ECJ clarifies that reliance on third party capacities is not possible after the tenderer has been found not to comply with qualitative selection criteria (C-387/14)

In its Judgment of 4 May 2017 in Esaprojekt, C-387/14, EU:C:2017:338, the European Court of Justice (ECJ) provided clarification on some practical issues concerning the application of qualitative selection criteria to tenderers for public contracts seeking to rely on the capacities of third parties. The case is interesting because it concerns a situation where reliance on third party capacities is only sought once the contracting authority has reached a decision that the tenderer does not meet the relevant qualitative selection criteria on its own (or in the consortium configuration used in the submission of the initial tender).  

Thus, the case combines elements of clarification or supplementation of tender documentation with issues derived from the principles of non-discrimination, equal treatment and transparency. The Esaprojekt Judgment is based on the 2004 EU procurement rules (Dir 2004/18, Arts 2, 45, 48 and 51) but it is relevant for the interpretation of the 2014 rules as well (Dir 2014/24/EU, Arts 18, 19, 57 to 60, 63 and, specially, 56(3)).

In the case at hand, and in simple terms, the tenderer that submitted the preferred bid for the provision of IT services (Konsultant Komputer) had declared that it had the required previous experience through the execution of two contracts prior to the tender. However, on a challenge from a disappointed bidder (Esaprojekt), the contracting authority found that such previous experience was not acceptable because it did not concern contracts of the same type required in the tender documentation. At this stage, Konsultant Komputer sought to 'complement' the documentation evidencing its experience by providing the contracting authority with "a new list of supplies in which it relied on the experience of another entity, Medinet Systemy Informatyczne sp. z o.o. concerning two supplies ... It also sent an undertaking from Medinet Systemy Informatyczne to provide, as an advisor and consultant, the resources necessary for the performance of the contract ..." (C-387/14, para 27).

The contracting authority was satisfied with the submission of such 'complement' to the previous documentation, but (unsurprisingly), this was challenged by Esaprojekt on the basis that "Konsultant Komputer ... had submitted false information and had failed to prove that it had fulfilled the conditions for participation in the procedure" (para 29). The Polish court referring the case for preliminary ruling to the ECJ condensed the main legal issues as concerning whether the EU procurement rules (1) "preclude an economic operator, when it supplements documents at the request of the contracting authority, from relying on supplies of services other than those it included in its initial bid or from being able to rely, in that regard, on supplies of services made by another entity on whose resources it did not rely in its initial bid" (para 30); (2) whether, in the circumstances of the case, "the economic operator is able to ... rely on the capacities of other entities where it does not itself fulfil the minimum conditions required in order to take part in the tender procedure for a service contract" (para 31); and (3) the need to determine "in which circumstances an economic operator may be held liable for serious misconduct and, therefore, be excluded from taking part in a public contract" due to the supply of incorrect or misleading information concerning its previous experience (para 32). However, the questions referred to the ECJ do not map these three legal issues, but rather raise some other (more specific) issues.

It will not be surprising to find that the ECJ, in general, declared that proceeding as Konsultant Komputer and the contracting authority did was not allowed under the relevant provisions. On the main point concerning whether there was a breach of the requirements derived from the procurement rules and the general principles of procurement, after relying extensively on the principled framework consolidated in Partner Apelski Dariusz, the ECJ clarified that "Konsultant Komputer submitted documents to the contracting authority which were not included in its initial bid after the expiry of the time limit laid down for submitting applications for the public tender concerned. In particular ... it relied on a contract performed by another entity and the undertaking by the latter to place at the disposal of that operator the resources necessary for the performance of the contract ... Such further information, far from being merely a clarification made on a limited or specific basis or a correction of obvious material errors ... is in reality a substantive and significant amendment of the initial bid, which is more akin to the submission of a new tender" (paras 41-42). Thus, "by allowing the presentation by the economic operator concerned of the documents in question in order to supplement its original tender, the contracting authority unduly favour[ed] that operator as compared with other candidates and, thereby, breache[d] the principles of equal treatment and non-discrimination of economic operators and the obligation of transparency which derives from them" (para 44).

The ECJ later addressed more specific issues. The following is thus just a short excerpt of the relevant parts of the Esaprojekt Judgment in relation to each of the issues--while some more critical reflections are saved for the final part of this post.

First, the ECJ considered the possibility of combining the knowledge and experience of two entities to meet a selection criterion where those entities do not separately have the capacities required to perform a particular contract, and where the contracting authority considers that the contract concerned cannot be divided and must thus be performed by a single operator. On that point, after slightly reinterpreting the question, the ECJ established that the relevant rules do "not allow an economic operator to rely on the capacities of another entity ... by combining the knowledge and experience of two entities which, individually, do not have the capacities required for the performance of a particular contract, where the contracting authority considers that the contract concerned cannot be divided, in that it must be performed by a single operator, and that such exclusion of the possibility to rely on the experience of several economic operators is related and proportionate to the subject matter of the contract which must be therefore performed by a single operator" (para 54).

Second, it considered the possibility for an economic operator that participates individually in an award procedure for a public contract to rely on the experience of a group of undertakings, of which it was part in connection with another public contract, irrespective of the nature of its participation in the performance of the latter. The ECJ found that the EU rules allow "an economic operator, for a particular contract, to rely on the capacities of other entities, such as a group of undertakings of which it is a member, so long as it proves to the contracting authority that that operator will have at its disposal the resources necessary for the execution of the contract" (para 60). Further, it clarified that "where an economic operator relies on the experience of a group of undertakings in which it has participated, that experience must be assessed in relation to the effective participation of that operator and, therefore, to its actual contribution to the performance of an activity required of that group in the context of a specific public contract" because, from a practical perspective, "an economic operator acquires experience not by the mere fact of being a member of a group of undertakings without any regard for its contribution to that group, but only by directly participating in the performance of at least part of the contract, the whole of which is to be performed by that group" and, consequently, "an economic operator cannot rely on the supplies of services by other members of a group of undertakings in which it has not actually and directly participated as experience required by the contracting authority" (paras 62-64).

Third, the ECJ was asked whether the possibility to exclude economic operators that are guilty of serious misrepresentation when supplying information requested by the contracting authority may be applied where the information is of such a nature as to affect the outcome of the call for tenders, irrespective of whether the economic operator acted intentionally or not. On this point, the ECJ concluded that the discretionary exclusion "may be applied where the operator concerned is guilty of a certain degree of negligence, that is to say negligence of a nature which may have a decisive effect on decisions concerning exclusion, selection or award of a public contract, irrespective of whether there is a finding of wilful misconduct on the part of that operator" (para 78) and, more explicitly, that "in order to sanction an economic operator which has submitted false declarations by excluding its participation in a public contract, the contracting authority is not required ... to provide evidence of the existence of wilful misconduct on the part of that economic operator" (para 72).

Finally, the considered whether EU procurement law allows an economic operator to justify compliance with an experience-based selection criterion by relying simultaneously on two or more contracts as a single contract (or, in other words, by combining different partial elements of experience), despite the fact that the contracting authority has not expressly provided for such a possibility either in the contract notice or in the tender specifications. On this point, the ECJ found that "it is conceivable prima facie that the experience necessary for the performance of the contract concerned, acquired by the economic operator in the performance of not one, but two or more different contracts, may be regarded as sufficient by the contracting authority and thereby enables that operator to win the public contract concerned" (para 85) and, therefore, "in so far as the possibility to rely on experience acquired in relation to several contracts has not been excluded either in the contract notice or in the tender specifications, it is for the contracting authority, subject to review by the competent national courts, to check whether the experience gained from two or more contracts, having regard to the nature of the works concerned and the subject matter and purpose of the contract concerned, ensures the proper performance of that contract" (para 87).

Overall, the level of clarification provided by the ECJ in the Esaprojekt should be welcome, although it also raises the broader issue of the extent to which national courts should be willing to engage in principles-based reasoning without referring extremely detailed references for preliminary rulings. There is a clear trade-off to be achieved between ensuring homogeneous interpretation of the EU public procurement rules and (not) overburdening the ECJ. If every case where the general principles of public procurement (now in Art 18(1) Dir 2014/24/EU) are applicable is referred to the ECJ, the system will not be able to cope. In my view, none of the issues raised in this case were particularly complex or controversial, and could have been resolved by general reference to the principles of equal treatment and transparency, which makes me wonder if there may not be a need for a different approach to these issues.

For example, discussion between practitioners has raised the issue whether it would be acceptable for an undertaking in a situation similar to Konsultant Komputer's first submission to 'complement' the selection documentation by supplying a fresh list of new own references (or references to its own experience not submitted in the original documentation). I would submit that it is not allowed. In my view, it is clearly not allowed if the experience has been gained after the date for the submission of tenders, because that establishes the relevant cut off point for the assessment of qualitative suitability (or responsiveness). And, also clearly (although it may be more debatable), this would not be allowed if the experience was gained before that date but the economic operator failed to include the relevant references in the original documentation. I think that this is the case because such an omission of previous experience is not observable by the contracting authority in view of the submitted documentation alone (how could it second guess whether the economic operator provided a full, or even the best, set of references?)--which, in my opinion, excludes it from the scope of application of the rules controlling the request for clarifications under both the Manova case law and the specific provisions of Art 56(3) Dir 2014/24/EU, except if the entire document concerning experience was missing (which would make the defect visible to the contracting authority). Functionally, I would think that this contributes to the manageability of the selection process, while being entirely compliant with the principles of equal treatment and non-discrimination.

Anyway, the point I am trying to make is that, if issues at this level of detail need to be clarified by the ECJ in relation with each of the provisions of the procurement directives, the potential gains of having regulation partly based on general principles will be lost. Therefore, I wonder if it would be possible to reconsider the need for preliminary references where the application of general principles could do.

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....

ECJ gets first principles of EU public procurement law wrong, as demonstrated by the regulation of dynamic purchasing systems (C-410/14)

In its Judgment of 2 June 2016 in Falk Pharma, C-410/14, EU:C:2016:399, the European Court of Justice (ECJ) had to revisit the very concepts of procurement and of public contract for the purposes of the interpretation and application of EU public procurement law. The ECJ decided to approach the issue from a 'first principles' perspective and to work deductively on the basis of the general principles and main aims of EU public procurement in order to delineate the contours of what a public contract is. In my opinion, the result of this process is faulty and needs to be criticised because the ECJ only looked at part of the general principles and aims of EU public procurement law and, more importantly, by avoiding a systematic analysis and ignoring the regulation of dynamic purchasing systems, reached a solution that creates internal inconsistency within the system of EU public procurement regulation.

The dispute in the Falk Pharma case

In the case at hand, the ECJ was requested to interpret whether a so-called 'authorisation system' implemented by German authorities in relation with the acquisition of pharmaceutical products was covered by the EU public procurement rules or not. In simple terms, under the relevant part of German social security law concerned with statutory health insurance, 'in the case of the supply of a medicinal product which has been prescribed by indicating its active ingredient and whose replacement by a medicinal product with an equivalent active ingredient is not excluded by the prescribing doctor, pharmacists must replace the medicinal product prescribed with another medicinal product with an equivalent active ingredient in respect of which a rebate contract has been concluded' (C-410/14, para 11). Or, in other words, when operating under the statutory health insurance scheme, German pharmacists are under an obligation to dispense generics for which a rebate scheme is in place unless the prescribing doctor has insisted on a specific branded product.

In order to establish such a rebate system for a given anti-inflammatory drug used to treat inflammatory bowel disease (mesalazine), in the Falk Pharma case, the relevant authorities 'published in the supplement to the Official Journal of the European Union a notice concerning an "authorisation procedure" for the conclusion of rebate contracts ... concerning medicinal products whose active ingredient is mesalazine. The rebate rate was fixed at 15% of the ‘ex-factory’ price and the period covered ran from 1 October 2013 to 30 September 2015' (para 13). It should be noted that the 'procedure provided for the authorisation of all interested undertakings meeting the authorisation criteria and for the conclusion with each of those undertakings of identical contracts whose terms were fixed and non-negotiable. Furthermore, any other undertaking fulfilling those criteria also had the opportunity of acceding on the same terms to the rebate contract scheme during the contract period' (para 14). The German authorities considered that this scheme was not covered by the EU public procurement rules (para 15).

As a result of the procedure, the German authorities entered into only one rebate contract with Kohlpharma. A competing interested undertaking challenged the setting up of the rebate scheme on the basis that the so-called 'authorisation procedure' was actually a public contract and, consequently, should have been advertised and awarded in compliance with the applicable EU rules (at the time, Directive 2004/18). The referring court explained how German courts were divided on this issue. 'For certain courts a public contract is a contract which gives the chosen operator exclusivity, so that a contract which is concluded with all the operators who wish to conclude such a contract does not constitute a public contract. Other courts take the view that all contracts concluded by a contracting authority are public contracts and that the choice of one of the tenderers, and therefore the grant of exclusivity, is an obligation of a contracting authority' (para 22).

After an elaborate discussion on the arguments both for and against the consideration of these schemes as public contracts (paras 23-30), the basic question posed to the ECJ is to determine 'whether Art 1(2)(a) Dir 2004/18 must be interpreted as meaning that a contract scheme ... through which a public entity intends to acquire goods on the market by contracting throughout the period of validity of that scheme with any economic operator who undertakes to provide the goods concerned on fixed terms, without choosing between the interested operators, and allows those operators to accede to that scheme throughout its period of validity, must be classified as a public contract within the meaning of that directive' (para 32).

The ECJ's position in the Falk Pharma case

The ECJ's first reaction is to stress that '[a]dmittedly, ... such a scheme leads to the conclusion of contracts for a pecuniary interest between a public entity, which could be a contracting authority within the meaning of Directive 2004/18, and economic operators whose objective is to supply goods, which corresponds to the definition of "public contracts" laid down in Article 1(2)(a) of that directive' (para 33). In my view, the analysis should have ended here and the ECJ should have limited itself to declare the authorisation scheme covered by EU public procurement rules (more details on the reasons why, below).

However, in order to answer more fully this seemingly simple question, the ECJ decided to go back to the very basics and interrogate Dir 2004/18 for its general aims and goals. In that regard, and after repeating some standard arguments on the EU procurement rules' goal to avoid favouritism in the award of public contracts (paras 34-36), the ECJ establishes the most controversial part of the Falk Pharma Judgment by finding that:

37 ... where a public entity seeks to conclude supply contracts with all the economic operators wishing to supply the goods concerned in accordance with the conditions specified by that entity, the fact that the contracting authority does not designate an economic operator to whom contractual exclusivity is to be awarded means that there is no need to control, through the detailed rules of Directive 2004/18, the action of that contracting authority so as to prevent it from awarding a contract in favour of national operators.

38      It is therefore apparent that the choice of a tender and, thus, of a successful tenderer, is intrinsically linked to the regulation of public contracts by that directive and, consequently, to the concept of ‘public contract’ within the meaning of Article 1(2) of that directive (C-410/14, paras 37 & 38, emphasis added).

I find both points faulty for the reasons explored below. Moreover, I find this position very worrying because of the sweeping implications it has for the definition of public contract and because this understanding of public procurement as an activity necessarily requiring the choice of a successful tenderer will carry over to the interpretation and enforcement of Directive  2014/24 because, according to the ECJ:

40 ... that principle is expressly set out in the definition of the concept of ‘procurement’, now set out in Article 1(2) of Directive 2014/24, in respect of which one aspect is the choice by the contracting authority of the economic operator from whom it will acquire by means of a public contract the works, supplies or services which are the subject matter of that contract (C-410/14, para 40, emphasis added).

What the ECJ got wrong

The absence of risk of protectionism or competitive restriction

Regarding the finding of the ECJ in para 37 of Falk Pharma that there is no need to control the conclusion of this type of contractual mechanisms under the specific rules of the EU public procurement directives because there is no risk of award those contracts in favour of national operators, I submit that the ECJ failed to understand the mechanics of the supply chain involved in the so-called 'authorisation scheme' or 'rebate contracts' and that this led to an improper assessment of the risk of favouritism or protectionism of certain economic operators. Moreover, I also submit that, in any case, this is not the correct logic to follow and that a competition-based assessment should lead to a different conclusion.

These rebate contracts only make sense for entities active in Germany and with working distribution mechanisms whereby their medicine is made available to German pharmacies. The mechanics of the rebate are quite obvious in requiring two pre-conditions for the actual delivery of the medicine by a specific provider. One, it is necessary for the provider to conclude the required rebate contract with the authorities managing the statutory health insurance system. Two, it is necessary for the provider to have its products available in German pharmacies. Even then, there is no guarantee to end up selling the product if a competing supplier has a rebate scheme in place, has its products available at the pharmacy and has a lower selling price because, despite being obliged to grant the same rebate (in the case, 15%) it has a lower ex-factory price (for details on this, see the recent report on pharmaceutical product pricing).

Therefore, in my view and to the extent to which it is possible to grasp the economic reality behind the case on the basis of the pyrrhic information available in the Falk Pharma Judgment, the creation of this rebate scheme still clearly has potential 'protectionistic' effects in that it favours pharmaceutical companies already established and active in Germany over potential suppliers that would need to enter the pharmacy distribution channels in order to take part in the 'authorisation scheme'. Thus, in my view, even from the perpective of limiting EU public procurement rules to an anti-protectionism goal, the ECJ would have gotten the assessment wrong by remaining at a level of generality that masks the fact that the scheme formally open to any willing supplier is actually skewed in favour of pharmaceutical companies already active in Germany--which, in terms of the ECJ's analysis, are more likely to be domestic companies.

But, beyond this, I think that the ECJ's assessment was also affected by tunnel vision and failed to evaluate the situation from the perspective of the pro-competitive orientation of the EU public procurement rules, despite the referring court's stress on the fact that 'EU law on public contracts has always been characterised by an element of competition' (para 25). From this functional perspective, it is criticisable that the ECJ decided to exclude the 'authorisation scheme' from the scope of application of the EU public procurement directives on the basis that it does not constitute a public contract, while at the same time going back to the obscure requirement that its award is based on a procedure that 'in so far as its subject matter is of certain cross-border interest, is subject to the fundamental rules of the [TFEU], in particular the principles of equal treatment and of non-discrimination between economic operators and the consequent obligation of transparency, that obligation requiring that there be adequate publicity. In that regard, Member States have some latitude in a situation such as that at issue in the main proceedings for the purpose of adopting measures intended to ensure observance of the principles of equal treatment and the obligation of transparency' (para 44).

This only creates legal uncertainty and potentially limits competition for the contract. It would have been preferable for the ECJ to actually look at the entirety of the goals of the EU public procurement rules and, it being clear that the 'authorisation scheme' 'leads to the conclusion of contracts for a pecuniary interest between a public entity ... and economic operators whose objective is to supply goods' (para 33), subject it to compliance with the specific rules of the EU public procurement directives (concerning dynamic purchasing systems, as elaborated below), if nothing else for the purpose of ensuring competition for these contracts.

The need to make a final choice as an essential element of procurement procedures

Furthermore, the ECJ's finding in para 38 of the Falk Pharma Judgment, that 'one aspect [of the concept of procurement] is the choice by the contracting authority of the economic operator from whom it will acquire by means of a public contract the works, supplies or services', should also be criticised. First, because too strict an interpretation of this element of choice of the specific contractor, supplier or service provider (ab initio or from the start of the contractual relationship) by the contracting authority can result in ridiculous results, e.g. where end users are given choice between alternative suppliers, be it within framework agreements or dynamic purchasing systems, or where the contracting authority draws from contractual systems set up by third parties (such as central purchasing bodies, or through other types of collaborative procurement). In many a case, the contracting authority that sets up the general contractual scheme does not necessarily end up choosing the provider itself or in a direct manner. But this should not exclude the applicability of the EU public procurement rules.

Secondly, reliance on the specific wording of Art 1(2) Dir 2014/24 should also be criticised because the ECJ seems to read too much into the definition of procurement created ex novo in this instrument. Remarkably, when the European Commission proposed the text of the new Directive in 2011, it defined procurement in a broader and functional manner by indicating that: 'Procurement within the meaning of this Directive is the purchase or other forms of acquisition of works, supplies or services by one or more contracting authorities from economic operators chosen by those contracting authorities, whether or not the works, supplies or services are intended for a public purpose'. The justification given by the Commission for this introduction was that '[t]he basic concept of "procurement" ... has been newly introduced in order to better determine the scope and purpose of procurement law and to facilitate the application of the thresholds'. However, there is no further explanation of the purpose of this definition.

The final text of Art 1(2) of Dir 2014/24 deviates from the proposal by establishing that 'Procurement within the meaning of this Directive is the acquisition by means of a public contract of works, supplies or services by one or more contracting authorities from economic operators chosen by those contracting authorities, whether or not the works, supplies or services are intended for a public purpose' (the emphasis indicates the differences). This change of drafting originates from the second compromise text of the Council (see here), and the debate seems to only have revolved around the need for a public contract to exist in order to trigger the application of the Directive. To the best to my knowledge, the element of choice of economic operator was not controversial and did not attract any relevant attention in the legislative process--as evidenced, for instance, by the fact that the provision is not dealt with in any detail in relevant scholarship: Constant De Koninck, Thierry Ronse and William Timmermans, European Public Procurement Law. The Public Sector Procurement Directive 2014/24/EU Explained through 30 Years of Case Law by the Court of Justice of the European Union, 2nd edn  (Wolters Kluwer Law & Business, 2015). 

As clearly criticised by Caranta, 'the new definition provided in Article 1(2) of Directive 2014/24 still [leaves] wide margins of ambiguity' and, further, '[t]he legislative drafting technique here leaves much to be desired. The two provisions might easily have been merged, and the distinction between “procurement” and “public contract” is simply lost in most of the other language versions. Moreover, “public contract” is clearly the genus, with “procurement” being the species. The genus should have been defined first, with the specification elements (in writing, acquisition, pecuniary interest, and so on) added at a later stage' [see R Caranta, 'The changes to the public contract directives and the story they tell about how EU law works' (2015) 52(2) Common Market Law Review 391-459, emphasis added]. As Caranta points out, the definition seems to only bring about a change in terms of stressing the requirement for an 'acquisition' to take place (for the reasons he explains), which in the Falk Pharma case is uncontroversial.

Overall, then, I cannot understand why the ECJ got so hung up on the specific wording of Art 1(2) Dir 2014/24 and why it gave such relevance to the need to choose a supplier for procurement to exist. From a functional perspective, it would seem superior to interpret procurement as any contractual mechanism whereby the contracting authority determines which suppliers can supply and under which conditions, regardless of whether there is any element of exclusivity or whether any potential supplier is excluded from the scheme. This functional approach certainly bodes better with the regulation of undisputed (if not too regularly used) EU public procurement mechanisms such as the dynamic purchasing system, which was simply ignored by the ECJ.

How the ECJ ignored the regulation of dynamic purchasing systems

Indeed, beyond the general criticisms above, the Falk Pharma Judgment must also be criticised because the ECJ enters into a very limited systematic analysis of the EU public procurement architecture that ignores the regulation of dynamic purchasing systems, both in Dir 2004/18 and Dir 2014/24. Indeed, the ECJ simply considered that

41 ... it should be noted that the special feature of a contractual scheme, such as that at issue in the main proceedings, namely its permanent availability for the duration of its validity to interested operators and, therefore, its not being limited to a preliminary period in the course of which undertakings are invited to express their interest to the public entity concerned, suffices to distinguish that scheme from a framework agreement. In accordance with Article 32(2), second paragraph, of Directive 2004/18, contracts based on a framework agreement can only be awarded to economic operators who are originally parties to that framework agreement (C-410/14, para 41, emphasis added).

That is true. But the ECJ's analysis flagrantly failed to assess the compatibility of those general features (ie permanent availability of the possibility to opt in to interested operators, despite not having expressed initial interest) with the regulation of dynamic purchasing systems under Art 33 Dir 2004/18, which are precisely this type of contractual arrangement. Granted, the specific rules on the running of the dynamic purchasing system would have required some further assessment and the fact that pharmacists draw from the electronic catalogue resulting from the rebate agreements could have created some difficulties regarding the specific mechanics of the dynamic purchasing systems envisaged in Dir 2004/18 regarding the need for indicative tenders and the mini-competitions for each award (not so much under the revised rules of Art 34 Dir 2014/24, especially if coupled with the rules on electronic catalogues in Art 36 Dir 2014/24), but that should not have excluded from the scope of application of EU public procurement rules (both under Dir 2004/18 and, more importantly, Dir 2014/24) any type of contractual scheme permanently open to economic operators willing to supply for the entirety of its duration. In my view, this is bound to result in a major systematic incongruence--why call something a dynamic purchasing system and comply with EU public procurement rules if you can call it 'authorisation process' or any other creative name and do away those requirements? Definitely not a desirable outcome from the perspective of regulatory consistency.

Final thoughts

For all the reasons explored above, I think that the Falk Pharma Judgment is an undesirable development of EU public procurement law. Moreover, I am puzzled by the absence of an Advocate General Opinion. Given the fundamental relevance of the concept of public contract, and now of procurement itself, for the application of this regulatory system, the worse thing to do is to carry out analyses based on linguistics without exploring the systematic and functional implications of definitional issues. In my view, this is an issue worth resending to the CJEU for clarification at the earliest possible opportunity as soon as any slightly different "authorisation scheme" or "alternative acquisition mechanism" is tendered in any of the Member States, so that the full ECJ and, if possible, on the back of a strong Advocate General Opinion, has the opportunity to fix this--or, on the contrary, continues a dangerous path of recognition (and legitimacy) of "non-procurement acquisition systems" subjected to the basic principles of the EU Treaties and the requirements derived from the internal market fundamental freedoms, but not to the EU public procurement rules, which would extend the difficulties traditionally linked to below-thresholds and not-covered contracts to a whole new dimension of acquisition contractual mechanisms, and which I would certainly find undesirable.

State aid in rescue of firms in difficulty, merger control and patent litigation (T-79/14): quite a mix

In its Judgment of 1 March 2016, Secop v Commission, T-79/14, EU:T:2016:118, the General Court (GC) has ruled on the procedural rights of interested parties in a State aid case (for discussion of related case law in this area, see here). The Secop Judgment is interesting because it includes some analysis of the similarities and differences of the rights of interested (third) parties for the purposes of, on the one hand, State aid control (Arts 107-108 TFEU and Reg 2015/1589 and its predecessor Reg 659/1999) and, on the other, merger control (Reg 139/2004) under EU law.

The analysis in the Secop case is complicated by two elements. First, by the fact that the State aid was given under the guidelines on rescue and restructuring aid (in their 2004 version) and, because parts of the restructuring plan implied the acquisition of assets of the financially distressed group (ACC) by a competitor (Secop), this required merger control clearance from the European Commission. Second, the analysis is complicated by the subsequent emergence of a patent litigation between the two industrial conglomerates involved in both State aid and merger procedures (ie between the 'surviving' parts of the distressed ACC group and Secop as the acquirer of some of its assets), which have an open dispute as to whether a valid licence agreement for the use of proprietary patented technology was entered into as part of the rescue plan. This dispute has led to two sets of proceedings concerning those patents, respectively before the German and Italian courts. It is interesting to look at the case and the GC's reasoning.

background of the case

The case concerned two industrial conglomerates: ACC and Secop. ACC was an industrial conglomerate with an Italian holding company and a number of subsidiaries at different levels. For the purposes of the case, it is only necessary to note that HCH was the holding company of the group, ACC Compressors was the operating subsidiary of first level, and ACC Austria was an operating subsidiary of second level. Following financial difficulties within the ACC group, all its subsidiaries and the holding company itself were eventually declared insolvent. As the GC summarises,  'following a call for tenders launched in the context of ACC Austria’s insolvency proceedings, a purchase agreement for the assets of ACC Austria was signed between [Secop] ... and ACC Austria’s insolvency administrators. That contract was made subject to the suspensive condition of a declaration by the European Commission that the transaction was compatible with the internal market' (para 3).

In order to cover the liquidity needs of the ACC group and to allow it to continue its activities pending the preparation of a restructuring or liquidation plan, Italy gave ACC Compressors (the parent company ACC Austria) a State guarantee of 6 months for credit lines in support of liquidity needs of a total amount of EUR 13.6 million. Subsequently, the European Commission decided not to raise objections to the acquisition of ACC Austria’s assets by Secop (see Case No COMP/M.6996 - Secop/ ACC Austria, the ‘merger decision’), thereby validating the contract between Secop and ACC Austria's insolvency administrators. Shortly afterwards, the Commission also decided not to raise objections to the State aid given by Italy to ACC Compressors (see Case No COMP/SA.37640 - Rescue aid for ACC Compressors S.p.A. - Italy, the 'contested State aid decision').

What I find interesting in the case is that the challenger of the State aid (Secop) is the beneficiary of the asset disposal under the merger procedure, which was in turn opposed by ACC Compressors as the parent company of the 'traded subsidiary' under insolvency administration (ACC Austria). Thus, Secop and ACC, as industrial conglomerates, hold opposite interests in the merger and the State aid cases.

It would seem that, by aiming to enforce the exclusive rights deriving from the patents acquired together with ACC Austria's assets against the former parent company (ACC Compressors), as well as challenging the State aid given by the Italian Republic to that same company, Secop is clearly engaging in an all-out strategy to eliminate a competitor at at time when it faces financial difficulties (which would nullify the Italian intervention to rescue it). Conversely, it could also seem that by selling assets linked to specific patents and claiming to have retained a right of use of the patents (through the entering of a valid licence agreement, or otherwise), and at the same time receiving State aid from Italy, ACC could be trying to obtain dual support in times of financial difficulty--ultimately at the expense of a competitor (Secop) that acquired assets at a time of distress. These issues and considerations are not particularly clear in the Secop Judgment, but my intuition is that they influenced the outcome of the case.

In particular, the GC's Secop Judgment refers to the action by Secop seeking the annulment of the State aid received by ACC Compressors after the transfer of ACC Austria's assets took place. For the purposes of our discussion, the two main arguments submitted by Secop are that: 1) the European Commission should have taken into account that, following the transfer of ACC Austria's assets, ACC Compressors would not be legally entitled to keep on using certain patents now held by Secop, which would prevent ACC from carrying on with its industrial activity and, ultimately, infringe the 2004 guidelines for rescue and restructuring aid; and 2) that it is discriminatory for ACC Compressors to have been able to oppose the acquisition of ACC Austria's assets by Secop in the framework of the merger control procedure (where ACC Compressors was recognised as an interested party), whereas Secop has been denied the equivalent possibility in the State aid case because the Commission decided not to open a formal investigation. The discussion focuses on each of these arguments in turn. 

Arguments regarding the use of patents

On the substance of the dispute, primarily, Secop contends that 'following the disposal of ACC Austria’s assets, the patents at issue can no longer be used by ACC Compressors, which must, therefore, be considered to be a firm emerging from the liquidation of an existing firm and, consequently, a newly created firm ... failing the ability to use the disputed patents, ACC Compressors does not have sufficiently developed structures to be eligible for rescue aid' (para 30). This argument concerns point 12 of the 2004 guidelines for rescue and restructuring aid, which indicated that 'a newly created firm is not eligible for rescue or restructuring aid even if its initial financial position is insecure. This is the case, for instance, where a new firm emerges from the liquidation of a previous firm or merely takes over that undertaking’s assets. A firm is in principle considered to be newly created for the first three years following the start of operations in the relevant field of activity. Only after that period will it become eligible for rescue or restructuring aid …’. The GC dismisses this argument on the following grounds:

35 First, ACC Compressors and ACC Austria were initially part of one and the same undertaking in that the two companies produced the same products, on two different sites, but under the same economic management. Upon the transfer of ACC Austria’s earning assets ... it is true that the volume of activity of this firm had been reduced, since the activities corresponding to the production site located in Austria no longer formed part of it. Thus, the undertaking to which the contested aid ... was granted comprised only ACC Compressors’ earning assets. Nevertheless, ACC Compressors managed the undertaking concerned, both before and after the transfer, and ... it carried on ... albeit in a reduced fashion, the production and marketing of compressors, which was the traditional activity of that undertaking. Therefore, contrary to the applicant’s claims, it was the same undertaking as that which had been making compressors since 1960.

36 Second, ... in the situation in which the assets are transferred, it is not the entity formed of the economic activities retained by the transferor company that is relevant, for the purpose of the classification ‘newly created firm’ but the entity made up of the economic activities of the transferee company, within which the transferred assets were integrated. It is also normal and reasonable for a firm in difficulty to dispose of certain assets and focus its activity on its core business, whether from a geographical or sectoral perspective, in order to improve the chances of economic recovery. Point 39 of the Guidelines thus expressly envisages the divestment of assets as a means of preventing undue distortions of competition, in the context of the examination of a restructuring plan for the purpose of granting restructuring aid. It would be contrary to the overall purpose of the Guidelines for such a sale of assets to lead systematically to the exclusion of the transferring company from the benefit of rescue aid.

37 The fact that a legal dispute over the ... patents is under way between ACC Compressors and [Secop] cannot lead to a different assessment.

38 Indeed, at the time the contested [State aid] decision was adopted, the Commission could take into account only the factual and legal situation of ACC Compressors as it was at the date of that adoption; at the most, it had to take into account the foreseeable evolution of that situation, for the period for which rescue aid was granted, namely, six months ... However ... at the date of the adoption of the contested [State aid] decision, ACC Compressors was still using the disputed patents to manufacture compressors ... and there was nothing to indicate that this situation could have changed in the six following months.

39 In addition, the existence of the patent dispute was not relevant for the purposes of assessing the compatibility of the contested aid with the internal market. It is true that, had [Secop] won the case in the patent dispute, it would have been conceivable that ACC Compressors could no longer have used the disputed patents and would, accordingly, have had to cease production of a significant range of compressors ... However, this also depended on the question of whether, after a possible defeat in the courts, ACC Compressors could obtain a user license for those patents. Moreover, it could not be ruled out from the outset that it could offset the possible disposal of its activity producing ... compressors against the development of other lines or activities. In any event, it must be considered that it was not for the Commission to anticipate the outcome of the patent dispute, pending before the national courts at the date of adoption of the contested decision, by substituting its assessment for that of the competent courts, seized of that dispute.

40 Finally, it is appropriate to reject the applicant’s argument ... that the Commission ought to have taken into account that, in the context of the merger procedure, ACC Compressors itself had indicated that, if [Secop] were to purchase the assets of ACC Austria, it could not pursue its production of compressors, since it would not then be able to use the disputed patents any longer.

41  In the merger decision, the Commission considered ACC Compressors’ claims and found that, given, in particular, the patent dispute between the two parties, it was not inconceivable that an agreement on a licence should be concluded between them. The Commission had therefore already found, in the merger proceedings, that ACC Compressors’ claims that it could not pursue the production of compressors when there was no licence for the disputed patents were hypothetical (T-79/14, paras 35-41, emphasis added).

I find the second part of the GC's position difficult to share. In particular, I struggle to understand why the Commission did not require the granting of a sufficient licence as a condition for the clearance of the merger. This would have avoided all issues leading to the existing patent litigation and, in the specific circumstances of the State aid case, it would have also allowed for the rescue and restructuring plan to avoid a major risk of discontinuation of industrial activity by the beneficiary of the aid, which would have seemed desirable.

It is clear that the GC cannot review or alter the merger decision when reviewing the contested State aid decision, but it seems strange that it shows such deference to the Commission's argumentation in the merger decision, which is very weak. Indeed, the Commission's considerations (as presented by the GC in para 40 and 41) are equally hypothetical and rather counterintuitive--why would the companies reach a licence agreement now, when they could have included it in the negotiations leading up to the contract for the purchase of the assets? Were there any impediments for ACC Compressors to obtain that licence via the insolvency administrators of its subsidiary ACC Austria.

Somehow, it seems that the Commission was cutting corners in its analysis during the merger control procedure, particularly by failing to impose a behavioural remedy that could certainly have dispelled uncertainties in the market prognosis. Then, it seems once again too lenient for the GC to allow the Commission to also cut corners in the State aid case by refusing to open a formal investigation, where it would have had to take Secop's arguments into consideration and dispose of them in a more robust manner. 

Arguments regarding the asymmetrical access by interested parties to merger and State aid procedures

On the procedural side of the dispute, in short, Secop submits that 'it has not had the opportunity to present its views in the State aid procedure, initiated for the benefit of ACC Compressors, in order to oppose the grant of the contested aid to the latter ... On the other hand, ACC Compressors has had the opportunity, as part of the merger procedure, to oppose the takeover of ACC Austria’s assets by [Secop]. In its view, it is a violation of the principle of equal treatment, since the competitive relationship between the ACC group and the Secop group ought to have been assessed in both procedures' (para 61). The GC also dismisses this argument, following this reasoning:

62 ... the principle of equal treatment, as a general principle of EU law, requires comparable situations not to be treated differently and different situations not to be treated in the same way, unless such treatment is objectively justified ...

63 ... both in the context of a State aid procedure and in a merger procedure, the competitors of the firms at issue have no right to be automatically associated with the procedure, and this is particularly so in the context of the initial phase of the procedure, in the course of which the Commission makes a preliminary assessment of either the aid at issue, or the notified merger.

64 Indeed, first, as far as concerns State aid ... It is only in connection with the [the actual investigation stage referred to by Article 108(2)], which is designed to allow the Commission to be fully informed of all the facts of the case, that the FEU Treaty imposes an obligation, for the Commission, to give interested parties notice to submit their comments ... It follows that interested parties, other than the Member State concerned, including competitors of the aid recipient, such as the applicant in the present case, have no right to be associated with the procedure in the preliminary examination stage.

65 Secondly, as regards mergers, ... the Commission may hear — on its own motion — natural or legal persons other than the notifiers and other parties to the proposed merger, but it is obliged to do so only on the two conditions that those persons have a sufficient interest and that they make such a request ...

66 ... ACC Compressors’ position in the merger procedure was not only that of a competitor of [Secop], the undertaking notifying the merger, but also one of an ‘interested party’ ... in that, as ACC Austria’s parent company, all assets of which were to be sold, it had to be assimilated to the vendor of those assets and, therefore, had the status of party to the proposed merger. However, unlike its competitors ... interested parties have the right to express their view at all stages of the procedure, including the preliminary phase ...

67 It must therefore be stated that the situation of the applicant, under the State aid procedure that led to the contested decision, is different from that of ACC Compressors under the merger procedure that led to the decision on the merger, in that ACC Compressors had a right to be heard before the adoption of that latter decision. Consequently, the fact that the Commission did not, before adopting the contested decision, give the applicant the opportunity to state its point of view does not infringe the principle of equal treatment (T-79/14, paras 62-67, emphasis added and references to further case law have been omitted).

I find this analysis too formalistic and, in my view, the GC has ultimately failed to engaged with the argument on discrimination at a substantive level. The recognition of specific rights to interested parties in merger proceedings is not a useful comparator in this case. Rather, the GC could (should) have focused on the different access to the Commission given to competitors in merger cases and in State aid cases, particularly at the initial stage of proceedings, and assessed from a functional perspective whether that difference makes sense (ie is justified and proportionate). In my view, it is not. 

More importantly, the Secop Judgment moves in the same direction as a line of case law where the GC is making it increasingly difficult for competitors to challenge State aid decisions. This is very counter-productive for the consolidation of a State aid 2.0 control system, where the Commission needs to increasingly rely on market intelligence provided by third parties and market complaints raised by competitors. This line of case law will, ultimately, consolidate the ineffectiveness of the EU State aid rules [as discussed in detail in A Sanchez-Graells, “Digging itself out of the hole? A critical assessment of the Commission’s attempt to revitalise State aid enforcement after the crisis” (2016) Journal of Antitrust Enforcement, forthcoming]. This is an undesirable development of EU economic law in this area. 

Interesting case on the award of public contracts and 'prudential budgetary reserves' (T-90/14)

The tension between budgetary rules and public procurement law was rather evident in a recent case before the General Court (GC) of the Court of Justice of the European, which it decided in its Judgment of 8 October 2015 in Secolux v Commission, T-90/14, EU:T:2015:772 (only available in French). The case concerned procurement by the EU Institutions, but the situation seems to be applicable mutatis mutandis to procurement covered under the general EU rules for procurement carried out by the Member States.

In the case at hand, the European Commission received a tender valued at 4,222,680 euros and selected it for award of the contract, therefore disclosing that information to all other bidders as part of the general debriefing process. However, the Commission finally awarded the contract for a value of 5,070,000 euros and disclosed this information in the relevant contract award notice. There was no indication of the reasons behind this higher contract value in the contract award notice.

In view of this significant discrepancy between both contract values, a disappointed tenderer challenged the award decision on the basis of an infringement of the requirements of transparency, equal treatment and non-discrimination resulting from the applicable rules. Quite surprisingly, the GC dismissed this claim, on the basis of the following reasoning:

27. At the outset, it should be noted that, as the Commission has explained, the amount of the successful offer was 4,222,680 euros ... The contract has been awarded for 5 070 000 euros euros ... This later amount is equivalent to the rounded price of the offer of the successful tenderer, increased by 20% for indexing and contingencies.

29. In this context, the applicant alleges in particular infringement of the principles of transparency and equal treatment ... as well as rules on advertising.

32. ... it is understood that the applicant's complaint, in essence, is directed against the award of the contract for an amount equivalent to the offer of the successful tenderer , increased by 20% for indexing and contingencies.

37 According to the relevant case law, the principle of transparency, which is essentially aimed to ensure the absence of favoritism or arbitrariness on the part of the contracting authority, means that all terms and conditions of the award procedure must be drawn in a clear, precise and unequivocal manner in the contract notice or in the contract documents (judgments of 29 April 2004, Commission / CAS Succhi di Frutta, C-496/99 P, EU: C: 2004: 236, paragraph 111, and of 26 September 2014, Evropaïki Dynamiki / Commission, T-498/11, EU: T: 2014: 831, paragraph 119).

38 In order to ensure respect for equal treatment and transparency, it is important that all the elements taken into consideration by the contracting authority to identify the economically most advantageous tender and, if possible, their relative importance are known potential bidders when preparing their tenders (judgment of 21 July 2011, Evropaïki Dynamiki / EMSA, C-252/10 P, EU: C: 2011: 512, paragraph 30, and Evropaïki Dynamiki / Commission, paragraph 37 above, EU: T: 2014: 831, paragraph 121).

39 All these requirements were satisfied in this case. Indeed, it clearly appears from the case file that the terms and conditions of the award process have been clearly established in the call for tenders. In addition, the allocation by the Commission for a market value including indexing and contingencies was irrelevant in the identification of the most economically advantageous tender. 

40 ... the first plea must be rejected as in part inoperative and in part unfounded. None of the arguments advanced by the applicant is in any event undermine that conclusion. 

41 First, it should be stressed that the Commission limited itself to  the creation of a budgetary reserve, which will not be used in the absence of contingencies and applications for price indexing. Therefore, it is not a unilateral increase of the price proposed by the successful tenderer. Moreover, the reservation of a higher budget to deal with unforeseen circumstances constitutes prudential behavior on the part of the Commission (T-90/14, paras 27, 29, 32 and 37 to 411, own translation from French and emphasis added).

The reasoning of the GC is quite surprising because, regardless of the budgetary mechanisms or restrictions affecting the Commission's decision (eg under the applicable rules, there was no specific provision allowing for contract modification, which would have created an incentive for the Commission to create a budgetary reserve by means of inflating the award price), the contract was in fact awarded at a higher price than the tender submitted by the bidder, which is a significant deviation of the standard procedural requirement and opens the door to post-award negotiations that can completely undermine the pre-award competition. 

Such preservation of the result of the ex ante competition for the contract is precisely the reason why contract modification has been the object of specific regulation under Art 72 Dir 2014/24. In short, pre-empting the effectiveness of rules on contract modification (either inexistent rules that prevent it or positive rules that constrain it) by artificially increasing the price of the contract at award stage should not be seen as legitimate prudential behaviour on the part of the contracting authority, but a deviation of power that certainly infringes the basic requirements of the duty of good administration.

Moreover, in the case at hand, there were allegations that the offer was abnormally low and that the chosen tenderer would be unable to perform the contract at the prices offered. Under those circumstances, the GC would have been well advised to dig deeper into the (actual) reasons for the Commission to create such a budgetary reserve by means of an artificially high contract price (which is certainly not best or even standard practice), which could reasonably have been motivated by an actual knowledge that the execution of the contract could not be performed at the offered prices without increases (due to indexation, contingencies or otherwise). And this seems particularly suspicious in view of the fact that the awardee of the contract was an incumbent provider of services to the European Commission.

Thus, in my opinion, the decision of the GC in Secolux v Commission is either naive or way too formal and a better analysis of the behaviour of the Commission would be necessary. I am no expert in EU budgetary law at all, but I find it odd that the Commission can simply decide to create 'prudential budgetary reserves' by means of a manipulation of the prices of the contracts it awards. If there is a further appeal to the CJEU, I would prompt the Court to consider the issue under a more stringent framework.

CJEU offers clarification on identification and assessment of conflicts of interest in public procurement (C-538/13)

In its Judgment in eVigilo, C-538/13, EU:C:2015:166, the Court of Justice of the European Union (CJEU) has offered very much needed guidance on the assessment of conflicts of interest in public procurement, as well as the degree of forcefulness with which contracting authorities must tackle such important issue. 

Its guidance will be very relevant in the interpretation and application of Article 24 of Directive 2014/24 on conflicts of interest, as well as the related provision on exclusion of economic operators affected by conflicts of interest [art 57(4)(e) dir 2014/24]. Thus, the eVigilo Judgment and the CJEU's reasoning deserve some close analysis.

Concerning the issue of conflict of interest (there were others to be addressed, particularly regarding the time limits for the challenge of a procurement decision), it is worth highlighting that eVigilo challenged the award on the basis of a bias of the experts who evaluated the tenders due to the existence of professional relations between them and the specialists referred to in the winning tender. 

More specifically, eVigilo claimed that the specialists referred to in the tender submitted by the successful tenderers were colleagues at the Technical University of Kaunas (Kauno technologijos universitetas) of three of the six experts of the contracting authority who drew up the tender documents and evaluated the tenders. In its view, this was sufficient to strike the award decision down.

This is a situation that, in my view, would now be clearly covered by Art 24 Dir 2014/24 (not applicable to the conflict time-wise), whereby "conflicts of interest shall at least cover any situation where staff members of the contracting authority or of a procurement service provider acting on behalf of the contracting authority who are involved in the conduct of the procurement procedure or may influence the outcome of that procedure have, directly or indirectly, a financial, economic or other personal interest which might be perceived to compromise their impartiality and independence in the context of the procurement procedure" (emphasis added). 

Hence, the CJEU's assessment of the claim is highly relevant. After reiterating its case law on the principles of equality, non-discrimination and transparency, and stressing that "[u]nder the principle of equal treatment as between tenderers, the aim of which is to promote the development of healthy and effective competition between undertakings taking part in a public procurement procedure, all tenderers must be afforded equality of opportunity", the CJEU considered that

37 The finding of bias on the part of an expert requires in particular the assessment of facts and evidence that comes within the competence of the contracting authorities and the administrative or judicial control authorities.
38 It should be pointed out that neither Directive 89/665 nor Directive 2004/18 contains specific provisions in that regard [and, it is worth adding, Directive 2014/24 does not contain any specific procedural rules as to how to assess these issues either].
39 The Court has consistently held that, in the absence of EU rules governing the matter, it is for every Member State to lay down the detailed rules of administrative and judicial procedures for safeguarding rights which individuals derive from EU law. Those detailed procedural rules must, however, be no less favourable than those governing similar domestic actions (principle of equivalence) and must not render impossible in practice or excessively difficult the exercise of rights conferred by EU law (principle of effectiveness) (see judgment in Club Hotel Loutraki and Others, C‑145/08 et C‑149/08, EU:C:2010:247, paragraph 74 and the case-law cited).
40 In particular, the detailed procedural rules governing the remedies intended to protect rights conferred by EU law on candidates and tenderers harmed by decisions of contracting authorities must not compromise the effectiveness of Directive 89/665 (see judgment in Uniplex (UK), C‑406/08, EU:C:2010:45, paragraph 27 and case-law cited).
41 It is not, as a general rule, contrary to those principles for an expert’s bias to be established in a Member State solely on the basis of an objective situation in order to prevent any risk that the public contracting authority could be guided by considerations unrelated to the contract in question and liable, by virtue of that fact alone, to give preference to one tenderer.
42 Concerning the rules on evidence in that regard, it should be pointed out that ... the contracting authorities are to treat economic operators equally and non-discriminatorily and to act in a transparent way. It follows that they are assigned an active role in the application of those principles of public procurement.
43 Since that duty relates to the very essence of the public procurement directives (see judgment in Michaniki, C‑213/07, EU:C:2008:731, paragraph 45), it follows that the contracting authority is, at all events, required to determine whether any conflicts of interests exist and to take appropriate measures in order to prevent and detect conflicts of interests and remedy them. It would be incompatible with that active role for the applicant to bear the burden of proving, in the context of the appeal proceedings, that the experts appointed by the contracting authority were in fact biased. Such an outcome would also be contrary to the principle of effectiveness and the requirement of an effective remedy ... in light, in particular, of the fact that a tenderer is not, in general, in a position to have access to information and evidence allowing him to prove such bias.
44 Thus, if the unsuccessful tenderer presents objective evidence calling into question the impartiality of one of the contracting authority’s experts, it is for that contracting authority to examine all the relevant circumstances having led to the adoption of the decision relating to the award of the contract in order to prevent and detect conflicts of interests and remedy them, including, where appropriate, requesting the parties to provide certain information and evidence.
45 Evidence such as the claims in the main proceedings relating to the connections between the experts appointed by the contracting authority and the specialists of the undertakings awarded the contract, in particular, the fact that those persons work together in the same university, belong to the same research group or have relationships of employer and employee within that university, if proved to be true, constitutes such objective evidence as must lead to a thorough examination by the contracting authority or, as the case may be, by the administrative or judicial control authorities.
46 Subject to compliance with the obligations under EU law, and specifically with those referred to in paragraph 43 above, the concept of ‘bias’ and the criteria for it are to be defined by national law. The same applies to the rules relating to the legal effects of possible bias. Thus, it is for national law to determine whether, and if so to what extent, the competent administrative and judicial authorities must take into account the fact that possible bias on the part of the experts had no effect on the decision to award the contract (C-538/13, paras 37 to 46, emphasis added).

In my view, the CJEU has handed down a very straightforward Judgment that clearly favours (or, actually, imposes) a strong reaction to allegations of bias and conflict of interest, and which sets a very high threshold regarding the relevant duty of the contracting authority to investigate and to act. Ultimately, this derives from the obligation of contracting authorities to enforce the general principles of procurement (now in art 18 dir 2014/24, which includes the principle of competition) and its diligent administration implications.

The reader will allow me to submit that this is fundamentally in line with my interpretation of the rules on conflict of interest under Art 24 Dir 2014/24 as developed in Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 369-373, which I reproduce below. 

Consequently, I cannot but welcome the CJEU's eVigilo Judgment and hope that Member States will take it into due account in the transposition of the rules of Dir 2014/24 into their domestic legal orders.

As a preliminary issue with potential ramifications regarding all the decisions to be adopted at the stage of evaluation of the tenders and award of the contract—although, as mentioned previously, it is also relevant in various previous phases related inter alia to the qualitative selection of tenderers—in our view, contracting authorities are under an obligation to adopt an approach to the development of these tasks that is both neutral and possibilistic. The existence of a duty of neutrality or ‘impartiality’ of procurement procedures—and, implicitly, of contracting authorities—as a specification of the principles of equal treatment, of the ensuing transparency obligation, and of the principle of competition is a clear requirement of the system envisaged in the directives,[1] and has been hinted at in the EU case law by requiring that ‘the impartiality of procurement procedures’ is ensured.[2]

The existence of such a neutrality requirement is fundamental, and the EU judicature has consistently stressed the obligation of contracting authorities to guarantee equality of opportunity of tenderers at each and every stage of the tendering procedure.[3] Importantly, it should be stressed that

Under the principle of equal treatment as between tenderers, the aim of which is to promote the development of healthy and effective competition between undertakings taking part in a public procurement procedure, all tenderers must be afforded equality of opportunity when formulating their tenders, which therefore implies that the tenders of all competitors must be subject to the same conditions (emphasis added).[4] Moreover, this ultimately rests on the clear position that a system of undistorted competition, as laid down in the Treaty, can be guaranteed only if equality of opportunity is secured as between the various economic operators.[5]

In this regard, it has been emphasised that contracting authorities are under a particular duty to avoid conflicts of interest[6] with the result that, after the discovery of such a conflict of interests between a member of the evaluation committee and one of the tenderers, the contracting authority must act with due diligence and on the basis of all the relevant information when formulating and adopting its decision on the outcome of the procedure for the award of the tender at issue in order to comply with the basic obligation of ensuring equality of opportunity.[7] This might require different reactions from the contracting authority, depending on the circumstances of the case, but should always be oriented towards preventing instances of discrimination—ie, not favouring, or discriminating against, a tenderer as a result of the bias of the member of the evaluation committee.[8] Therefore, there should be no doubt as to the neutrality requirements in the conduct of the evaluation of tenders and award of public contracts. This is now particularly clear in light of the provisions in article 24 of Directive 2014/24, which expressly requires that Member States ensure that contracting authorities take appropriate measures to effectively prevent, identify and remedy conflicts of interest arising in the conduct of procurement procedures so as to avoid any distortion of competition and to ensure equal treatment of all economic operators.[9] This measure is complemented by the new ground for exclusion of economic operators in clonflict of interest (as discussed above §II.A.vii). Consequently, under the 2014 rules, contracting authorities are under a very clear mandate to detect, investigate and effectively tackle conflicts of interest.

As regards the adoption of a ‘possibilistic’ or anti-formalistic approach—oriented towards maintaining the maximum possible degree of competition by avoiding the rejection of offers on the basis of too formal and/or automatic rejection criteria—it is important to underline that the relevant case law has already offered some guidance that points in this direction by stressing that ‘the guarantees conferred by the European Union legal order in administrative proceedings include, in particular, the principle of good administration, involving the duty of the competent institution to examine carefully and impartially all the relevant aspects of the individual case’ (emphasis added)[10]—which, in the case of public procurement, should be interpreted as requiring contracting authorities to exercise due care in the evaluation of the bids submitted by tenderers.[11] To be sure, the obligation of contracting authorities to review the bids for possible mistakes and to contact tenderers to seek for correction is limited as a mandate of the principle of non-discrimination (below §II.B.ix); but the scope for clarification of the tenders and for the establishment of rules allowing for a flexible treatment of formally non-fully compliant bids (on this, below §II.B.iv), support the adoption of a possibilistic approach towards the evaluation of bids as a specification or particularisation of the duty of due care or diligent administration that is required of contracting authorities.

In this regard, as reasoned by EU case law, the evaluating team is under an obligation to conduct the revision of the bids in accordance with the principle of good administration and is, consequently, under an obligation to exercise the power to ask for additional information in circumstances where the clarification of a tender is clearly both practically possible and necessary, and as long as the exercise of that duty to seek clarification is in accordance with the principle of equal treatment.[12] It is submitted that this means that the evaluating team is to adopt an anti-formalistic approach that renders the effective appraisal of the tenders possible—regardless of minor deficiencies, ambiguities or apparent mistakes. Indeed, as stressed by the jurisprudence, in cases where the terms of a tender themselves and the surrounding circumstances known to the authority indicate that the ambiguity probably has a simple explanation and can be easily resolved, then, in principle, it is contrary to the requirements of good administration for an evaluation committee to reject the tender without exercising its power to seek clarification. A decision to reject a tender in such circumstances is, consequently, liable to be vitiated by a manifest error of assessment on the part of the institution in the exercise of that power,[13] and could result in an unnecessary restriction of competition. In that regard, it should be taken into consideration that

it is also essential, in the interests of legal certainty, that the contracting authority should be able to ascertain precisely what a tender offer means and, in particular, whether it complies with the conditions set out in the specifications. Thus, where a tender is ambiguous and it is not possible for the contracting authority to establish, swiftly and efficiently, what it actually means, that authority has no choice but to reject that tender (emphasis added).[14]

Therefore, in a nutshell, contracting authorities should ensure that the evaluation of bids leading to the award of the contract is based on the substance of the tenders, adopting a possibilistic or anti-formalist approach that excludes purely formal decisions that restrict competition unnecessarily; subject, always, to guaranteeing compliance with the principle of equal treatment. In that vein, it is important to stress that the duty of good administration does not go so far as to require the evaluation team to seek clarification in every case where a tender is ambiguously drafted.[15] Particularly as regards calculations and other possible non-obvious clerical mistakes, the duty of good administration is considerably more restricted and the evaluation team’s diligence only requires that clarification be sought in the face of obvious errors that should have been detected by the purchasing agency when assessing the bid.[16] This is so particularly because the presence of non-obvious errors and their subsequent amendment or correction might result in breaches of the principle of equal treatment.[17] Therefore, as general criteria, it seems that the relevant case law intends to favour the possibilistic approach hereby advanced, subject to two restrictions: i) that it does not breach the principle of equal treatment (ie, that it does not jeopardise the neutrality of the evaluation of tenders), and ii) that it does not require the contracting authority to develop special efforts to identify errors or insufficiencies in the tenders that do not arise from a diligent and regular evaluation.

Therefore, it is submitted that contracting authorities should develop the activities of evaluation of bids and award of the contract on the basis of such a neutral and possibilistic approach—which must be aimed at trying not to restrict competition on the basis of considerations that are too formal (ie, effectively to appraise which is the tender that actually or in substance offers the best conditions, regardless of minor formal defects or non-fulfilment of immaterial requirements) and, at the same time, ensuring compliance with the principle of non-discrimination and the ensuing transparency obligation.

---

[1] In this regard, it should be stressed that the principles of non-discrimination and competition present close links; see above ch 5 §IV.A, with references to the relevant case law.

[2] Case C-324/98 Telaustria and Telefonadress [2000] ECR I-10745 62. See also H-J Prieβ, ‘Distortions of Competition in Tender Proceedings … and the Involvement of Project Consultants’ (2002) 156.

[3] See: Case C-496/99 P Succhi di Frutta [2004] ECR I-3801 108. See also Case T-406/06 Evropaïki Dynamiki (CITL) [2008] ECR II-247 83; Joined Cases T-376/05 and T-383/05 TEA–CEGOS [2006] ECR II-205 76; Case T-160/03 AFCon Management Consultants [2005] ECR II-981 75; and Case T-145/98 ADT Projekt [2000] ECR II-387 164.

[4] Case T-345/03 Evropaïki Dynamiki v Commission (CORDIS) [2008] ECR II-341 143; and Case T-86/09 Evropaïki Dynamiki v Commission [2011] ECR II-309 61.

[5] Case C-202/88 France v Commission [1991] ECR I-1223 51; Case C-462/99 Connect Austria [2003] ECR I-5197 83; and Case T-250/05 Evropaïki Dynamiki (OPOCE) [2007] ECR II-85 46.

[6] As now emphasised in recital (16) of Directive 2014/24: ‘Contracting authorities should make use of all possible means at their disposal under national law in order to prevent distortions in public procurement procedures stemming from conflicts of interest. This could include procedures to identify, prevent and remedy conflicts of interests.’

[7] Case T-160/03 AFCon Management Consultants [2005] ECR II-981 75; and, by analogy, Case T-231/97 New Europe Consulting [1999] ECR II-2403 41. Recently, see Case T-297/05 IPK International v Commission [2011] ECR II-1859 122.

[8] For an overview of evaluating teams regulation and practice in the US—which focus on similar concerns—see SW Feldman, ‘Agency Evaluators in Negotiated Acquisitions’ (1991–1992) 21 Public Contract Law Journal 279; and DI Gordon, ‘Organizational Conflict of Interest: A Growing Integrity Challenge’ (2005–2006) 35 Public Contract Law Journal 25.

[9] Arrowsmith (n 28) 1295–96. Generally, see P Lascoumes, ‘Condemning corruption and tolerating conflicts of interest’, in JB Auby, E Breen and T Perroud (eds), Corruption and Conflicts of Interest: A Comparative Law Approach, Studies in Comparative Law and Legal Culture (Cheltenham, Edgar Elgar, 2014) 67–84. See also DI Gordon and G Racca, ‘Integrity Challenges in the EU and U.S. Procurement Systems’, in G M Racca and C R Yukins (eds), Integrity and Efficiency in Sustainable Public Contracts (Brussels, Bruylant, 2014) 117–46.

[10] Case T-236/09 Evropaïki Dynamiki v Commission [2012] pub. electr. EU:T:2012:127 45; and Joined Cases T-376/05 and T-383/05 TEA–CEGOS [2006] ECR II-205 76.

[11] ibid.

[12] See: Case T-211/02 Tideland Signal [2002] ECR II-3781 37–38, and cited case law. See also C-599/10 Slovensko [2011] ECR I-10873 and Case C-336/12 Manova [2013] pub. electr. EU:C:2013:647.

[13]  Case T-211/02 Tideland Signal [2002] ECR II-3781 37–38; Case T-63/06 Evropaïki Dynamiki v OEDT [2010] ECR II-177 98; Case T-195/08 Antwerpse Bouwwerken v Commission [2009] ECR II-4439 56; Case T-554/08 Evropaïki Dynamiki v Commission [2012] pub. electr. EU:T:2012:194 56; and Case T-553/11 European Dynamics Luxembourg v ECB [2014] pub. electr. EU:T:2014:275 300.

[14] Case T-211/02 Tideland Signal [2002] ECR II-3781 34; Case T-63/06 Evropaïki Dynamiki v OEDT [2010] ECR II-177 98; and Case T-8/09 Dredging International and Ondernemingen Jan de Nul v EMSA [2011] ECR II-6123 71.

[15] See: Case T-211/02 Tideland Signal [2002] ECR II-3781 37 ab initio.

[16] See: Case T-495/04 Belfass [2008] ECR II-781 65–71.

[17] Case T-19/95 Adia Interim [1996] ECR II-321 43–49. Similarly, Case T-169/00 Esedra [2002] ECR II-609 49; and Case T-195/05 Deloitte Business Advisory [2007] ECR II-871 102.

CJEU flexibilises treatment of formally non-compliant bids in public procurement (C-336/12)

In its Judgment of 10 October 2013 in case C-336/12 Manova, the Court of Justice of the EU (CJEU) has  followed its own approach in Slovensko and created some room for the flexible interpretation of the rules on formal compliance of bids submitted in public procurement procedures.

 

In Manova, the contracting authority had requested some of the tenderers to provide financial statements that had not been included in their bids after the deadline for their submission had ellapsed. Given that this decision was challenged on the grounds of a potential breach of the principle of equal treatment, the referring court decided to request a preliminary ruling from the CJEU, which was asked "whether the principle of equal treatment is to be interpreted as precluding a contracting authority from asking a candidate, after the deadline for applying to take part in a tendering procedure, to provide documents describing that candidate’s situation – such as a copy of its published balance sheet – which were called for in the contract notice, but were not included with that candidate’s application".

 

In rather clear terms (although some caveats may have been dispensed with, in my opinion), the CJEU ruled that:

the principle of equal treatment must be interpreted as not precluding a contracting authority from asking a candidate, after the deadline for applying to take part in a tendering procedure, to provide documents describing that candidate’s situation – such as a copy of its published balance sheet – which can be objectively shown to pre-date that deadline, so long as it was not expressly laid down in the contract documents that, unless such documents were provided, the application would be rejected. That request must not unduly favour or disadvantage the candidate or candidates to which it is addressed (C-336/12 at para 42).

In my view, the Manova Judgment must be welcome, both for its functional approach and for its alignment with domestic practices in a significant number of EU Member States--as discussed in Sánchez Graells, A, "Rejection of Abnormally Low and Non-Compliant Tenders in EU Public Procurement: A Comparative View on Selected Jurisdictions", in S Treumer and M Comba (eds), Award of Public Contracts under EU Procurement Law, vol. 5 European Procurement Law Series, (Copenhagen, DJØF, 2013) 267-302. This seems a good step in the direction of avoiding that overly strict formal requirements get in the way of actual good public procurement practices.