Public procurement criteria, specifications and in-house contracts

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Public procurement criteria, specifications and in-house contracts Public procurement relates to the purchase of goods and/or services by public bodies, bodies governed by public law and entities

1 Public procurement criteria, specifications and in-house contracts Public procurement relates to the purchase of goods and/or services by public bodies, bodies governed by public law and entities operating in the utilities sector on the basis of special or exclusive rights granted by the state ( contracting authorities ). This is the second in a series of articles on public procurement. The first article gave a general introduction to public procurement. This article considers some of the intricate issues which may arise in a public procurement process with a particular emphasis on the award of contracts in-house and the adoption of selection and award criteria and technical specifications. In-house contract awards The public procurement directives generally apply if a contracting authority intends to conclude for pecuniary interest a contract in writing with an entity which is formally distinct from it and independent of it in regard to decision-making, irrespective of whether or not the latter entity is a contracting authority. On the other hand, keeping work in-house within a contracting authority generally does not infringe the directives and probably does not violate the EC Treaty rules prohibiting discrimination and other restrictions on trade. Similarly, the procurement directives have been held not to apply to the award of contracts to companies closely connected to a contracting authority. In other words, even though the bodies are legally distinct in form, they are treated as the same body in substance. In Teckal 1, it was held that the procurement directives do not apply to a contract to be concluded between a contracting authority and a legally distinct company if (i) the contracting authority exercises a control over the company similar to that which it exercises over its own departments and (ii) the company carries out the essential part of its activities with the contracting authority or other contracting authorities. This raises two important questions for contracting authorities considering awarding a contract in-house: first, what is required to exercise a similar control and, secondly, what does an essential part entail? With respect to the first question, the ECJ held in Stadt Halle 2 that even a minority shareholding held by a private entity in the relevant company excludes the possibility that the contracting authority can exercise control over the company to the same extent as it does over its internal departments. This was held to be the case even though the contracting authority held 75.1% of the shares in the company. Thus, a contract can generally only be awarded to a joint public-private company if the company wins the contract in a competition. 1 C-107/98. 2 C-26/03

2 Two further recent cases indicate that it may not even be permissible to open up the share capital of a company, which was awarded a contract without a competition, to private shareholders for the duration of the contract. The ECJ elaborated further on what is required in order for a contracting authority to exercise a control over a company similar to that which it exercises over its own departments in Carbotermo 3. It held that the contracting authority must have a power of decisive influence over both strategic objectives and significant decisions of the company The ECJ considered the value of the shareholding to be indicative of this level of control, but not determinative. With respect to the second question, the ECJ stated that, for a company to carry out the essential part of its activities with the contracting authority (or authorities), the company s activities must be devoted principally to the contracting authority (or authorities) and any other activities must be of marginal significance. In other words, the company s services must be intended mostly for the authority alone. Ultimately, it was held that the contracting authority did not have the requisite degree of control over the company required to render the directives inapplicable despite the fact that the contracting authority held, together with some other public authorities, all of the share capital in the company (i.e. no private company held shares in the company). This was because the boards of directors of the relevant companies were considered to have ample managerial control which they could exercise independently of the contracting authority. Thus, the power given to the board of directors as well as whether there are private shareholders are relevant. There are also further specific provisions in the directives which can be relevant to awards inhouse. However, this article is limited to an analysis of the general principles. Selection criteria The Public Sector Directive 4 (unlike the Utilities Directive 5 ) exhaustively sets out the categories of information that may be requested of candidates with a view to excluding them or, by implication, selecting them for the next round. These are the candidate s economic and financial standing; professional and technical knowledge or ability; and rejection factors such as bankruptcy. A contracting authority can limit in the contract notice the number or range of candidates to be invited. If it does not do so, then all candidates who present correct candidatures and who have the required minimum capacity levels must be invited to the next stage. On the other hand, if, in a non-open procedure, the contracting authority has specified in the contract notice the number or range of candidates which will be invited to the next stage, the range of tenderers which are most suitable must be selected by the contracting authority and invited to the next stage. A contracting authority is required to indicate in the contract notice the criteria or rules it intends to apply to select the range of most suitable tenderers. 3 C-340/04. 4 Directive 2004/18/EC. 5 Directive 2004/17/EC.

3 A contracting authority is generally not required to publish the weightings for the selection criteria. However, the ECJ has held that if, in the context of a restricted procedure, a contracting authority has laid down, prior to the publication of the contract notice or documents, the rules for weighting of the selection criteria it intends to use, the contracting authority is obliged to state them in the contract notice or tender documents. This obligation is based upon the principle of transparency and, accordingly, it seems by analogy that this may also apply where a negotiated or competitive dialogue procedure is undertaken. Award criteria If a contracting authority chooses to award a contract on the basis of the economically most advantageous tender, it is required to set out, in the contract notice or contract documents, all the award criteria which it will take into account in awarding the contract. The list of criteria set out in the directives in this regard is not exhaustive. The new directives confirm that the award criteria and their weightings must be given to tenderers in sufficient time for tenderers to be aware of them when preparing their tenders. A mere reference to the existence of the ranking in the contract notice or tender documents will not suffice for this purpose. It is possible to derogate from the requirement to give weightings if it is not possible to establish them in advance and it is justifiable in the circumstances. In this event, the criteria must be set out in descending order of importance. Only the award criteria specified in the contract notice or documents may be used by a contracting authority in evaluating a tender. It has been held that these criteria must be formulated in such a way as to allow all reasonably well-informed and normally diligent tenderers to interpret them in the same way and also that they must be interpreted by the contracting authority in the same way throughout the entire procedure. The award criteria must be linked to the subject matter of the contract and must enable the level of performance of each tender to be assessed in the light of the object of the contract, as defined in the technical specifications. The criteria should also be formulated so as to facilitate the objective assessment and comparison of tenders. The award criteria must comply with all the relevant provision of Community law including, in particular, the prohibitions flowing from the principles laid down in the EC Treaty. Accordingly, criteria which might indirectly or directly discriminate against tenderers from other member states or their employees should be avoided. A contracting authority s choice of award criteria is limited to criteria aimed at identifying the offer which is the most economically advantageous or, in other words, offers the best value for money. The ECJ has confirmed that environmental objectives can be taken into account for the purpose of identifying the most economically advantageous tender provided that the environmental objectives are linked to the subject matter of the contract. This is now reflected in the recitals of the new directives. In addition, social factors, such as a requirement that long-term unemployed be employed in performance of the contract, have been upheld as legitimate award criteria notwithstanding that the condition did not directly go to the economic advantage of the tender. Again, this is now reflected in the recitals of the new directives.

4 In general, the scope to take social issues into account during the procurement process is more limited than that for environmental issues because, by virtue of their nature, they are less likely to be clearly related to the subject of the contract. Technical specifications The procurement directives contain important rules on the use of technical specifications. Similarly, the EC Treaty has a number of provisions which operate to prohibit the use of restrictive technical specifications. The technical specifications set out the objective characteristics and scope of what the contracting authority wishes to procure and must be specified in the contract documents. The technical specifications should be drawn up clearly in terms of functional performance and requirements and must generally be defined by reference to European specifications. Each reference to a technical specification must be accompanied by or equivalent. The directives expressly prohibit, unless justified by the contract, the introduction of technical specifications which mention products of a specific make or source or a particular process which have the effect of favouring or eliminating certain providers. In particular, the indication of trade marks, patents, types, or a specific origin or production is prohibited. For example, in the Unix 6 case, the ECJ held that it was prohibited under the directives and the EC Treaty to specify that a Unix software system should be provided as this referred to a particular make. However, derogations from this rule may be permitted on an exceptional basis if the contracting authority is otherwise unable to give a sufficiently precise and intelligible description of the subject matter of the contract provided any references are accompanied by the words or equivalent. This exception is strictly interpreted. This is well illustrated by the fact that the European Commission has repeatedly taken action against member states for use of specifications such as Intel microprocessor notwithstanding that they were combined with the phrase or equivalent. Changes to criteria and specifications It often transpires during a procurement process that a contracting authority desires, for one reason or another, to change the published technical specifications or criteria which are set out in the tender documents. There is a risk that adopting such changes may result in the operation of a process and/or award of a contract which are substantially different to that initially advertised. In these circumstances, it may be argued that the contract actually awarded was not advertised or awarded in accordance with the procurement directives and/or the EC Treaty principles. Accordingly, the safest or least risky course of action in these circumstances is generally to terminate the process and to start a new procedure with the revised criteria or technical specifications. There are, however, certain counter arguments that can be made. Contracting authorities are often reluctant to terminate and start afresh and sometimes a decision in this regard may be based on the likelihood of legal challenge rather than on strict compliance with the public procurement directives and the EC Treaty. 6 C-359/93.

5 Attribute to Robert McDonagh, Solicitor, Mason Hayes+Curran. Robert McDonagh is a solicitor in the commercial department of Mason Hayes+Curran. For more information, please contact Robert at rmcdonagh@mhc.ie or The content of this article is provided for information purposes only and does not constitute legal or other advice. Mason Hayes+Curran ( is a leading business law firm with offices in Dublin, London and New York. Copyright Mason Hayes+Curran All rights reserved.

OPINION OF ADVOCATE GENERAL LÉGER delivered on 11 November

OPINION OF MR LÉGER JOINED CASES C-21/03 AND C-34/03 OPINION OF ADVOCATE GENERAL LÉGER delivered on 11 November 2004 1 1. Does the fact that a person has been involved in the preparatory work for a public