Are the EU Institutions (about to start) breaching Art 50 TEU & EU public procurement law in the context of Brexit?

The Financial Times has reported that "Brussels starts to freeze Britain out of EU contracts ~ Commission memo tells staff to prepare to ‘disconnect’ UK". According to the FT, an internal European Commission memorandum urges its senior officials to start introducing Brexit considerations in their decision-making, seemingly to avoid “unnecessary additional complications”. As public procurement is concerned, the FT indicates that 

Where legally possible, the [C]ommission and its agencies will be expected in all activities to “take account” of the fact that Britain may be “a third country” within two years, including in appointing staff and in awarding billions of euros of direct contracts for research projects or services.

“Apart from the legal requirement for a contracting party to be established in the EU, there may be political or practical reasons that speak in favour of contracting parties established in a specific member state, not only at the conclusion of the contract, but also throughout the duration of the contract,” the note states.

The FT piece lacks the necessary detail for a full legal assessment and the caveat that this strategy should be undertaken "where legally possible" may well deactivate it [in legal terms]. However, at least in its thrust, this is a rather clear breach of Article 50(3) TEU.

Inasmuch as it states that "The Treaties shall cease to apply to [a withdrawing Member] State ... from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification" (given by the UK on 29 March 2017), unless this period is extended unanimously by the European Council; Art 50(3) TEU does not allow for any anticipatory effects of a decision to withdraw. Until withdrawal and its terms are actually agreed and legally effective, both the withdrawing Member State and the EU Institutions remain bound by EU law in its supremacy, direct effect and the mandate to respect the rule of law (Art 2 TEU). This is an appropriate measure aimed at the preservation of the rule of law in the form of compliance with EU law during the withdrawal negotiations, not least because nobody knows if withdrawal is legally irreversible and unavoidable -- and, quite frankly, every day that goes by without the EU Institutions (as well as the UK) seeking clarification from the Court of Justice of the European Union is a missed opportunity and another blow to the foundations of the rule of law in the EU.

Such prohibition of anticipatory effect goes both in the direction of preventing the 'freeing up' of the withdrawing Member State from compliance with EU law (which is obvious from Art 50(3) TEU itself), as well as in the opposite direction of preventing the EU Institutions from discriminating against the withdrawing Member State. It is clear to me that EU law will always bind the EU Institutions vis-a-vis a withdrawing Member State all the way up to the point of legal withdrawal - and from then onward, the legal regime setting up mutual duties will be that of any transitory arrangements created by the withdrawal agreement, and/or the legal regime governing the "the framework for [the withdrawing Member States'] future relationship with the Union". Violating the absolute mandate of subjection to EU law up to the point of withdrawal would be an infringement of Art 50(3) TEU by the EU Institutions -- if not by itself, certainly in combination with the duty of non-discrimination and equal treatment between Member States of Art 4(2) TEU, as well as the duty of sincere cooperation of Art 4(3) TEU.

In the specific area of public procurement, just as it was illegal for the UK's Department for International Trade to tender contracts screening contractors on the basis of their commitment to support the delivery of Brexit as a cultural fitness criterion (see here), it is also illegal for the EU Institutions to tender contracts on the basis of "political or practical reasons that speak in favour of contracting parties established in a specific member state, not only at the conclusion of the contract, but also throughout the duration of the contract". Article 102 of the Financial Regulation governing the award of contracts by EU Institutions clearly establishes that "All public contracts financed in whole or in part by the [EU] budget shall respect the principles of transparency, proportionality, equal treatment and non-discrimination". Imposing requirements around the Member State of incorporation, registration or sit of a public contractor runs against these general principles.

There may be some specific circumstances or projects (the FT piece mentions the Galileo project) where it would not be possible for public contractors to be based outside the EU, but these are clearly exceptional and need to be subjected to a very strict proportionality analysis. In most cases, particularly for services and research contracts, there is no need for any physical presence in the EU (or elsewhere). This is clearly demonstrated by the coverage of a good number of Brexit-sensitive services markets in the EU's market access concessions under the World Trade Organisation's Government Procurement Agreement (albeit on a reciprocal basis, for obvious trade policy reasons).

Moreover, the extent to which it would be impossible for UK-based contractors to complete the execution of public contracts post-Brexit depends on the existence or not of transitory arrangements, as well as the framework for the future EU-UK relationship (which may well imply mutual coverage of services procurement in WTO GPA terms). Therefore, a decision made now that determined such impossibility and thus served as the basis for the exclusion of UK tenderers from procedures carried out by the EU Institutions would be legally defective.

Beyond these technical issues, it is shocking and worrying to see the EU Institutions engage in what can be seen as trade war by erecting non-tariff barriers against a withdrawing Member State, just as it was worrying and unacceptable to see the UK do that. If both parties to the withdrawing negotiations "prepare" for a disorderly Brexit in this manner, this will be a self-fulfilling prophecy. And the only stopper to such noxious developments is to be found in the rule of law and the EU's and the withdrawing Member States' obligations under the Treaties to comply with EU law until the withdrawal is effective in terms of Art 50(3) TEU. If the European Commission is itself not able to abide in this manner, then my pessimism about the irreversible effects of Brexit on EU law can only plummet even further....

New paper: Competition Infringements and Procurement Blacklisting

I have uploaded my last working paper of 2016 on SSRN. It is entitled "Competition Infringements and Procurement Blacklisting" and will appear in the Competition Law Journal next year. Its abstract is as follows:

In this article I explore the rules for the blacklisting of competition infringers under relevant EU and UK public procurement law, including their interpretation by the European Court of Justice. I also consider the practical difficulties for their enforcement by procurement professionals in the UK and suggest additional roles that the Competition and Markets Authority (CMA) and Crown Commercial Service (CCS) could have in order to facilitate their effectiveness. Finally, I also stress the existence of a trade-off between a more active enforcement of procurement blacklisting rules and the attractiveness of the CMA’s leniency policy. By way of concluding remarks, I set out a blueprint for targeted policy reform. I submit that this should include the development of mechanisms for the provision of CMA support to procurement professionals that identify indicia of bid rigging, the development of a policy on the imposition of procurement blacklisting as a sanction for competition law infringers, and the creation of a UK-wide blacklisting register operated by CCS.

The full reference for the paper is: Sanchez-Graells, Albert, Competition Infringements and Procurement Blacklisting (December 14, 2016). Forthcoming in the Competition Law Journal.. Available at SSRN: https://ssrn.com/abstract=2885278.

CJEU consolidates push for overcompliance with EU public procurement rules in the provision of public services (C-446/14)

In its Judgment of 18 February 2016 in Germany v Commission (Zweckverband Tierkörperbeseitigung), C-446/14 P, EU:C:2016:97 (only in German and French), the Court of Justice of the European Union (CJEU) has supported the approach of the General Court (GC) in the assessment of the Altmark (C-280/00, EU:C:2003:415) conditions for the analysis of State aid regarding a system of financial support for a service of general economic interest (SGEI) consisting in the maintenance of reserve animal disposal capacity in the case of epizootic in a public abattoir in the state of Rhineland-Palatinate in Germany.

This appeal was against the GC's Judgment in T-295/12 (EU:T:2014:675, which is discussed by P Nicolaides here), but the analysis of the CJEU was highly relevant for the pending appeal against the GC Judgment in T-309/12 (EU:T:2014:676, discussed here), which has now been abandoned by the appellant (the abattoir, now in liquidation). The intricacies of the case are quite complex, and points of detail are too specific to discuss now. However, there are some general issues to note in view of the CJEU's Germany v Commission (Zweckverband Tierkörperbeseitigung) Judgment. 

From the outset, it must be stressed that the CJEU is following the GC in a trend that may well be modifying the scope of the Altmark test in a way that pushes for overcompliance with the EU public procurement rules as the only effective way in which Member States can achieve legal certainty in the way they organise their SGEIs. This requires to take a long view on some of the arguments in the case.

The CJEU has generally been very clear that 'the four conditions set out in Altmark ... are distinct from one another, each pursuing its own finality' (para 31, own translation from French). In particular, it stressed that the first condition requires 'that the recipient undertaking must actually be required to discharge public service obligations and those obligations must be clearly defined for such compensation to escape the classification as State aid' (para 26, own translation from French), while the fourth condition determines that 'when the choice of the undertaking which is to discharge public service obligations, in a specific case, is not in the framework of a public procurement procedure, the level of compensation needed must be determined based on an analysis of the costs which a typical, well run, undertaking would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations' (para 29, own translation from French). In that regard, these would seem to require separate, independent assessments of each of the Altmark conditions.

In contrast, in the challenged decision, the GC had determined that

as part of the review of the question whether the fourth Altmark criterion ... is satisfied, there is certainly room to take into consideration the nature of the service in question and the circumstances of the case, and it is therefore possible that this criterion, which requires a comparison of the costs and revenues directly related to the provision of the SGEI, can not be applied strictly to the present case (see, that effect, case BUPA ea / Commission (T-289/03, EU:T:2008:29) paragraph 246). Indeed, the Court has already held that ... although the conditions set out in Altmark ... concern without distinction all sectors of the economy, their implementation must take into account the specificity of a certain sector and, given the particular nature of the SGEI mission in specific sectors, it should be flexible in the application of the Altmark judgment ... in relation to the spirit and purpose that led to the establishment of said conditions, so that they are suitable to the particular facts of the case (see case of 7 November 2012 CBI / Commission, T-137/10 (EU:T:2012:584) paragraphs 85 and 86, and the cases cited) (T-295/12, para 131, own translation from French).

This was criticised by Germany as a conflation of the first and fourth Altmark conditions, particularly because the analysis supported by these general remarks implied dismissing the existence of an SGEI in the specific case in Rhineland-Palatinate, and a general consideration of the costs incurred by undertakings active in the same sector in other German states that, however, may have been subjected to different public service obligations or where no SGEI may have existed at all (T-275/12, para 130). In Germany's submission, this would have led the GC to a tautological conclusion. 

The CJEU dismisses the argument on the following basis:

... the Court cannot be criticized for having reached a tautological conclusion that would have linked the lack of satisfaction of that fourth condition to a finding of lack of qualification of maintaining a reserve capacity as a service of general economic interest [first condition]. Indeed, as is clear from paragraph 130 of the judgment, the Court, first, discussed the situation in which the maintenance of a reserve capacity in case of an outbreak could have validly received such qualification [of SGEI] and on the other hand, felt that, given the obligations of the competent public authorities in all German states to eliminate the largest quantity of substances ... received during an outbreak [regardless of the way they organised the discharge of that public obligation, and regardless of whether they defined an equivalent SGEI], it was necessary to take into account the existing situation in other German states to determine the necessary level of compensation on the basis of an analysis of the costs which a typical undertaking, well run and adequately equipped, would have incurred in meeting the public service requirements (C-446/14 P, para 35, own translation from French).

Thus, the general conclusion of the CJEU is that the GC did not err in law by conflating the different conditions established in Altmark. 

I disagree with the CJEU because, even if the conditions 'are distinct from one another, each pursuing its own finality', the logic in their application to a same set of factual circumstances requires that, once the scope of the economic activity that the Member State claims is an SGEI is properly established for the purposes of the judicial review (and regardless of whether the first condition is upheld or not in terms of whether those obligations are clearly defined), the analysis of the fourth condition (ie either procurement of that 'alleged' SGEI or analysis of the costs of a notional well-run undertaking providing that 'alleged' SGEI) needs to remain within that context.

Otherwise, the assessment of the notional, well-run undertaking's cost structure outside of the remit of the 'alleged' SGEI under dispute comes to basically neutralise the second alternative test in the fourth condition of Altmark by allowing the Commission and the GC (and ultimately the CJEU) to find any other comparator they deem to be sufficiently close to that economic activity, which nullifies the economic concept of the notional, well-run competitor. Immediately, this pushes Member States to try to avoid in this types of assessment, which can only be done by resorting to (certain types of) public procurement procedures under the first test in the fourth Altmark condition [for discussion, see A Sanchez-Graells, 'The Commission’s Modernization Agenda for Procurement and SGEI', in E Szyszczak & J van de Gronden (eds) Financing Services of General Economic Interest: Reform and Modernization, Legal Issues of Services of General Interest Series (The Hague, TMC Asser Press / Springer, 2012) 161-181]. 

This may well be cornering Member States in an impossible situation where, regardless of the way they conceive and delineate an SGEI [which they have exclusive competence to do, under Art 14 TFEU and Protocol No (26) therewith, and, currently, reminded in the provisions of Article 1(4) of Directive 2014/24], an assessment of the fourth Altmark condition only allows them to operate with sufficient legal certainty if they contract out the provision of that service in a way that complies with the EU public procurement rules (and not all of them, at that). This is certainly not a desirable outcome and, once more, the developments supported by the CJEU require a fundamental rethinking of the coordination of State aid and public procurement rules, in particular in the area of SGEIs [for discussion, particularly in the setting of procurement challenges, see A Sanchez-Graells, 'Enforcement of State Aid Rules for Services of General Economic Interest before Public Procurement Review Bodies and Courts' (2014) 10(1) Competition Law Review 3-34].

GC imposes liability on the European Commission for obvious breach of equal treatment in public procurement (T-199/14)

In its Judgment of 29 October 2015 in Vanbreda Risk & Benefits v Commission, T-199/14, EU:T:2015:820 (not available in English), the General Court (GC) annulled a procurement award decision for several breaches of the principle of equal treatment and condemned the European Commission to compensate the complainant for the damages resulting from the award of the contract to a competing undertaking. 

This is the second instance of imposition of liability on EU Institutions for breach of the applicable public procurement rules in less than a month (see European Dynamics Luxembourg v OHIM). However, this case differs from previous findings of liability of EU Institutions because it is not concerned with formal aspects of the procurement process (namely, debriefing obligations and the duty to state reasons), but with substantial issues concerning the equal treatment of tenderers. 

In fact, as the analysis below will show, the case indicates very poor procurement practice by the European Commission, which is surprising and may diminish the credibility of the institution that is aiming to foster a culture of compliance with public procurement rules as a key aspect of the new strategy for a deeper and fairer internal market (see comments here). Indeed, the Commission would be well advised to tighten up its own procurement processes and to lead by example in such change of mentality regarding compliance with  substantive standards and good procurement practices.

In the case at hand, the European Commission had tendered a contract for insurance services. Amongst the tender conditions, the Commission imposed that 'in the case of awarding the contract to a consortium of economic operators, all members of this group had to have " joint responsibility [...] in executing the contract"'. This requirement triggered a significant volume of documentary obligations in case tenderers intended to submit joint offers as part of a consortium (see T-199/14, paras 7-12). 

The Commission received two offers: one from Vanbreda Risk & Benefits (Vanbreda) and one from Marsh. Marsh's offer was made in consortium with others, and this included the participation of AIG Europe Limited (AIG). In view of this, Vanbreda indicated to the European Commission that, in its ownexperience,

AIG, who participated in the Marsh consortium, refused on principle to jointly undertake liability and therefore [Vanbreda] was almost certain that [Marsh's] could not comply with the substantive and formal requirements of the tender specifications (T-199/14, para 14, own translation from French).

The European Commission did not respond to this claim by Vanbreda. First, on the basis that the evaluation of the tenders was on-going (para 15) and, upon communicating its decision to award the contract to the Marsh consortium and Vanbreda's insistence that the offer could not possibly meet the requirement of joint liability, on the pretext that at this debriefing stage, it could not provide information other that 'the characteristics and relative advantages of the successful tender and the name of the successful tenderer' (para 21). After repeated requests from Vanbreda, the Commission eventually replied that

the issues at the root of the applicant's concern had been duly analyzed throughout the tender evaluation stage, that all offers were found compliant and, therefore, the contract was awarded to the bid with the lowest price. The Commission did not forward any of the requested documents to the applicant (T-199/14, para 24, own translation from French).

Unsurprisingly, Vanbreda challenged the award decision. Its main contention was that by allowing Marsh to offer a joint bid for the performance of the contract with a consortium of non-jointly and severally liable insurers, the Commission would have allowed this operator to offer a much lower price (see paras 42-43, where the impact of joint liability on pricing is further discussed).

Upon review of the file in the context of the challenge, Vanbreda discovered that its interpretation of the offer submitted by Marsh did not reflect the reality of the offer submitted by Marsh in cooperation with other insurers. As the GC summarises

Marsh would have in fact filed its offer as a broker sole tenderer and the Commission and Marsh would have corresponded extensively after the opening of tenders about the solidarity condition. The Commission never reported these facts to [Vanbreda], despite repeated questioning of the latter (T-199/14, para 45, own translation from French).

In view of these additional facts, Vanbreda adjusted its arguments to oppose the possibility that an insurance company such as Marsh could have submitted an offer as a 'broker sole tenderer' because, in its view, this would have infringed the requirement of joint liability in the execution of the contract. The Commission opposed this argument on the basis that it relied on an erroneous and restrictive interpretation of both the tender documentation and Belgian law (see details in paras 54-55).

In view of these arguments, and after reminding that the principle of equal treatment of tenderers aims to promote the development of healthy and effective competition between companies participating in a public tender and requires that all tenderers have the same chances in formulating the terms of their offers and are subject to the same conditions of competition (para 64), the GC found that

93 It appears from the foregoing that the admission of a broker to participate in the tender as the sole tenderer is contrary both to the provisions of the tender and the economy of the system set up thereby. The arguments put forward by the Commission concerning the goal it would have pursued of trying to maintain a high level of competition by the participants in the contested tender, are not likely to justify non-compliance with the tender documentation.

94 Furthermore, it appears from the evidence that one of the essential conditions of the tender consisted in the commitment, by the insurer or insurers, to ensure that the contracting authority would benefit from a 100% coverage of the risks set out in the specifications.

95 According to the Commission, in the hypothesis ... of a broker sole tenderer, it would have been incumbent upon the latter to organize the practicalities of the execution of the contract. This approach would have meant for the Commission to check whether the 100% coverage condition described in paragraph 94 above was fulfilled by focusing solely on the results and not on how it was obtained.

96 In this case, when submitting his tender, Marsh presented a distribution of risks between the participating insurance companies in order to reach the goal of 100% coverage. By letter of 14 February 2014, Marsh informed the Commission that one of the insurers to take part in its offering, AIG, had refused to sign the contract. Following this defection, Marsh proposed a new allocation of these risks, without changing the total price of the successful tender, which implied that the coverage of the share of AIG's participation would firstly be achieved by increasing the participation quotas of the remaining insurance companies and, secondly, by allocating a portion of that share to two new insurance companies  that were not among those originally specified in the Marsh's tender.

97 Accordingly, when Marsh had to, firstly, renegotiate increasing the shares of the insurance companies which had initially mandated it as a broker and, secondly, negotiate the participation of two new insurers, not only the competing offer [by Vanbreda] was known, but the certainty of the award to Marsh was acquired. Conversely, if at the time of the formation of the initial offer, and therefore without knowing that the contract would be awarded to them, the insurance companies mandating Marsh had had to assume higher quotas of participation, which implied greater risks for them, it is likely that, in all economic probability, they would have demanded an increase in their remuneration. This could, therefore, have lead to an increase in the tender price. Similarly, the negotiation of a stake by two new insurers in the offer, at a time when neither the price of the competing offer nor the certainty of obtaining the contract would have been known, was also likely to lead to a different result, potentially affecting the total price of the offer proposed by Marsh upwards. Rather, in this case, the two new insurance companies could know exactly the maximum remuneration they could get at the time when they entered into an agreement with Marsh.

98 Therefore, even if the total price of the successful tender has actually not changed for the Commission, the conditions negotiated between the broker sole contractor and the rest of the insurance companies have undoubtedly been changed.

99 It follows from the above that the admission of a broker to participate in the call as a sole tenderer mandated by insurance companies, first, makes illusory the verification by the evaluation committee of the merits of the offer against the conditions imposed by the specifications; secondly, allows said broker to benefit, in this case, of a competitive advantage over other bidders; and thirdly, causes unequal treatment in favour of the broker sole tenderer relative, in particular, to a competitor submitting a joint bid with one or more insurers (T-199/14, paras 93-99, own translation from French and emphasis added).

The GC then goes on to assess to what extent the mere fact of the Commission's engagement with Marsh in pushing for a substitution of AIG after having found out that such insurance company had not accepted the clause on joint liability (as suggested by Vanbreda) amounted to a violation of the principle of equal treatment and the prohibition of negotiations immediately prior to award of the contract, and finds that it is indeed the case (paras 102-133) [for discussion on how such pre-award negotiations can affect competition, and arguments supporting the position followed by the GC, see A Sanchez Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 418-421].

The GC also assesses to what extent the post-evaluation authorisation of a change in the composition of the consortium on which Marsh actually relied also amounts, in itself, to a breach of the principle of equal treatment and, once more, it finds that such a breach took place (paras 134-158). 

Once these infringements are settled, the GC then goes one to assess to what extent the Commission needs to indemnify Vanbreda and finds that the damage derived from the loss of a chance of being awarded the contract and to obtain the corresponding market references in terms of experience is recoverable, but that the rest of claims on the basis of expected benefits and moral damage are not (paras 160-217).

As mentioned at the beginning, in my view, this is a case that shows that the European Commission may not be itself prepared to comply with the very same principles it expects Member States to adhere to. It seems just too obvious that the Commission was willing to engage in very significant procedural irregularities in order to secure a saving of about €0.25mn/year, which was the difference between the offers submitted by Marsh and Vanbreda. 

Under certain lenses, this is an understandable situation, but this is precisely why the rules on the award of public contracts need to prevent these situations of financial conflict of interest in the assessment of non-compliant bids. It seems like there is a very long and winding road ahead in terms of trying to avoid these problems down the rout of fostering a culture of compliance... In the meantime, this type of hard enforcement decisions such as the GC Judgment in Vanbreda Risk & Benefits v Commission must be most welcome.

My preliminary thoughts on why UK's Referendum Bill franchise infringes Art 18 TFEU

This is just a short development of my thoughts regarding why UK's Referendum Bill franchise infringes Art 18 TFEU. For an analysis of the voting franchise and the difficult issues it raise, see Prof Jo Shaw's excellent piece here. I will develop lengthier arguments in view of the debate I hope this will spur. For now, this is a broad brushstroke presentation of the argument:

Art 18 TFEU prohibits any discrimination on grounds of nationality, and that prohibition of discrimination applies within the scope of application of the Treaties and without prejudice to any special provisions contained therein. As recently stressed by the CJEU in Dano (C-333/13, EU:C:2014:2358) “Every Union citizen may therefore rely on the prohibition of discrimination on grounds of nationality laid down in Article 18 TFEU in all situations falling within the scope ratione materiae of EU law. These situations include those relating to the exercise of the right to move and reside within the territory of the Member States conferred by point (a) of the first subparagraph of Article 20(2) TFEU and Article 21 TFEU”… “the principle of non-discrimination, laid down generally in Article 18 TFEU, is given more specific expression in … Directive 2004/38 in relation to Union citizens who … exercise their right to move and reside within the territory of the Member States” (59 & 61).

I will limit my points to non-UK EU citizens that have resided in the UK for more than five years, which have acquired permanent residency under Art 16 Dir 2004/38 (thought the same arguments apply functionally to the rest of non-UK EU citizens residing in the UK, at least those who are not an unreasonable burden on the social assistance system). 

Those non-UK residents will (likely) see their permanent residency right affected (if not taken away) should the UK pull out (barring a general grandfathering of those rights). While some non-UK EU citizens are given right to vote in the referendum (Irish, Maltese, Cypriots) regardless of any other condition linked to their right to residence under Art 16 Dir 2004/38 or otherwise; others (rest of nationalities) do not get the right to vote on an issue that affects the continuity of the rights acquired under Dir 2004/38—and, ultimately, Arts 20-21 TFEU, which clearly engages Art 18 TFEU. This is discrimination based on nationality and, consequently, prohibited by Art 18 TFEU. Moreover, given the relevance of permanent residence rights for the development of basic human rights as recognised in the EU Charter (such as private and family life, Art 7; or property, Art 17, just to mention the most likely to be affected), this sort of discrimination is unacceptable.

Of course, the only valid argument against this is that Art 50(1) TEU determines that “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements”. However, even then, it seems contrary to UK constitutional principles to force non-UK citizens to apply for citizenship (if they can) in order to have their basic fundamental rights upheld. Hence, this is not only politically and socially unacceptable, but legally flawed and open to challenge before the Court of Justice of the European Union.

Social housing, State aid and procurement show up again in EU Courts' case law (T-397/12)

In its Judgment in Diputación Foral de Bizkaia v Commission, T-397/12, EU:T:2015:291 (only available in ES and FR), the General Court (GC) of the Court of Justice of the European Union (CJEU) has decided a case involving State aid and public procurement for social housing. The issues raised in this case are technically different from those discussed in previous cases and, particularly, in Libert and Others (joined cases C-197/11 & C-203/11, EU:C:2013:288). However, there are some elements worth discussing. 

As a preliminary point, it is worth stressing that the case only concerned violations of State aid rules under Arts 107 and 108 TFEU. However, there was a very significant violation of EU public procurement rules as well--as a result of the direct award of over €150mn worth of works or supplies (depending on how pre-fabricated modular homes are categorised). Nonetheless, given that this was not discussed in the case, the comments are limited to the State aid dimension of the Spanish infringement of EU law.

The claimant, Diputación Foral de Bizkaia (DFB) is a regional authority in Spain and it owns 100% of public corporation Bizkailur SA (Bizkailur), which is dedicated to urban development, particularly for industrial purposes, with the ultimate aim of attracting business to the region. Through Bizkailur, DFB entered into two contracts with Habidite Technologies País Vasco SA (Habidite) for the set-up of a construction module factory in Alonsotegi and the delivery of 1,500 modular homes. 

According to the first contract, DFB and Bizkailur would purchase a land plot and adapt it for industrial use to prepare the setting up of a Habidite factory in Alonsotegi. Under the second contract, the public authorities committed to purchase from Habidite a total of 1,500 homes constructed with modules produced in Alonsotegi in order to sell them as social housing [see the Commission's press release].

The Commission found that the contracts contained illegal state aid because no private player would have accepted to contract on such terms. In the Commission's view, the maximum support that could be granted to the project was of €10.5 mn, but the actual advantage given to Habidite was much larger [see Commission's Decision for details]. Moreover, given that the measures had not been notified before they were granted to Habidite, the aid was unlawful.  DFB challenged the Commission's decision, but the GC has dismissed the appeal. A further appeal before the CJEU seems unlikely, given that the Habidite project was eventually abandoned by DFB due to lack of financial resources.

Some of the arguments submitted by DFB to the GC are so shocking that they deserve some discussion before laughing them off. In particular, I find it ridiculous for DFB to have submitted that no aid existed on the basis of a circular argument ultimately based on its own failure to comply with EU law, which would suffice to trigger a constructive estoppel under Spanish law (as, indeed, later declared by the competent domestic courts; see press release). 

The argument goes as follows: DFB signed a contract with Hadibite through Bizkailur for interests in land and property, which subjected it to Spanish civil rules (ie private law). A fundamental element in the Spanish contract formation rules is the requirement of Art 1258 Civil Code, according to which "Contracts are perfected by mere consent, and since then bind the parties, not just to the performance of the matters expressly agreed therein, but also to all consequences which, according to their nature, are in accordance with good faith, custom and the law" (emphasis as per GC's extracts). The aid given to Hadibite through the contracts was illegal under Arts 107 and 108 TFEU. Hence, the contract was null and void and, ultimately, there was no aid because DFB (through Bizkailur) was not boud to comply with an illegal contract. 

This is a circular and preposterous argument, as it would mean that there would never be illegal and unlawful State aid measures because they would be legally non-existent as a result of the supremacy and direct effect of Arts 107 and 108 TFEU, regardless of the specific (private or public) contract rules of the specific Member State. And, in any case, domestic theories of estoppel could well de-articulate the argument on strictly contractual terms--which would immediately trigger issues of good faith in negotiations and pre-contractual liability for the authorities granting aid, which is also prevented by the effet utile of Arts 107 and 108 TFEU.

Along these lines, and more elegantly, the GC considered that "as to the applicant's argument that there can be no breach of EU law because national law requires a prior notification of the planned aid to the Commission [without which there is no legally binding and unconditional commitment to actually grant the aid], it suffices to state that it cannot be declared that no infringement of EU law existed for the mere fact that [the contracts] also violated national law" (T-397/12, para 36, own translation).

Finally, it is worth mentioning that the Judgment is also interesting for the discussion of the procedural rights of sub-central public authorities in State aid infringement procedures opened against the Member State of which they are part. The GC reiterated the standard position that (given that they are interested parties, but not parties of the procedure) such authorities cannot rely on the rights of defense or try to maintain an open debate with the Commission (paras 53-63).

Is Inter-Environnement Wallonie alive? It is, but the CJEU does not maximise use of Directive's anticipatory effects (C-104/04)

In Federconsorzi and Liquidazione giudiziale dei beni ceduti ai creditori della Federconsorzi (Federconsorzi), C-104/14, EU:C:2015:125, the Court of Justice of the EU (CJEU) has addressed a rather obscure issue of succession of exemptions to comply with EU Directives that I find interesting. In my view, the underlying issue is one of good faith and estoppel related to the case law on anticipatory effect of Directives [such as Inter-Environnement Wallonie and Mangold; see M Klamert, The Principle of Loyalty in EU Law, Oxford Studies in European Law (Oxford, OUP, 2014) 76-77], although the CJEU has reached a different solution in Federconsorzi.

The preliminary reference sent by the Corte suprema di cassazione (Italy) concerned certain difficulties in the transition from the implementation of Directive 2000/35 to that of Directive 2011/7, both of them on combating late payment in commercial transactions, regarding Italian legislation modifying the interest on a debt predating those directives to the detriment of a State creditor.

Due to Italian post-WWII mechanisms to ensure supply of certain agricultural products that were in place until 1967, a large number of agricultural cooperatives held a significant volume of credit against the State (about €512 mn) due to the management of that centralised supply of cereals and other agri-food products. That debt was assigned to Federconsorzi (now in liquidation) in 1999 as part of a broader reform of the legislation applicable to agricultural cooperatives. The applicable 1999 legislation determined that the credits held by Federconsorzi against the State "up to 31 December 1997, shall be satisfied by the allocation [...] of government securities by the Minister for the Treasury, the Budget and Economic Planning". 

This rule was complemented in 2003 by a provision whereby the “interest referred [applicable to those credits] is calculated up to 31 December 1995 on the basis of the official discount rate, plus 4.4 points, with annual capitalisation, and for the years 1996 and 1997, only at the statutory interest rate.” In 2012 there was a further reform of these rules, whereby all outstanding credits against Federconsorzi (not only those up to 31.12.97) "shall bear interest calculated up to 31 December 1995 on the basis of the official discount rate, plus 4.4 points, with annual capitalisation, and for the subsequent period only at the statutory interest rate."

In simple terms, Federconsorzi's claim is that both the 2003 and the 2012 reforms impose a detriment on the State creditors by setting too low interest rates on debts accrued after 1995, which would run contrary to (both the 2000 and 2011) EU rules on combating late payment in commercial transactions. The difficulty from a technical perspective is that Italy opted to limit the temporal effects of both Dir 2000/35 and Dir 2011/7 in their respective transpositions, so that the rules derived from Dir 2000/35 did not apply to contracts concluded before 8 August 2002, and those transposing Dir 2011/7 only apply to transactions concluded on or after 1 January 2013.

The most interesting point is thus to determine whether the legally-mandated changes (ie reduction or cap) of the interest rates applicable to credits derived from pre-existing contracts with Federsconsorzi, but which were enacted in the period of effectiveness of the rules transposing Dir 2000/35 (both of them happened between 8 Aug 2002 and 1 Jan 2013) and one of them during the period for transposition of Dir 2011/7, are contrary to EU law--implicitly, at least in the second case, on the basis of the latter's anticipatory effect.

The CJEU has found that the relevant provision of EU law, including the third paragraph of Art 288 TFEU, "must be interpreted as not precluding a Member State which has made use of the option under Article 6(3)(b) of Directive 2000/35 [ie has limited its effects to after 8 August 2002] from adopting, during the period prescribed for transposition of Directive 2011/7, legislative provisions, such as those at issue in the main proceedings, which are capable of modifying, to the detriment of a creditor of the State, the interest on a debt arising out of the performance of a contract concluded before 8 August 2002." 

The reasoning followed by the CJEU to reach this conclusion deserves some closer look. According to the CJEU,

31 ... the option for a Member State, when transposing Directive 2000/35, of excluding contracts concluded before 8 August 2002, as the Italian Republic did [...] is expressly provided for in Article 6(3)(b) of that directive and, when exercised, that option has the effect of rendering all the provisions of that directive inapplicable ratione temporis to those contracts.

32 Furthermore, modifications to the disadvantage of a creditor of the State, made by a legislative act adopted during the period prescribed for transposition of Directive 2011/7, of the interest on a debt arising from the performance of a contract concluded before 16 March 2013 may not in any event be regarded as being capable of seriously compromising the attainment of the objective pursued by that directive (see judgment in Inter-Environnement Wallonie, C‑129/96, EU:C:1997:628, paragraph 45), as Article 12(4) of that directive gives Member States the option of excluding contracts concluded before that date, and the Member State concerned could therefore consider exercising that option.

33 Consequently, it does not follow from the obligation to transpose Directive 2011/7, nor can it be inferred from Article 12(3) of that directive, allowing Member States to retain or adopt provisions more favourable to the creditor than the provisions necessary to comply with that directive, or from Article 7 of that directive, on abusive agreements, terms or practices, that a Member State which has made use of the option under Article 6(3)(b) of Directive 2000/35 may not modify, to the detriment of a creditor of the State, during the period prescribed for transposition of Directive 2011/7, the interest on a debt arising out of the performance of a contract concluded before 8 August 2002, without prejudice, however, to the possibility of there being remedies under domestic law against such a modification (C-104/14, paras 31-33, emphasis added).

In my view, the reasoning of the CJEU at para 32 of Federconsorzi can be challenged regarding amendments of pre-existing credits that take place during the period of (unexcludable) validity of the Directives. An alternative reading would be that Member States are allowed to keep pre-existing credits as they were prior to 8 August 2002, but they cannot reduce commercial creditor protection because that goes against the very explicit goals of the Directives on combating late payment in commercial transactions. 

That could easily be squared with the Inter-Environnement test of compromising the objective pursued by the Directives, given that it originally was to "prohibit abuse of freedom of contract to the disadvantage of the creditor. Where an agreement mainly serves the purpose of procuring the debtor additional liquidity at the expense of the creditor ... these may be considered to be factors constituting such an abuse" (rec 19 Dir 2000/35), and did not change later (if not to stress the objective to avoid abuses) with its 2011 rewording: "[t]his Directive should prohibit abuse of freedom of contract to the disadvantage of the creditor. As a result, where a term in a contract or a practice relating to ... the rate of interest for late payment ... is not justified on the grounds of the terms granted to the debtor, or it mainly serves the purpose of procuring the debtor additional liquidity at the expense of the creditor, it may be regarded as constituting such an abuse" (rec 28 Dir 2011/7, emphasis added).


Consequently, I think that once again the CJEU has taken an easy way out in order to provide legal certainty to Member States at the expense of substantive compliance with EU law.

However, the Federconsorzi Judgment at least clarifies two points regarding Directive's anticipatory effect: 1) that it is alive and kicking, in terms of it being a general principle of EU law that, during the period of transposition of a Directive, Member States must refrain from any legislative measure that may "be regarded as being capable of seriously compromising the attainment of the objective pursued by that directive"; and 2) that the easiest option for Member States to avoid that anticipatory effect is to include cut-off deadlines in the Directives themselves.

Should Damages in Public Procurement Hinge on Disappointed Bidders’ Commercial Interests? A Comment on Energy Solutions EU Ltd v Nuclear Decommissioning Authority

This comment has been previously published in eutopialaw. I am thankful to Christopher Brown for having brought this stimulating case to my attention.

In its recent Judgment of 23 January 2015 in Energy Solutions EU Ltd v Nuclear Decommissioning Authority [2015] EWHC 73 (TCC), the High Court ruled on a preliminary issue in a public procurement dispute and held that the review court has no discretion (not) to grant damages for losses resulting from a breach of the public procurement rules. In my view, the Energy Solutions v NDA Judgment should be criticised at least for two reasons: firstly, because it misinterprets the EU rules on public procurement remedies and their link with the general principle of State liability for breaches of EU law; and secondly, because it creates an analytical framework based on the commercial decisions of disappointed bidders that would result in excessive (strategic) claims for damages. Moreover, the Energy Solutions v NDA Judgment sheds light on an important shortcoming of the system of public procurement remedies that is perpetuated under the recently adopted Public Contracts Regulations 2015 (SI 2015/102). This comment addresses these issues in turn.

Background

The dispute arises after Energy Solutions (as part of a bidding consortium, but that is not relevant for our purposes) was not chosen as the winning bidder in a tender for a nuclear waste management contract with the Nuclear Decommissioning Authority (NDA). After expressing its disagreement with the award decision and seeking additional information in the ensuing debriefing process, Energy Solutions eventually challenged the tender procedure within the 30-day limit applicable under reg.47D(2) of the applicable Public Contracts Regulations 2006 (SI 2006/5, as amended, primarily by SI2009/2992). By the time the challenge was effected, NDA had already entered into a contract with the winning bidder. Energy Solutions sought compensation for the damages it alleged to have suffered as a result of the improper conduct of the tender procedure

NDA tried to bar the damages action by arguing that a failure to challenge the award decision within the 10-day standstill period provided for under reg.32(3) Public Contracts Regulations 2006 (which could have prevented it from entering into the contract) broke the causal link between any breach of the applicable procurement rules and the ensuing damages (which, If any, would then derive from the tardiness of the challenge). NDA basically claimed that having foregone the possibility to prevent the award of the contract to another tenderer by activating the suspension foreseen in reg. 47G Public Contracts Regulations 2006, Energy Solutions had also lost the possibility to seek damages compensation. In support of that position, NDA submitted that, under reg.47J(2)(c) Public Contracts Regulations 2006, the review court retained discretion (not) to award damages resulting from a breach of public procurement rules in circumstances such as those in the case (ie the lost opportunity of litigating within the standstill period).

The High Court ruled against NDA on both points. Edwards-Stuart J found no basis for the

submission that any award of damages is dependent on the level of gravity of the breach, or any other such factor, and thus dependent on an exercise of judicial "discretion" or judgment, or whether, absent any failure to mitigate its loss, having proved a breach of the [public procurement rules] a claimant is entitled to anything other than damages that should be assessed by reference to ordinary principles. It may well be that the claimant's conduct will have been such that the court will be very reluctant to make any assumptions in its favour in relation to damages, but that is simply an aspect of the usual approach of the court to the assessment of damages (para 86).

As mentioned above, this finding is open to criticism, both for its inconsistency with EU law and because it creates an analytical framework that may result in excessive claims for damages. Each of these issues is addressed in turn. The problem derived from the diverging duration of the standstill period and the time limit for the challenge of award decisions is discussed last, as it also affects the brand new Public Contracts Regulations 2015.

The improper conceptualisation of the damages remedy with an EU law origin

In order to reach a conclusion on the discretionary or automatic nature of the damages remedy under reg.47J(2)(c) Public Contracts Regulations 2006, Edwards-Stuart J embarked on an assessment of the original provision that this regulation transposes, that is, art.2(1)(c) of Directive 89/665/EC (as amended by Directive 2007/66/EC), as well as its interpreting case law (primarily, Combinatie Spijker Infrabouw-De Jonge Konstruktie and Others, C-568/08, EU:C:2010:751). However, in my view, his Judgment fails to extract the adequate conclusions.

It is worth stressing that, as stressed in paragraph 87 of Spijker (and repeated in para 69 of Energy Solutions v NDA), art.2(1)(c) of Directive 89/665 “gives concrete expression to the principle of State liability for loss and damage caused to individuals as a result of breaches of EU law for which the State can be held responsible” (emphasis added). In my view, Edwards-Stuart J completely misses the point when he tries to distinguish the Energy Solutions v NDA case by stating that

This is not a claim against a Member State for a breach of EU law which was intended to confer a right upon a person such as the Claimant. This is a claim brought by a corporate body against a national public body under the Regulations, an English national provision [sic] (para 83, emphasis added).

If nothing else, this position simply misses the entire EU law doctrine of supremacy and direct effect of Directives (Van Duyn v Home Office, C-41/74, EU:C:1974:133) and the duty of consistent interpretation (Marleasing v Comercial Internacional de Alimentación, C-106/89, EU:C:1990:395). Moreover, it is unnecessary for the analysis the High Court needed to complete in the case at hand. In that regard, it is also worth stressing that, as clearly established by the Court of Justice in Spijker (and repeated in para 70 of Energy Solutions v NDA)

In the absence of EU provisions in that area, it is for the legal order of each Member State to determine the criteria on the basis of which damage arising from an infringement of EU law on the award of public contracts must be determined and estimated … In the absence of any provision of EU law in that area, it is for the internal legal order of each Member State, once those conditions have been complied with, to determine the criteria on the basis of which the damage arising from an infringement of EU law on the award of public contracts must be determined and estimated, provided the principles of equivalence and effectiveness are complied with (Spijker, paras 90 and 92, emphasis added).

Hence, in order to stress the point of procedural autonomy (subject only to equivalence and effectiveness), Edwards-Stuart J did not need to take the difficult (and unacceptable) position of trying to decouple Energy Solutions’ claim from its obvious EU origin by rejecting its true essence.

Following on this aspect of the Judgment, it is also important to stress that counsel properly identified a further development of relevance in terms of assessing the effectiveness requirement. Indeed, in Danske Slagterier (C-445/06, EU:C:2009:178), the Court of Justice issued additional guidance on the possibility of imposing certain duties on disappointed tenderers before they can claim compensation for damages. That case concerned a German rule whereby reparation for loss or damage cannot be obtained by an injured party that has wilfully or negligently failed to utilise an available legal remedy (§839(3) BGB). The dispute concerned precisely the level of diligence that could be required under EU law from a claimant in damages that had forgone other (theoretically) available remedies before claiming for compensation.

In a situation that is clearly comparable to the one in Energy Solutions v NDA (as implicitly acknowledged by Edwards-Stuart J in para 73), the Court of Justice ruled that

it is a general principle common to the legal systems of the Member States that the injured party must show reasonable diligence in limiting the extent of the loss or damage, or risk having to bear the loss or damage himself … It would, however, be contrary to the principle of effectiveness to oblige injured parties to have recourse systematically to all the legal remedies available to them even if that would give rise to excessive difficulties or could not reasonably be required of them … [Union] law does not preclude the application of a national rule such as that laid down in para. 839(3) of the BGB, provided that utilisation of the legal remedy in question can reasonably be required of the injured party. It is for the referring court to determine … whether that is so (paras 61 to 64).

In my view, this provides the proper framework for the analysis of Energy Solutions v NDA, as it places the High Court in the position of assessing whether requiring claimants to challenge award decisions within the 10-day standstill period is reasonable and can become a pre-condition for their damages claims, despite the fact that the applicable regulations provide them with a 30-day period to do so. That is the point of “discretion” (rectius, non-automaticity) in the award of damages derived from public procurement infringements on which the parties disagreed, and one to which I will return below.

However, Edwards-Stuart J insisted (para 78) on his view that the domestic remedy has nothing to do with the general principle of State liability under EU law (in a frontal disregard of Spijker para 87), which excludes the applicability of any guidance ultimately based on the State liability doctrine (Brasserie du pêcheur and Factortame, C-46/93, EU:C:1996:79). In my view, this creates significant confusion and implies a breach of EU law within the UK legal system (which could, if not remedied, end up resulting in liability under Köbler, C-224/01, EU:C:2003:513).

The improper focus on the commercial choices or gambles of the disappointed bidder, which could trigger excessive litigation seeking procurement damages compensation

My second criticism of the Judgment in Energy Solutions v NDA derives from the isolated and commercially-led analysis of the system of remedies provided by Directive 89/665, as transposed by the Public Contracts Regulations 2006 (and now the Public Contracts Regulations 2015). The point of departure for the analysis of the remedies system and, particularly, the granting of damages, needs to rest on two basic points. 

The first one is a point of law. Damages are conceptualised as an ancillary remedy under Directive 89/665 [for discussion see S Treumer, ‘Damages for breach of the EC public procurement rules - changes in European regulation and practice’ (2006) 17(4) Public Procurement Law Review 159-170]. In my view, this is particularly clear after the 2007 reforms [similarly, S Arrowsmith, The Law of Public and Utilities Procurement. Regulation in the EU and the UK, Vol. 1, 3rd edn (London, Sweet & Maxwell, 2014) 178; see also R Caranta, The Comparatist’s Lens on Remedies in Public Procurement (Istituto Universitario di Studi Europei, WP 2011-1) 7-8], which aimed at ensuring the effectiveness of the public procurement rules through stronger requirements of ineffectiveness of contracts concluded in their breach. This is the proper interpretation of the ensemble of remedies established under the EU rules and, in particular, given that art.2e(2) in fine Directive 89/665 expressly indicates that “[t]he award of damages does not constitute an appropriate penalty”.

Hence, damages are not an alternative or substitute remedy for the ineffectiveness of illegally awarded contracts (which can only be replaced with proper penalties imposed on the infringing contracting authority where public interest mandates the continuation of the illegally-awarded contract). Moreover, damages are not a free standing remedy, as they must be based on a (sufficiently serious) breach of procurement rules, which necessarily carries the consequence of either ineffectiveness of the contract or penalties for the contracting authority. This is also very clear from the wording of reg.47J Public Contracts Regulations 2006, which requires the review court to make findings on ineffectiveness and civil penalties, while it (simple?) authorises the court to make findings regarding damages compensation (this is discussed in paras 62ff of the Energy Solutions v NDA Judgment, but in a way that goes against the literal reading of the provision).

The second point is a point of general policy based on economic incentives. In my view, disappointed tenderers will always have an incentive to seek damages compensation. Once they have participated in a tender procedure and not been awarded the contract, it is more favourable for them to seek damages (particularly if loss of profits is recoverable) than to seek the specific performance of the tender procedure being brought back to the point previous to the relevant infringement, or even the award of the contract as such. Once they are put in a position where they have an automatic claim for damages based on the infringement of the procurement rules, they will always prefer its exercise to any alternative remedy that either does not secure them the contract (because it forces a re-tendering) or awards them the contract (as getting direct financial compensation for the lost profits is better than having to – properly – execute a contract in order to create them). 

In short, creating an automatic right to damages compensation for breach of public procurement rules would become a ‘winning lottery ticket’ for disappointed bidders. It is simple to see how such unbalanced rights to remedies would trigger excessive litigation. From a policy perspective, then, it should be required that contractors only be entitled to damages when a specific, non-financial remedy is not available (ie, when the illegally awarded contract must be protected in view of a sufficient public interest).

From this perspective, it is hard to understand how Edwards-Stuart J can consider that

If the claimant is seeking to have the award of the contract suspended, then it must start proceedings within the standstill period or, in any event, within the 30 day period and before the award of the contract. However, if the claimant is merely seeking damages, then it need only start proceedings within the 30 day period. I do not see any basis for treating these two remedies as being of different importance: that depends on a claimant's circumstances and what it is seeking to achieve - the Regulations give it a choice (para 79, emphasis added).

The relevant point, in my view, is that the Regulations do not give a choice to the Court (not the claimant) in terms of the content of the challenge against an award decision. If the Court finds that there is an infringement, it must impose the relevant remedies (not only damages), as clearly established in reg.47J Public Contracts Regulations 2006 for cases in which the contract has already been entered into (and in relatively less stringent terms, in reg. 47I Public Contracts Regulations 2006 when the contract has still not been entered into). Hence, regardless of whether the claimant complements the claim for damages with a claim for ineffectiveness or not, the Court must always consider the possibility and desirability of setting the illegally-awarded contract aside. Consequently, there should actually not be any difference, from the point of view of the Court, between the two sets of remedies indicated above. Maybe in blunter terms, under the applicable Regulations, a claimant is never allowed to actually only seek damages because the Court is never allowed to only rule on damages.

Hence, considerations such as those developed in paragraphs 87 to 91 of the Energy Solutions v NDA Judgment must be rejected, since they rely on the consideration that a claimant can legitimately conclude “for various commercial reasons, that damages would be an adequate remedy in all the circumstances” (para 87, emphasis added), and that this needs to be the guiding principle in the construction of the system of remedies for public procurement infringements.

I of course acknowledge that this is an approach that implicitly recognises that disappointed bidders do not challenge award decisions only in their own interest, but also exercise a (residual, implicit) ‘general attorney-like’ function aimed at catching and sanctioning infringements of (EU) public procurement law—in a sort of private enforcement akin but different from that developed for the equivalent competition law rules. However, I struggle to see how the system of remedies could be developed in satisfactory way exclusively considering disappointed bidders’ commercial interests.

The source of the problems: diverging time-limits beyond mandatory standstill periods

The final issue that bears comment (and much further thought) refers to the existence of time-limits for the challenge of procurement decisions that reach beyond mandatory standstill periods. The situation created under the Public Contracts Regulations 2006 has just been perpetuated under the recently adopted Public Contracts Regulations 2015, which regs.87 and 92(2) perpetuate the problem of a general time-limit for the start of proceedings that exceeds the mandatory 10-day standstill period. As Edwards-Stuart J rightly pointed out in the Energy Solutions v NDA

the Regulations permit an unsuccessful tenderer to start proceedings after the expiry of the standstill period, and therefore at a time after which the authority may have entered into the contract with the successful tenderer: indeed, the Regulations expressly contemplate this eventuality. I therefore have considerable difficulty in seeing how a decision not to start proceedings within the standstill period could be said to be unreasonable. But, as I have already said, this is a question of fact (para 54).

Hence, the problem that is (now, clearly) on the table is that the part of the time-limit for the start of proceedings that runs beyond the duration of the mandatory standstill creates space for strategic litigation, particularly if coupled with the ‘automaticity’ (or lack of discretion) for the award of damages resulting from a breach of public procurement rules discussed above. There are two possible options. On the one hand, to overrule Energy Solutions v NDA and go back to a Spijker-compliant interpretation of the Public Contracts Regulations (2006 and 2015), so that a judgment of ‘reasonableness’ of the time at which the proceedings are started is conducted by the court on a case by case basis. This option creates legal uncertainty and may trigger further litigation at EU level. On the other hand, to amend the Public Contracts Regulations 2015 so that the standstill period and the time-limit to initiate actions coincide. In that case, I would expect the standstill to be extended, rather than the time-limit to be reduced. One way or the other, though, the system needs fixing in order to close the gaps that can now trigger excessive (strategic) litigation.

GC pushes for overcompliance with EU public procurement rules in the provision of public services (T-309/12)

In its Judgment in Zweckverband Tierkörperbeseitigung v Commission, T-309/12, EU:T:2014:676, the GC has assessed the compatibility with EU State aid rules of a system of financial support to the maintenance of reserve animal disposal capacity in the case of epizootic. It is a very long and complicated Judgment and its reading is not easy, as the only available versions are in French and German. However, it is a case that should not go unnoticed. In my view, it raises two very fundamental questions where the position of the GC (and the Commission) is at least highly contentious and it will be good to see if a further appeal to the CJEU opens a door to some clarification in this area of EU economic law.

 

The first contentious issue is the economic or non-economic character of the activity at stake. In para 86 of the Judgment [and relying by analogy on the reasoning in FENIN, C-205/03, EU:C:2006:453 at para 26 and in Mitteldeutsche Flughafen and Flughafen Leipzig-Halle v Commission, C-288/11 P, EU:C:2012:821 at para 44 (but quoting its own argument in T-443/08 at para 95, which the CJEU later endorsed)] the GC concludes that "even if it is true that the applicant was required to maintain a reserve capacity in the event of an epidemic (rectius, epizootic), it does not mean that the implementation of this obligation by the applicant was related to the exercise of the prerogatives of public power" (emphasis added). In my view, and for reasons that I still need to articulate fully, this does not make good sense. However, this is a point I would like to reserve for the near future.

 

The second contentious issue is that, in the overall assessment of the GC, the fact that the arrangement between the affected German lander (and a multiplicity of regional and local authorities) and the public undertaking providing the reserve animal disposal capacity in the case of epizootic was covered by exceptions to the EU public procurement rules (either under the Teckal in-house exception or the Hamburg public-public cooperation exception, which is not entirely clear in the case) did not have any effect on the application of the Altmark criteria to the case. I know that this is an issue riddled with nuances and jargon stemming from public procurement rules, but I will try to disentangle it in a way that shows the difficulty created by the GC finding, as I see it.

 

Under the Altmark criteria (4th condition), compliance with applicable public procurement rules is a requirement for State aid granted to the provider of services of economic interest (acknowledgely, an issue related with the first point) to be compatible with Articles 107(1) and 106(2) SGEI (rectius, for State aid not to exist due to the lack of economic advantage) [for discussion, see A Sánchez Graells (2013), "The Commission’s Modernization Agenda for Procurement and SGEI" in E  Szyszczak & J van de Gronden (eds.), Financing SGEIs: State Aid Reform and Modernisation, Series Legal Issues of Services of General Interest (TMC Asser Press/Springer) 161-181]. In the absence of procurement procedures for the selection of the provider, the level of economic support needs to be "determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with [material means] so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations". This is a fiendish exercise and, generally speaking, procurement is a much easier road. Hence, structurally, there is a clear pressure on public authorities to resort to procurement procedures in order to be on the safe side re compliance with State aid rules.

 

At the same time, however, it should be highlighted that public authorities have no obligation to resort to the market in order to discharge their (public service) missions and they are fundamentally free to either cooperate with other public authorities (Hamburg) or entrust the execution of those activities in-house (Teckal). This is an area where the clash between EU Institutions and Member States has been evident and the recently approved Directive 2014/24 tries to provide a compromise solution in Art 12 by recognising that in those cases a public procurement procedure is not required (and allowing for the instrumental entities used to even carry out market activities up to a 20% of their average total turnover). 

 

In my view, the fact that public procurement rules allow for the avoidance of public tenders in the award of public contracts [including those for the provision of public services (broadly defined)] to public undertakings or other contracting authorities, creates a difficulty from a State aid/procurement interaction perspective. The basic difficulty derives from the fact that a perfectly legal decision to keep certain activities within the public sector creates very significant difficulties for the funding of that activity as soon as there is any (potential) interaction with the market--which, at least under the new rules in Art 12 of Dir 2014/24, is also a perfectly legal situation. This is a structural problem of coordination of both sets of rules that comes to put pressure on the viability of keeping the Altmark criteria untouched.

 

Indeed, following the general reasoning of the GC in Zweckverband Tierkörperbeseitigung, the absence of a procurement procedure (despite the fact that it was not required) excludes the possibility to benefit from the presumption set out in the 4th Altmark condition and creates a significant risk of breach of EU State aid rules. From the perspective of the consistency of the procurement system and the effectiveness of the general consensus that the procurement rules "should [not] deal with the liberalisation of services of general economic interest, reserved to public or private entities, or with the privatisation of public entities providing services" [Rec (6) Dir 2014/24] , this is problematic. The increased risks of infringement of State aid rules brings a very important limitation on the contracting authorities' actual freedom to resort to schemes covered by Art 12 of Directive 2014/24 and creates a clear incentive for overcompliance with public procurement rules.

 

Regardless of the benefits that more compliance with procurement rules and public tenders could bring about, the clear limits that EU constitutional rules (and the principle of neutrality of ownership in Art 345 TFEU in particular) create need to be respected and duly acknowldeged. Hence the difficulty in coordinating all these sets of provisions in a manner that is respectful with both the split of competences between Member States and the EU, and the effectiveness of EU State aid rules.

 

In my view, the CJEU should use the opportunity to clarify these complicated issues in case the GC's Zweckverband Tierkörperbeseitigung Judgment is further appealed. In the meantime, there are lots of issues that require further thought and, in particular, how to exactly reach the adequate balance in the coordination of both sets of rules.

Avoidance of EU #publicprocurement rules by artificial contract split triggers #reduction in cohesion funds for #Spain (T-384/10)

In its Judgment of 29 May 2013 in case T-384/10 Spain v Commission, the General Court of the EU (GC) has dismissed the appeal against a 2010 Commission Decision that reduced the contribution of the structural and cohesion funds to several water management infrastructure projects in Andalusia due to various infringements of the applicable EU public procurement rules.

In its audit of the execution of the project, the European Commission identified several infringements of the EU public procurement rules by the project management firm appointed by the Andalusian regional authorities (which was mandated  by art 8(1) of Regulation 1164/94 to comply with public procurement rules due to the project being financed with EU funds). 

More specifically, the Commission considered that some contracts had been illegally split in order to keep them below the value thresholds that trigger the application of EU public procurement rules, in others technical criteria had illegally required undertakings to prove they had prior experience in Spain (which constitutes a discrimination on the basis of nationality), or award criteria had illegally included 'average prices' rather than a sound economic assessment of the offers, recourse to negotiated procedures had been abused, mandatory time limits had not been respected, and the ban on negotiations after the award of the contracts had not been respected. All in all, indeed, the project seemed to be severely mismanaged in terms of public procurement compliance.

In view of such shortcomings and infringements, and considering that full cancellation of the funding would however be a disproportionate penalty, the European Commission decided to impose financial corrections that partially reduced the contribution of the EU funds to the water management infrastructure projects by between 10 and 25% of the original contribution.

Spain tried to counter the Commission Decision and justify the inexistence of the alleged infringements, but to no avail. The discussion before the GC mainly revolved around the issue of the artificial split of the contracts in order to exclude the application of the EU rules (which is discussed in paras 65-97 of T-384/10). In order to address this issue, the GC offers a recapitulation of the criteria applicable to the assessment of whether a complex project involves a single or several detachable works.

66 As a preliminary point, it should be recalled that, under Article 6, paragraph 4 of Directive 93/37, no work or contract may be split up with the intention of avoiding the application of that Directive. Moreover, Article 1, letter c) of the Directive defines the term "work" as the outcome of building or civil engineering works taken as a whole that is sufficient of itself to fulfil an economic and technical function. Therefore, to determine whether the Kingdom of Spain infringed Article 6, paragraph 4 of the Directive, it must be ascertained whether the subject of the contracts at issue was one and the same work in the sense of Article 1, letter c), of the Directive.

67 According to the case law, the existence of a "work" within the meaning of Article 1, letter c) of Directive 93/37 must be assessed in light of the economic and technical function expected from the result of the works that are the object of the corresponding public contracts (judgments of the Court of 5 October 2000, Commission / France, C-16/98, ECR p. I-8315, paragraphs 36, 38 and 47, to October 27, 2005, Commission / Italy, C-187/04 and C-188/04, not published in the ECR, paragraph 27, of January 18, 2007, Auroux and Others, C-220/05, ECR p. I-385, paragraph 41, and of March 15, 2012, Commission / Germany, C-574/10, not published in the ECR, paragraph 37).

68 Moreover, it should be noted that the Court has stated that, for the result of various works to qualify as 'work' within the meaning of Article 1, letter c) of Directive 93/37, it suffices that those meet either the same economic function or the same technical function (Commission / Italy, paragraph 67 above, paragraph 29). The verification of the economic identity and of the technical identity are thus alternative and not cumulative, as submitted by the Kingdom of Spain.

69 Lastly, it should be noted that according to the case law, the simultaneity of the call for tenders, the similarity of the notices, the unity of the geographical framework within which tenders are called for and the existence of a single contracting entity constitute additional evidence that can support the finding that different works contracts actually correspond to a single work (see, to that effect, Commission / France, paragraph 67 above, paragraph 65). [T-384/10 at paras 66-9, own translation from Spanish].

It is also worth stressing that the GC confirms prior case law and clarifies that there is no need to prove any intention on the part of the contracting authorities in order to find that they have infringed the rules against the artificial split of the contracts. In that regard,

94 Finally, the Kingdom of Spain argues that, in order to declare the existence of an infringement of Article 6, paragraph 4 of Directive 93/37, the Commission should have tested the concurrence of a subjective element, namely, the Spanish authorities' intention to split the contracts in question for the purpose of evading the obligations of the Directive. This argument cannot be accepted.

95 In that regard, suffice it to note that the finding that a contract has been split in contravention of EU rules on public procurement does not require a prior demonstration of a subjective intent to avoid the application of the provisions contained in these regulations (see, to that effect, Commission / Germany, paragraph 67 above, paragraph 49). When, as in this case, such a finding has been proven, it is irrelevant to assess whether or not the infringement results from the will of the Member State to which it is attributable, from its negligence, or even from technical difficulties that it had to face (see, to that effect, the Court of Justice of October 1, 1998, Commission / Spain, C-71/97, ECR p. I-5991, paragraph 15). In addition, it must be remembered that, in the judgment in Commission / France and Auroux and Others, cited in paragraph 67 above, in order to declare the existence of an infringement of Article 6, paragraph 4 of Directive 93/37, the Court saw no need  for the Commission to previously prove the intention of the member State concerned to avoid the obligations imposed by the Directive by splitting the contract. [T-384/10 at paras 94-5, own translation from Spanish].

The case also discusses the issue of the cross border interest of some of the contracts that, even after the prior criteria against the artificial split of contracts were applied, remained below the EU procurement thresholds. The considerations of the GC revolve basically around the fact that the works were to be conducted very close to the Portuguese border and, consequently, their cross-border interest cannot be excluded. 

Once this is found, the inclusion of discriminatory technical criteria requiring undertakings to prove they had prior experience in Spain (and, even more precisely, in Andalusia and with the specific contracting entity) shows too clearly the discriminatory design of the procurement procedures and the ensuing breach of the EU public procurement rules (in this case, the general principles applicable to tendering of contracts not covered by the Directive).

In view of all such infringements, the GC confirms the adequacy of the financial adjustments imposed by the European Commission, without finding any fault in the fact that they were determined as lump sums proportional to the initial value of the contribution by the EU funds.

In my opinion, the Judgment in Spain v Commission does not create new law in this area, but it provides clarification (particularly on the fact that single works can constitute a technical or an economic unit, at para 68) and useful guidance on the criteria applicable in the assessment of compliance with EU public procurement rules in the tendering of large and complicated infrastructure projects, which should be welcome.