Cleaning up

A recent European case on the direct award by a contracting authority of a contract for services to another public body has major implications for local authorities, writes Jack Hayward.

Local authorities often deliver services jointly for a variety of reasons. In addition they also sub-contract and contract other local authorities and public bodies to deliver services on their behalf. Sometimes contracting authorities come together and deliver services using the Teckal exemption where they exercise the same degree of control over an entity that they exercise over their own departments. (Case C‑107/98 Teckal [1999] ECR I‑8121)

On the other hand public procurement academics and practitioners have long held the view that where a contracting authority directly awards a contract for the delivery of services to another public body where there are commercial entities capable of delivering the service then such an award is potentially in breach of the Public Contract Regulations. Until now there has been very little case law directly on the point. However Case C‑386/11, Piepenbrock Dienstleistungen GmbH & Co. KG v Kreis Düren, has changed that in a dramatic way.

The Court’s judgement on this case was pronounced on 13 June 2013. The facts of the matter were as follows; Kreis Duren (an association of German local authorities which includes the City of Duren) decided to award a cleaning contract for its offices situated in the City of Duren to a Teckal controlled company operated by the City of Duren.  

Piepenbrock Dienstleistungen GmbH & Co. KG is a facilities management company based in Hanover, Germany and it brought an action by which it sought an order prohibiting Kreis Düren from entering into the contract without carrying out a public procurement procedure, claiming that the delivery of the cleaning services in return for remuneration constitutes a commercial service that could also be furnished by private service providers.

It further argued that the draft contract does not involve a type of in-house award to which public procurement law does not apply, in accordance with the judgment in Case C‑107/98 Teckal [1999] ECR I‑8121, since the conditions for the application of that exception were not met.

The terms of the contract were, inter alia, as follows;

1. Kreis Düren was to contract the cleaning of those buildings in its possession which were located in the municipal territory of Düren to Stadt Düren.
2. The cleaning was to comprise the cleaning of premises and glass in the office, administrative and school buildings of Kreis Düren.
3. Stadt Düren would assume sole responsibility for the task described under subparagraphs 1 and 2. The right and obligation to perform this task would be transferred to Stadt Düren and Stadt Düren would assume the duties of Kreis Duren and to that extent have sole responsibility.
4. Stadt Düren could avail itself of the services of third parties to perform the tasks assigned to it pursuant to subparagraph 1. So in effect it could subcontract the services.
5. That draft contract provided that Stadt Düren was to receive financial compensation for the costs which it incurred established on the basis of an hourly rate.
6. The draft contract reserved to Kreis Düren the right unilaterally to terminate the contract in the event of improper implementation on the part of Stadt Düren.
7. The cleaning tasks concerned were to be carried out by Dürener Reinigungsgesellschaft mbH, a company owned by Stadt Düren.

The referring Court asked the following question of the EU Court;

"Is a “public contract” within the meaning of Article 1(2)(a) of Directive 2004/18/EC … to be understood as … meaning a contract between two local authorities whereby one of them assigns strictly limited competence to the other in return for the reimbursement of costs, in particular where the task assigned concerns only ancillary business, not official activities as such?"

In its judgment the Court made a number of observations as follows;

1. In the draft contract Kreis Düren reserves to itself a supervisory power, and the contract provides that Kreis Düren may terminate it unilaterally in the event of failure to deliver the services by Stadt Düren.
2. In accordance with Article 1(2) of Directive 2004/18, a contract for pecuniary interest concluded in writing between an economic operator and a contracting authority, and having as its object the provision of services referred to in Annex II A to that directive, is a public contract. Therefore it is immaterial, on the one hand, whether that operator is itself a contracting authority and, on the other hand, whether the body concerned is primarily profit-making, whether it is structured as an undertaking or whether it has a continuous presence on the market (judgment of 19 December 2012 in Case C‑159/11 Ordine degli Ingegneri della Provincia di Lecce and Others [2012] ECR I‑0000, paragraph 26). Further a contract must be considered as being ‘for pecuniary interest’, within the meaning of Article 1(2)(a) of Directive 2004/18 even if the remuneration provided for remains limited to reimbursement of the expenditure incurred to provide the agreed service (see, to that effect, Ordine degli Ingegneri della Provincia di Lecce and Others, paragraph 29).
3. The Court considered that the Teckal exemption did not apply. The Court commented that "It is clear from the order for reference that, in the context of the main proceedings, first of all, neither entity controls the other. Moreover, the entity which is assigning the execution of a task to another, while it reserves the right to supervise the proper execution of that task, does not exercise over the second entity a control capable of being classified as similar to that which it exercises over its own departments. Lastly, that second entity is not carrying out the essential part of its activities for the first entity."
4. The Court also considered the type of contracts which establish cooperation between public entities with the aim of ensuring that a public task that all of them have to perform is carried out (Ordine degli Ingegneri della Provincia di Lecce and Others, paragraph 34). The Court made the point that the European Union rules on public procurement are not applicable in so far as contracts are concluded exclusively by public entities, without the participation of a private party, no private provider of services is placed in a position of advantage vis-à-vis competitors and implementation of that cooperation is governed solely by considerations and requirements relating to the pursuit of objectives in the public interest.

In conclusion the Court decided that all of the Lecce criteria were cumulative, with the result that a contract between public entities can fall outside the scope of European Union public procurement rules by virtue of that exception only if that contract fulfils all of those criteria.

In this case the Court held that the aim of the draft contract at issue in the main proceedings "does not appear to be to establish cooperation between the two contracting public entities with a view to carrying out a public task that both of them have to perform and that the that contract authorises the use of the services of a third party for the accomplishment of that task, with the result that that third party might be placed in a position of advantage vis-à-vis other undertakings active on the same market". (paras 39 & 40) As we know from the Risk Management Partners case the involvement of third parties always imports risk. However it is not clear from the judgment to what extent the potential involvement of third parties is key part of the test or just a factor to be taken into account.

What about s. 101 of the Local Government Act 1972? Will this be affected? The referring court was unsure whether the law on public procurement was generally inapplicable to agreements on cooperation between local authorities, as "acts of internal administrative organisation". It pointed out that the administrative organisation of the Member States is not a matter over which the European Union has any power and, moreover, that the administrative autonomy of the municipalities, and thus the possibility of establishing voluntary cooperation between municipalities, is guaranteed by Article 28(2) of the Basic Law for the Federal Republic of Germany.(para 23).

The referring court observed that the purpose of the draft contract is virtually identical to any contract governed by Directive 2004/18 under which Stadt Düren would be commissioned to provide cleaning services for pecuniary interest. It asked, in that respect, whether the distinction made by the Basic Law between ‘mandating’ agreements and ‘delegating’ agreements is conclusive. The contract in question was a ‘delegating’ agreement however given that, when a contract relates to ancillary activities which do not directly concern the external activity of local authorities, the fact that a transfer of competence takes place by virtue of the contract is a purely technical point, as the choice of either type of contract in fact produces identical effects in economic terms. The referring court considered that, in the circumstances of the main proceedings, the use of a ‘delegating’ agreement might amount to "contriving to circumvent the rules on public procurement", as referred to in paragraph 48 of the judgment in Case C‑480/06 Commission v Germany.

Rather unhelpfully the Court did not deal with this question directly so presumably the Court agreed with the referring courts conclusion. However this does leave in limbo the question as to whether or not delegating agreements can ever be compliant outside Teckal and Lecce.

The case clearly has significant implications for local authorities. The direct award of a contract for services to another public body must be examined to ensure that it is either Teckal or Lecce compliant. If it is not then the contracting authority runs a very significant risk of challenge with all the adverse consequences that flow such as damages, declarations of ineffectiveness and civil financial penalties. Alert contracting authorities will use the few months that it will take this case to get into the knowledge base of contractors to ensure that they comply with the judgement.

Jack Hayward is a public procurement consultant and academic who works with local authorities and contracting authorities across the country. He is also editor of the Public Procurement Page.