Practical Law

Adrian Magnus, Partner and Stuart Stock, Associate, Berwin Leighton Paisner LLP:

On 13 June 2013, the Court of Justice of the European Union (ECJ), following the request for a preliminary ruling from the Higher Regional Court in Düsseldorf, handed down its judgment in Piepenbrock Dienstleistungen GmbH & Co. v Kreis Düren (Case C-386/11). The facts of the case have once again forced the court, and as a consequence contracting authorities and lawyers, to consider the scope of the “in-house” exceptions to the public procurement rules.

The dispute in Kreis Düren

Kreis Düren, an association of German local authorities, including the City of Düren (Stadt Düren), entered into a number of contracts with Piepenbrock to carry out cleaning services in buildings owned by Kreis Düren.

Kreis Düren subsequently agreed a contract with Stadt Düren for Stadt Düren to take sole responsibility for cleaning Kreis Düren’s office, administrative and school buildings in the Stadt Düren area, although the contract allowed Stadt Düren to use third parties to perform the assigned tasks. Stadt Düren intended to engage Dürener Reinigungsgesellschaft, a company owned by Stadt Düren, to carry out the cleaning services. The contract also provided for Stadt Düren to be reimbursed by Kreis Düren for the costs it incurred in performing the cleaning services.

Piepenbrock brought an action seeking an order prohibiting Kreis Düren from entering into the contract with Stadt Düren without conducting a competitive tender.

The case revitalises the question of when a contracting authority is required to procure services under the public procurement rules, which has been addressed numerous times in the academic literature, including this blog (for example, see Opinion, Applying the Teckal exemption and Teckal in the UK following the LAML decision).

The “in-house” exceptions

The ECJ agreed with Piepenbrock that the draft contract did not involve “in-house” service provision of the type to which the public procurement laws do not apply, namely the judicially created exceptions in Teckal (Case C-107/98) and Commission v Germany (Case C-480/06).

In Teckal, the ECJ confirmed that a contracting authority does not have to go out to competitive tender (and can therefore directly award a contract) when:

1. the service provider carries out the essential part of its activities with the contracting authority; and
2. the contracting authority exercises the same kind of control over the service provider as it does over its own departments.

It also clear that the Teckal exception will only apply where there is neither private sector ownership of the service provider nor any intention that there should be such ownership (Stadt Halle and another v TREA Leuna (Case C-26/03), at paragraph 49).

Later, in Commission v Germany, where four administrative districts in Germany concluded a contract with the City of Hamburg for waste disposal without a call for tenders, the ECJ found that public-public co-operation could be exempt from the public procurement rules where:

1. the arrangement involves only contracting authorities (i.e., there is no participation of private capital);
2. the nature of the agreement is one of genuine cooperation aimed at the joint performance of a common task, as opposed to a normal public contract; and
3. co-operation is governed only by considerations relating to the public interest.

Although not considered in Kreis Düren, there are other extensions of this line of case law. For example, we have recently advised on issues arising from the Asemfo case (Asociación Nacional de Empresas Forestales v Transformación Agraria SA (Case C-295/05)). That case establishes, at paragraph 54, that where a service provider has no choice but to accept a demand made by a contracting authority, or to set the price for the services provided, there is not a contract between the contracting authority and the service provider for the purposes of the public procurement rules, so those rules do not apply.

Application of the exceptions in Kreis Düren

The ECJ found that the proposed contract between Kreis Düren and Stadt Düren did not fall within the Teckal or Commission v Germany exceptions. When applying the conditions of Teckal, the court commented that:

“…none of those conditions is satisfied in the context of a contract such as that envisaged in the case before the referring court…first of all, neither entity controls the other. Moreover, [Kreis Düren] does not exercise over the second entity a control capable of being classified as similar to that which it exercises over its own departments.”

Nor did the exception in Commission v Germany apply, as the proposed contract was not to establish co-operation between two contracting authorities for the purpose of carrying out a public task that both needed to perform.

This is of course logical, as the court recognised that as Stadt Düren would be able to use third parties to perform its obligations under the proposed contract, the result would be “that that third party might be placed in a position of advantage vis-à-vis other undertakings active on the same market”.

The court therefore held that where one contracting authority proposes to assign to another contracting authority certain tasks, in return for financial compensation corresponding to the costs incurred, and the assignee is able to avail itself of the services of third parties that might be able to compete on the market for the accomplishment of that task, then that contract constitutes a public contract under Directive 2004/18.

The fact that no profit element was included in the compensation paid should not change this position (following the judgement in Azienda Sanitaria Locale de Lecce v Ordine degli Ingegneri della Provincia di Lecce and others (Case C 159/11)).

Comment

There is a fine line between public-public co-operation of the type exempted from the public procurement rules and the factual matrix of the Kreis Düren case. The result of falling outside the permitted exceptions is a potentially time-consuming and costly public procurement procedure for the contracting authority.

With increasing pressure on public entities to ensure efficiencies, which in turn is likely to lead to a commercial drive for more cost-saving shared services, the law in this area has never been more important or relevant. Taking the benefit of an in-house exception may help a public body achieve efficiencies rapidly, and as a result there is a temptation to push the boundaries of the decision in Commission v Germany as far as possible.

Where shared service projects are seeking to take advantage of an in-house exception, a clear assessment (undertaken early in the procurement) of the applicability of the exception is a necessity. This could help both contracting authorities and economic operators resolve or avoid a potentially contentious situation if the decision not to go out to tender is challenged. Given the short limitation period for bringing a claim, would-be suppliers are increasingly likely to feel obliged to issue a claim to protect their position in the absence of convincing arguments from the contracting authority as to why the relevant exception applies. Early disclosure by a contracting authority of its analysis may therefore avoid or encourage early settlement of disputes.