copenhagen, DJØF, 2016) 159-188.

Second, the grounds in Art 57(4)(c) and (d) of Directive 2014/24/EU have been transposed in a seemingly defective manner. Art 57(4)(d) has been omitted and Art 57(4)(c) is reflected in Art 71(1)(b) of Law 9/2017, according to which there is a prohibition to enter into a contract with an ‘economic operator … guilty of grave professional misconduct, which renders its integrity questionable, in matters such as market discipline, distortion of competition … in accordance with current regulations’ (own translation from Spanish).

Thirdly, Art 72(2) of Law 9/2017 foresees two ways in which the mandatory exclusion ground based on a prior firm sanction for competition infringements can operate. On the one hand, the prohibition to enter into a contract with competition law infringers ‘will be directly appreciated by the contracting bodies when the judgment or administrative resolution [imposing the sanction] had expressly established its scope and duration, and will be in force during the term indicated therein’ (own translation from Spanish). On the other hand—and logically, as a subsidiary rule—it is also foreseen that ‘In the event that the judgment or administrative resolution does not contain a ruling on the scope or duration of the prohibition to contract … the scope and duration of the prohibition shall be determined by means of a procedure instructed for this purpose, in accordance with the provisions of this article’ (own translation from Spanish). Such procedure is rather convoluted and involves a decision of the Minister of Finance on the advice of the State Consultative Board on Public Procurement.

Fourthly, and in an extreme pro-leniency fashion, Art 72(5)II of Law 9/2017 has established that the prohibition to enter into contracts will not apply to economic operators that have self-cleaned and, in particular, to those that have obtained leniency in the context of competition enforcement procedures. That is, there is an exemption from the otherwise applicable exclusion ground based on infringements of competition law for undertakings that demonstrate the ‘adoption of appropriate technical, organisational and personnel measures to avoid the commission of future administrative infractions, which include participating in the clemency program in the field of competition law‘ (own translation from Spanish).

It is also odd that the provision does not require economic operators to have ‘clarified the facts and circumstances in a comprehensive manner by actively collaborating with the investigating authorities‘, which was the main issue at stake in the Vossloh Laeis litigation.

A controversial decision by the Spanish National Commission on Markets and Competition (CNMC)

On 14 March 2019, the CNMC adopted a decision against 15 construction companies finding them responsible for a long-lasting bid rigging scheme to manipulate the tenders for public contracts works relating to different aspects of high-speed and conventional railroad electrification (full decision available in Spanish). One of the novel aspects of the decision is that the CNMC explicitly activated the prohibition to enter into contracts against the competition infringers. However, the CNMC did so in very peculiar manner.

The oddity of the decision mainly lies on the fact that CNMC decided not to establish the scope and duration of the prohibition to contract, but simply to refer the case to the State Consultative Board on Public Procurement (see pages 317-320). This was the object of criticism in a dissenting vote by Councillor María Pilar Canedo, who stressed that the CNMC should have set the scope and duration of the prohibition to contract in its decision (pages 366-370). The position of the CNMC is certainly difficult to understand.

On the one hand, the CNMC stressed that ‘regardless of the time limits within which the duration and scope [of the prohibition] must be set [by the Minister of Finance] ... it is possible to identify an automatism in the prohibition of contracting derived from competition law infringements, which derives ope legis or as a mere consequence of the adoption of a decision that declares said infraction, as established in the mentioned Article 71.1.b) of [Law 9/2017]‘ (page 319). On the other hand, however, the CNMC decided to (potentially) kick the effectiveness of such prohibition into the long grass by not establishing its scope and duration in its decision—and explicitly saying so (unnecessarily…). No wonder, contracting authorities will have some difficulty applying the automaticity of a prohibition which time and scope are yet to be determined.

Moreover, the CNMC was aware of the CJEU decision in Vossloh Laeis (above), to which it referred to in its own decision (in a strange manner, though). In that regard, the CNMC knew or should have known that, as a matter of directly applicable EU law, de facto the maximum exclusion period can run for three years, up to 14 March 2022. Therefore, by referring the file to the Minister of Finance via the State Consultative Board on Public Procurement and creating legal uncertainty as to the interim effects of a seemingly prohibition to contract with a yet to be specified scope and duration, the CNMC actually bought the competition infringers time and created a situation where any fianlly imposed prohibition to contract is likely to last for much less than the maximum three years.

The (for now) final twist: ADIF takes justice in its own hands

As if this was not enough, according to the Spanish press (see the main story in El Pais), the main victim of the cartel—the Spanish rail network administrator, ADIF—has now decided to take justice in its own hands.

According to the report, ADIF has written to the relevant companies announcing claims for damages—which is the ordinary reaction that could be expected. However, it has also taken the decision of demanding an anticipation of the compensation from those companies with which it has ‘live’ contracts, to which it has demanded a 10% price reduction. What is more, ADIF has decided to withhold 10% of the contractual price and to deposit in an escrow account before a notary, as a sort of sui generis self-created interim measure to ensure some compensation for the damages suffered from the cartel. The legal issues that this unilateral act generates are too many to list here. And these will surely be the object of future litigation.

What I find particularly difficult to understand is that, in contrast with this decisively aggressive approach to withholding payment, ADIF has awarded contracts to some of the competition infringers after the publication of the CNMC decision. And not a small number of contracts or for little amounts. In fact, ADIF has awarded over 280 contracts for a total value close to €300 million.

Thus, ADIF has largely carried out its business as usual in the award of public works contracts, both ignoring the rather straightforward argument of automaticity of the prohibition to contract hinted at by the CNMC— though based on a convoluted and rather strained interpretation of domestic law (Art 72(2) Law 9/2017)—and, more importantly, the discretionary ground for exclusion in Art 57(4)(d) of Directive 2014/24/EU.

There will certainly be some more scenes in this sainete…

Paper on Public Procurement & "Core" Human Rights

I have uploaded a new paper on SSRN, which is a draft chapter for a forthcoming book: O Martin-Ortega & C M O’Brien (eds), Public Procurement and Human Rights: Risks, Dilemmas and Opportunities for the State as a Buyer (Edward Elgar). In my chapter 'Public Procurement and "Core" Human Rights: A Sketch of the EU Legal Framework', I sketch the main mechanisms for the implementation of a "core" human rights-orientated public procurement policy foreseen in the 2014 EU Public Procurement Package.

In particular, I discuss the main constraints for the inclusion of human rights-related considerations in the procurement process through the following instruments: exclusion grounds; use of labels; award criteria; and contract performance requirements. I conclude by offering a sceptical view of the effectiveness of any of these mechanisms due to policy fuzziness and significant resource constraints, and query their desirability due to the implicit trade-offs they impose on the general effectiveness of the procurement function.

This is still very much work-in-progress, so any comments or feedback would be most welcome: a.sanchez-graells@bristol.ac.uk. The full paper is available on SSRN as: A Sanchez-Graells, 'Public Procurement and "Core" Human Rights: A Sketch of the EU Legal Framework' (January 16, 2018), to be published in O Martin-Ortega & C M O’Brien (eds), Public Procurement and Human Rights: Risks, Dilemmas and Opportunities for the State as a Buyer (Edward Elgar, forthcoming): https://ssrn.com/abstract=3103194.

In-depth discussions on contract modifications at the Danish Association for Public Procurement

I had the honour of being invited to speak at the workshop on "Contract Changes in a European Perspective" organised by the Danish Association for Public Procurement (Dansk Forening for Udbudsret), where I shared thoughts with academic colleagues that have been researching on the topic for a long time--such as Prof Steen Treumer, Dr Piotr Bogdanowicz and Dr Carina Risvig Hamer--as well as with practitioners, such as Erik Kjær-Hansen, facing the increasingly complex task of advising contracting authorities and economic operators.

In my presentation, I covered general issues concerning the interaction between contract modifications and competition for public contracts (slides below), Piotr concentrated on specific interpretive difficulties raised by Article 72 of Directive 2014/24/EU, and the general discussion raised interesting topics based on Danish practice--which is rather sophisticated, and also in a state of shock after the CJEU's Finn Frogne decision of last year (see here).

In my view, there are significant challenges derived from the extension of EU rules to the execution phase of public contracts and the pro-competitive logic that generally inspires the rules in Article 72 of Directive 2014/24/EU, as well as the previous case law of the CJEU, is limited and bound to continue hitting the wall of unnecessary inflexibility of procurement procedures unless some more commercially-oriented sophistication is introduced in future case law (which should limit, if not reverse, Finn Frogne).

In the meantime, there is notable pressure on lawyers involved in the drafting of contract modification clauses, which are after an impossible mix of flexibility and predictability. Definitely an area where further discussions are needed. If you want to get involved in the conversation, please feel free to email me at a.sanchez-graells@bristol.ac.uk (or comment below).

When does competition end? A staged approach to procurement modifications from Albert Sanchez Graells

Transparency in Procurement by the EU Institutions

The next collaboration of the European Procument Law Group (EPLG) will be on 'Transparency in public procurement'. Thanks to Dr Kirsi-Maria Halonen, we will meet in Helsinki on 4-5 September 2017 to discuss comparative reports on 11 jurisdictions, including 10 EU Member States and the rules applicable to the procurement of the EU Institutions. I was tasked with the last topic, and my draft report on 'Transparency in Procurement by the EU Institutions' is here: https://ssrn.com/abstract=3020168. Comments most welcome: a.sanchez-graells@bristol.ac.uk.