REUTERS | Andrew Winning

Transposing the Directive: What needs clarifying in the Public Contracts Regulations 2014

The government has indicated its intention to transpose Directive 2014/24/EU into UK law by the end of the year through enacting the Public Contracts Regulations 2014. They will use a copy-out approach to the transposition, reflecting the Directive more or less word for word. The aim of this approach is to avoid gold-plating and so retain the flexibility that has been a key driver for reform of the procurement rules.

However, in some areas the Directive is ambiguous. Clarity is required to avoid undue caution. After all, innovation thrives when the rules are clear. No one wants to be a test case.

Practical Law has therefore devised the following, non-exhaustive, list of key areas that we think the Cabinet Office should focus on clarifying.

Practical Law Public Sector wishes to thank David Gollancz of Keating Chambers for his helpful comments on this post.

 Article 12: Public contracts between entities within the public sector

Article 12 codifies the case law on the application of the procurement rules to public to public arrangements, specifically the exceptions established in the Teckal and Hamburg waste cases and developed in subsequent case law. The Hamburg waste exception, as it appears in Article 12, seems to allow for cooperation in relation to all activities carried out by the contracting authority (see paragraph 33 of the Preamble to the Directive). Does this mean the exemption can be used in relation to any services?

In Stadt Düren the ECJ appeared to limit the exemption to “public service tasks” as opposed to back office or incidental functions like cleaning (paragraph 22).  Will it allow for “piggy-backing”?  Hamburg waste, interpreted in the light of Stadt Düren, suggests that it will be lawful for contracting authorities to contract with each other to cooperate to use the services of a private sector third party in cases where they have combined to secure those services in the first place (see Hamburg waste paragraph 37).

Although Hamburg waste (and Article 12) do not expressly require there to be an open competition for the services that are the subject of cooperation to take advantage of the exemption, that is the implication arising from Stadt Düren. If that is (at least one of ) the factors that distinguishes those two cases, rather than the type of services and the structure of the relationship, it rather reduces the significance of the Teckal exception. And why not make that express in the Directive?

While Article 12 is welcome, it provides two very narrow exemptions and practitioners will still have to rely on the case law to interpret concepts such as the meaning of control. It would be useful to have guidance on where the line should be drawn between those two cases.

 Article 77: Reserved contracts for certain services

Article 77 allows contracting authorities to reserve tender processes for certain contracts to bidders with a public service mission. This was a concession obtained by the UK to further its policy of facilitating the establishment of staff mutuals. This explains why the definition of organisations that can benefit seems to exclude charities, as they aren’t owned or managed on the basis of employee ownership or participatory principles, unless they could be said to be run with “the active participation of employees, users and stakeholders”.  Guidance should clarify the sorts of organisations than can benefit from this provision.

Article 10: Specific exclusions for service contracts (Legal services)

Article 10(d) excludes many legal services from the scope of the Directive. If “other legal services which in the Member State concerned are connected, even occasionally, with the exercise of official authority” is interpreted widely to include most activities of public bodies, it is unclear if any legal services will be caught. Unless excluded, legal services fall within Annex XIV so must be advertised where the value of the contract exceeds EUR750,000.

 Articles 74 to 76: The light touch regime

Articles 74 to 76 introduces the light touch regime for contracts listed in Annex XIV, which replaces the current list of Part B services contracts (though not all Part B services are listed in Annex XIV). The Cabinet Office has indicated its understanding that the Commission will not investigate the award of contracts for Annex XIV services which fall below the EUR750,000 threshold and that the introduction of this regime supersedes the Interpretative Communication on contract awards not or not fully subject to the procurement directive. However, our view is that the new threshold does not mean that the award of contracts for Annex XIV services which fall below that threshold could not be challenged if they were let in breach of the EC Treaty principles, for example if they were of cross border interest but were not advertised.

 Article 53: Electronic availability of procurement documents

Article 53 requires tender documents to be available electronically at the time the contract notice is published. It is unclear how this rule should be applied to iterative procurement processes, for example, the restricted and competitive dialogue procedures. The Cabinet Office has, however, clarified that interested parties can be required to register before receiving copies of the documents, as long as no assessment is involved at that stage.

 Article 30 and 55: Post-tender negotiations and the debrief requirements

Article 30 states that final tenders in a competitive dialogue process may be “clarified, specified and optimised at the request of the contracting authority”. In addition, after the successful bidder has been identified, further negotiation is permitted to “confirm financial commitments or other terms contained in the tender by finalising the terms of the contract provided this does not have the effect of materially modifying the essential aspects of the tender or of the public procurement, including the needs and requirements set out in the contract notice or in the descriptive document and does not risk distorting competition or causing discrimination”.

This new provision is useful but risky, both in terms of procurement risk and also in prolonging the procurement outside the competitive phase. Guidance would be helpful, particularly in light of the new duty in Article 55 to disclose information on the “conduct and progress of negotiations and dialogue with tenderers” as part of the debrief information. How much information is required?

This apparent relaxation of the rules could be an error of translation if “negotiation” with its English meaning goes further than intended. (Other parts of the Directive raise concerns in this regard, see the reference in Recital 93 to books being “stamped” on recycled paper.)

 Article 48 (2): Use of PIN as a call for competition

Article 48 allows “sub-central” authorities (which includes local authorities) to use a PIN as call for competition. We wonder what the benefit is of doing this. In some cases, it may actually be a disadvantage because it is often only once an authority is ready to proceed with a procurement process, following market consultation, that it can be confident of the details it puts in its contract notice. Authorities will not be able to rely on a PIN as a call for competition where their requirements change after the PIN is published.

 Article 57(4): Exclusion for past poor performance

Article 57(4) contains new discretionary grounds for excluding bidders. Amongst them are:

(d) where the contracting authority has sufficiently plausible indications to conclude that the economic operator has entered into agreements with other economic operators aimed at distorting competition; and

(g) where the economic operator has shown significant or persistent deficiencies in the performance of a substantive requirement under a prior public contract, a prior contract with a contracting entity or a prior concession contract which led to early termination of that prior contract, damages or other comparable sanctions;

Both of these raise more questions than they answer.  What is a “plausible indication”?  It seems that it must be something less clear and definitive than an adverse finding following investigation by a regulator – but what would qualify? Contracting authorities may well wish to exclude economic operators whom they suspect of anti-competitive practices, but they will need some clear guidance on what amounts to an indication which is sufficiently plausible to meet the requirements of transparency and proportionality.

As to exclusion for poor prior performance, very few public contracts are terminated for poor performance, due to the difficulty of establishing fundamental breach and of immediately replacing the contractor.  However, many public contracts contain performance management mechanisms that fall short of termination, such as liquidated damages clauses and service credit schemes. Guidance is required on the meaning of “other comparable sanctions”.

Further questions arise, for example, can the authority take into account its own knowledge of the contractors’ performance on previous contracts, whether for that authority or others, if they are not expressly cited as clients by the contractors? How will authorities hear of poor performance on other authorities’ contracts? To have real muscle, outside the central government context, this provision relies on systematic information sharing between contracting authorities. Contracting authorities will need to see the quid pro quo to engage in information sharing on this scale, as no authority would wish to find itself alone confessing to having made a bad bargain.

 Article 72(1)(d)(ii): Modification of contracts during their term; Corporate restructuring

Article 72 (1)(d)(ii), which allows for a contract change without triggering a new procurement process where one contractor is replaced with another due to a corporate restructuring, contains strange drafting which seems to suggest restructuring applies to the replacement contractor, not the initial contractor. The drafting should be clarified to apply to a corporate restructuring of the incumbent.

 The Lord Young reforms

The Public Contracts Regulations 2014 will contain additional regulation implementing the reforms proposed by Lord Young in his report, Growing your business: A report on growing micro businesses (May 2013) and consulted on by the government last autumn.

These reforms will include a requirement to advertise every public contract valued at £25,000 or more. It will be interesting to see how these requirements interact with the rest of the regulations. For example, the remedies applicable to non-compliance, and the interaction with other law, including the NHS (Procurement, Patient Choice and Competition) Regulations (No 2) 2013, which do not require that every contract for NHS services be advertised.

Practical Law Public Sector wishes to thank David Gollancz of Keating Chambers for his helpful comments on this post.


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