Trygve Harlem Losnedahl, Doctoral Research Fellow at the University of Oslo, Centre for
European Law.
Brussels’ internal market watchdogs are communicating diverging
views on subcontracting in public procurement.
In a large report on good practice for
socially responsible procurement from May 2020, the Commission praises the
Norwegian municipality of Skien’s model to combat social dumping and work
related crime in public procurement.* Among the measures taken by the
municipality is to limit the length of the contract chain to increase
transparency and control, by requiring that every sub-contractor must be under
the direct control of the main contractor.
At the same time, the EFTA Surveillance Authority (ESA), which corresponds
to the Commission with regard to the EEA-states of Iceland, Liechtenstein and
Norway, has sent a letter of formal notice to Norway claiming that a
less restrictive national limitation on subcontracting chains is contrary to EU
law. The Norwegian national rule applies to the construction and cleaning
sectors, and sets the maximum length of three links in the contract chain, i.e.
main contractor, sub-contractors and sub-sub-contractors. In the letter of
formal notice, ESA leans heavily on a CJEU preliminary ruling from 26 September
2019, C-63/18 Vitali (see brief comments
on the judgment by David McGowan in PPLR
2020 issue 1). Vitali was the first
ruling from CJEU under the “new” procurement directives of 2014 regarding
limitations on subcontracting. The ruling has apparently left quite some
uncertainty.
In the following, I will give a brief background of the conflicting
interests in limitations on subcontracting in public procurement, and case law up
until the adoption of the new procurement directives of 2014. A presentation of
the Vitali-case will then follow before I (critically) assess ESAs interpretation
of the Vitali-case and ESA’s application of the Vitali-case on the Norwegian
legislation.
The
background – getting to the Vitali-case
To subcontract or not to subcontract, that
has been the question in a number of judgments from the CJEU during the last thirty
years (especially Cases C-389/92 Ballast Nedam Groep I, C-5/97 Ballast Nedam Groep II, C-176/98 Holst Italia, C-314/01 Siemens AG Österreich and ARGE Telekom & Partner, C-94/12 Swm Costruzioni 2 and Mannocchi Luigino). There has been a kind of tug-o-war where public buyers have been
pulling for a right to limit subcontracting, for such reasons as preventing
work related crime (Vitali) and
quality control of the procured services (C-406/14 Wroclaw and C-94/12 Swm Costruzioni 2 SpA and
Mannocchi Luigino DI). On the other side, supporters
of unrestricted competition on the internal market have been pulling to reduce
any limitations which could make public contracts less attractive for
businesses. From an internal market perspective, limitations on subcontracting are
seen as restrictions on the right to provide services. It has especially been
seen as restraining small and medium sized enterprises (SMEs). Because SMEs are
unable to compete for large public contracts, the only way for SMEs to get a slice
of the larger public contracts is via the main contractor, i.e. via the main
contractor’s right to subcontract.
The interpretation in favour of open competition
reached a peak in the Wroclaw-case (C-406/14
Wroclaw), which was decided under
the now repealed 2004-directive, and has similar facts as the Vitali-case. The
Polish city Wroclaw initiated a procurement procedure for a roadworks contract.
The tender specifications set out that tenderers were “obliged to perform at
least 25% of the works covered by the contract using its own resources”. In
other words, no more than 75% of the works for the specific contract could be
subcontracted. Such a tender requirement was compatible with the Polish law at
the time, and the Polish government argued that it was compatible with the
2004-directive article 26. Article 26 allowed contracting authorities to “lay
down special conditions relating to the performance of a contract, provided
that these are compatible with Community law and are indicated in the contract
notice or in the specifications.” Article 26 also stated that such conditions relating
to the performance of a contract could concern social and environmental
considerations.
The CJEU found that the 25%-stipulation
was contrary to EU law, i.e. the stipulation that the main contractor had to
perform 25% of the works itself. The court ruled that the 2004-directive art.
48(3) provided a right to subcontract which was “in principle, unlimited” (para
33). As regards to the argument set out by the Polish government that the 25%-stipulation
was a “special condition” allowed under article 26, the court rejected the
view. The court stated that “since [the 25%-stipulation] is contrary to Article
48(3)”, the stipulation “is contrary to EU law”. As mentioned, the wording of art.
26 contains the reservation that special contract conditions have to be “compatible
with Community law”. Thus, the court must be understood as concluding that
since another article of the directive gives a right to subcontract, special
conditions under art. 26 which limits that right, are incompatible with union
law. As one can see, the court gave the general right to subcontract according
to article 48(3) precedence over art. 26, and left art. 26 basically without any
substance in relation to setting conditions which could limit subcontracting.
To further underscore the court’s view on
the right to use subcontractors as a strongly protected right, AG Sharpston
argued that in her view, there was only one permissible restriction on
subcontracting (paras 31-34). Namely, when contracting authorities are not in a
position to verify the technical and economic capacities of the subcontractors
and those subcontractors are to perform essential parts of the public contract.
The court had opened for such an exception in C‑314/01
Siemens and ARGE Telekom (para 45-46).
As I will comment on further below, the 2014-directives
intended to put more emphasis on social, environmental and labour protective
considerations, thus tilting the balance back from the unrestricted market
position.
On 18 April 2016, the Italian legislature
adopted legislation which set out that “any subcontracting shall not exceed 30%
of the total amount of the contract for works, services or supplies” (para. 9).
In other words, 70% of the contract value had to be performed by the main
contractor, and there were no exceptions from this 30% limitation. The legislation’s
main objective was to combat Italy’s many criminal organizations, which
regularly made use of subcontracting in public contracts due to the reduced
transparency and division of responsibility that comes with subcontracting. (Reduced
transparency and control in contract chains is also highlighted in the
Commission report on socially responsible procurement in a case study from Copenhagen
(page 240).)
The Vitali-case (C‑63/18)
treated a restricted tendering procedure launched by the publicly owned Autostrade
per l’Italia SpA in August 2016, for the award of works on a motorway close to
Milan. The contract value was roughly 85 million euros. Vitali SpA placed an
offer in which more than 30% of the service was to be performed by
subcontractors. Vitali was excluded since the offer did not comply with the new
national 30%-limitation on subcontracting.
One does not have to be a trained lawyer
to see the apparent discordance between the ruling of the Wroclaw-case and the
new Italian 30%-limitation. It follows from the Vitali-judgment that the
Italian legislature was aware of the conflict between the ECJ case law and the
30%-limitation, but that the legislature took the new 2014-directives as an
opportunity to adopt measures which the former directives prohibited (paragraph
16). However, Italy’s view fell on deaf ears at the court. The court chose to
render its judgment without an Opinion from the Advocate General.
The CJEUs main reasoning is found in paragraph
38 to 42 of the judgment. The court presents its conclusion (somewhat
pre-emptively) in paragraph 38, that the Italian limitation “goes beyond what
is necessary” to combat criminal organizations. In paragraph 39, the court presents
the legal basis for the necessity condition, namely that article 18 of the
directive obliges the contracting authority to observe the principle of
proportionality. In paragraph 40 and 41, the court presents arguments for the
disproportionality of the Italian 30%-limitation, before it in paragraph 42 argues
that combating crime could be achieved with less restrictive measures, thus returning
in paragraph 43 to the conclusion that “a restriction on the use of
subcontracting such as that at issue in the main proceedings cannot be regarded
as compatible with Directive 2014/24”.
Since ESAs proceedings against Norway is
based on an interpretation especially of the Courts reasoning in paragraph 40
and 41, I cite them in full:
“40 In particular, as pointed out in paragraph 30
of the present judgment, the national legislation at issue in the main
proceedings prohibits, in general and abstract terms, use of subcontracting
which exceeds a fixed percentage of the public contract concerned, so that that
prohibition applies whatever the economic sector concerned by the contract at
issue, the nature of the works or the identity of the subcontractors.
Furthermore, such a general prohibition does not allow for any assessment on a
case-by-case basis by the contracting entity (see, by analogy, judgment of 5
April 2017, Borta, C‑298/15, EU:C:2017:266,
paragraphs 54 and 55).
41 It follows
that, in the context of national legislation such as that at issue in the main
proceedings, in respect of all contracts, a significant part of the works,
supplies or services concerned must be performed by the tenderer itself,
failing which it will be automatically excluded from the procurement procedure,
including where the contracting entity would be able to verify the identity of
the subcontractors concerned and would take the view, after verification, that
such a prohibition is not necessary in order to combat organised crime in the
context of the contract in question.”
As mentioned, ESA has sent a letter for
formal notice to Norway claiming that a national legislation which limits
subcontracting chains, is contrary to EU/EEA-law. Norway has rejected ESA’s
view, and ESA is currently assessing whether to instigate infringement
proceedings before the EFTA court (the EFTA equivalent of the CJEU under the
EEA Agreement). ESA states in the letter that it “relies on the judgment of the
CJEU in Vitali to conclude that the necessity condition is not met”, i.e. that
the Norwegian three chain limitation on subcontracting in public procurement is
not necessary to combat work related crime.
In my opinion, ESA makes three mistakes in
its interpretation and application of the Vitali-case. Firstly, ESA
cherry-picks legal sources, not taking sufficiently into account amendments in the
new directive. Secondly, ESA mistakes a characterization by the CJEU for criterion.
Thirdly, ESA fails in its assessment of the similarities and differences
between the Italian and the Norwegian rule. I will substantiate these three
claims in the following.
The “new” 2014-directives intended to open
more for social, environmental and labour protective considerations, thus
tilting the scale a bit back from pursuing the goal of an ever less restricted
competition on the internal market. The Commission report addresses this in its
introduction:
“The 2014
Public Procurement Directives make it clear that social aspects can be taken
into account throughout the procurement cycle, from preliminary market
consultation, through to the use of reservations and the light regime, and to
social award criteria and contract performance conditions. Public buyers across
Europe are starting to take advantage of these opportunities and demonstrate
real social impact in their purchasing. Despite this, Member States are not yet
fully exploiting the possibilities of public procurement as a strategic tool to
support social policy objectives.”
The most important amendment of the directives
in this regard, was the articles on principles of procurement. The
“principles-clause” in the 2004/18-directive (article 2) only included the
principle of equality, transparency and non-discrimination. When the EU
legislator adopted the 2014-directives, it included in the new
“principles-clause” (article 18 of the 2014/24 directive) a requirement that
economic operators must comply with applicable obligations in the fields of
environmental, social and labour law. In Tim
SpA (C-395/18) paragraph 38, the CJEU underlined that “the Union
legislature sought to establish” the requirement to comply with social,
environmental and labour law as a principle of procurement law, “like the other
principles”, i.e. equal treatment, non-discrimination, transparency,
proportionality and prohibiting the exclusion of a contract from the scope of
Directive 2014/24 or artificially narrowing competition. In other words, the
CJEU understood (and accepted) the EU legislators’ view that these social
principles should be on the same foot as the traditional inner-market
principles.
Through article 18, the EU-legislator also
clarified and limited what had been argued to be a (wide) principle of
competition in public procurement law. (See especially Sanchez Graells “Public Procurement and the EU
Competition Rules”, 2nd edition, 2015, and for an opposing view, Sue
Arrowsmith, "Purpose of the EU Procurement Directives: Ends, Means and the
Implications for National Regulatory Space for Commercial and Horizontal
Procurement Policies, The," Cambridge Yearbook of European Legal Studies
14 (2011-2012): 1-48.) Article 18 now establishes that
“[t]he design of the procurement shall not be made with the intention of
excluding it from the scope of this Directive or of artificially narrowing
competition.” By including “intention” and “artificially” in the wording of the
“principles clause”, it is clear that the competition principle includes a
subjective element. Even though it is not clear how this will be interpreted
and operationalized, there must be an “intention” in some form by the public
buyer to “artificially narrowing” competition.
Unlike the Commission report, ESA does not
appear to take this development in legislation, nor new case law, into account.
ESA does not comment on the development of the directive’s “principles clause”,
nor on Tim SpA.
Quite to the contrary, ESA appears to
cherry pick some of the more “competition friendly” case law from the CJEU,
even though this case law concerns the now repealed 2004-directives and despise
the fact there exists relevant case law concerning the 2014-directives. An
example is that ESA chooses to cite Borta
(C-298/15) when it argues that the Norwegian sub-contracting limitation puts
unjustified restrictions on competition, even though the CJEU explicitly states
in Borta that the new 2014-directive
“cannot be taken into consideration in order to answer the questions referred”
(para. 29). In Borta the CJEU
strongly underscored the interest of competition, as it wrote that “it is the
concern of the European Union to ensure the widest possible participation by
tenderers in a call for tenders” (para. 48). As to relevant case law under the
2014-directive, Vitali itself addresses
the goal of competition under 2014-directive, but the wording that CJEU uses in
Vitali (para. 27) is that it is “in
the interests of the European Union to ensure, in the field of public procurement,
that the opening up of competition in tendering procedures is enhanced.” – in
other words, a quite more reserved formulation.
ESA’s choosing and interpretation of legal
sources, as opposed to the Commission’s, directs ESA to a view which excessively
emphasizes the interest of unrestricted competition. This naturally affects ESA’s
assessment of the proportionality of the Norwegian limitation.
Mistake 2: Characterization, not criteria
The other mistake is that ESA takes Vitali’s
characterization of the Italian rule as “general and abstract” for criteria. Under
the heading “Assessment of the necessity condition”, ESA begins:
“The Authority [i.e.
ESA] relies on the judgment of the CJEU in Vitali to conclude that the
necessity condition is not met… In reaching its conclusion, the CJEU relied on
the fact that the [Italian] provision was in general and abstract terms, so
that the prohibition applied whatever the economic sector concerned by the
contract at issue, the nature of the works or the identity of the
subcontractors, and that it did not allow for any assessment on a case-by-case
basis by the contracting entity.
The Authority
considers [the Norwegian provisions] to be materially similar to the provision
in Vitali in that they are also in general and abstract terms and do not allow
for any case-by-case assessment as to whether or not they are necessary to meet
their objective.”
In the letter, ESA returns to an
assessment of whether the Norwegian rule is set in “general and abstract” terms
and if it allows for a proper case-by-case assessment. ESA holds that the Vitali-judgment
establishes these as two criteria, which each is sufficient to conclude that at
national limitation on the right to subcontract in public procurement is
contrary to the proportionality principle, i.e. the necessity condition. The two
criteria are (1) that the limitation is set “in general and abstract terms”, or
(2) does “not allow for a case-by-case assessment”.
As to the first of these two, i.e.
“general and abstract terms”, ESA has mistaken a characterization for criteria.
When the CJEU writes that the Italian provision was set "in general and
abstract terms", it must be understood as a characterization of the
Italian percentage rule, not as a criterion
for what types of provisions that are (always) considered to fall short of the
necessity condition. In law making, general and abstract rules have been an
ideal ever since the first (and less successful) codifications of the
Enlightenment, such as the very detailed style of the Prussian ALR of 1794,
with its 19 160 articles at a detailing level such as “to a library is to
be counted the shelves and cabinets where the books are located” (Anners, Erik:
''europeiske rettens historie''. Utg. Universitetsforl.. 1983. Page 211-212).
More importantly, such a criterion would
be quite impossible to apply. What does it mean that a rule is general or
abstract? How do you measure generalness or abstractness of a provision? When
does a rule tip to general and abstract from, I suppose, specific and concrete?
ESA does not try to develop or elaborate how
it understands the criteria of “general and abstract”. ESA does however conclude
that the Norwegian three-chain limitation is not “general”, since it is limited
to the sectors of construction and cleaning services. Even so, ESA finds that
the limitations “are otherwise in abstract terms”, as they “apply limitations
on subcontracting based on the number of links in the chain without any further
assessment of the nature of the works/services or the identity of the
subcontractors.”
In my view, neither “general” nor
“abstract” are criteria that the CJEU established to assess the necessity of
limitations on subcontracting. What the CJEU did in Vitali was to look at the specific traits of the national limitation,
to assess whether the limitation was necessary to achieve the limitation’s goal
of combatting organized crime. The specific traits that the CJEU highlighted in
Vitali paragraph 40, were that it “prohibits,
in general and abstract terms, use of subcontracting which exceeds [1] a fixed
percentage of the public contract concerned, so that that prohibition [2] applies
whatever the economic sector concerned by the contract at issue, [3] the nature
of the works or [4] the identity of the subcontractors. Furthermore, such a
general prohibition [5] does not allow for any assessment on a case-by-case basis
by the contracting entity…” [Numbers added to clarify the different elements].
As is often the case when the CJEU
undertakes a proportionality assessment, it does not state whether each of the
elements in its reasoning are to be understood as criteria that are necessary
and/or sufficient for reaching the same conclusion in similar cases. As I have
shown above, ESA understands “general and abstract terms” as criteria that are
sufficient to conclude that a limitation on subcontracting falls short of the
proportionality test. This leads ESA to an all too narrow approach to the
necessity condition, instead of a comprehensive assessment where all relevant
traits of a national limitation are taken into account.
Mistake 3: Not identifying the differences
I will here highlight three important differences
between the Italian rule in the Vitali-case and the Norwegian rule, which ESA,
as opposed to the Commission, misses and/or misjudges.
Firstly, the Italian rule applied to all
sectors and all contracts. The Norwegian rule is limited to the construction
and cleaning sectors, which are sectors especially troubled with work related
crime. As shown above, ESA finds that this sectorial limitation does not make
the Norwegian rule as “general” as the Italian, but since ESA means that the
Norwegian rule is otherwise set in “abstract terms”, it concludes that it has
similar shortfalls as the Italian rule. In my view, this is a misjudgement by
ESA, which follows from ESA’s own form of Begriffsjurisprudenz,
where “abstract” is mistakenly applied as a legal criteria. The differences in
sectorial scope of the Norwegian and Italian rules is highly relevant in a normal
proportionality assessment. Since the Norwegian rule only applies to two
sectors, it is a less restrictive measure than the Italian pan-sectorial rule.
The second important difference is that
the Italian rule prohibited main contractors from subcontracting more than 70 %
of the value of the contract to subcontractors, whereas the Norwegian rule
prohibited tenderers from allowing more than two links of subcontractors in the
contract chain, i.e. the main contractor, subcontractors and
sub-subcontractors. The Norwegian rule sets limitations neither on the value
that can be sub-contracted nor on the total numbers for subcontractors or
sub-subcontractors, just the length of each chain.
The Commission report highlights both
these two traits of the Norwegian rule in its presentation of the procurement
policy of the municipality of Skien. The municipality has established a main rule
of maximum one level of subcontracting under the main supplier, i.e. an even
more restrictive rule than the national two-level-limitation. The Commission
report argues:
“While there is
no restriction on the number of subcontractors or the proportion of the
contract subcontracted, all subcontractors must be under direct control of the
main contractor in order to avoid fragmentation of responsibility. This
provision accounts for possible specialisation needs within a contract and does
not impair access to public procurement by smaller operators.”
Under the Norwegian limitation, subcontractors
can carry out 100 % of the works. That was impossible under Italian law, where
70 % had to be carried out by the main contractor itself. So, where the Italian
rule effectively removes 70% of the public procurement market of large
contracts from SMEs, the same cannot be said of the Norwegian rule. This is a
major difference between the Norwegian and Italian limitations.
ESA does identify that the Italian
provision “limited the proportion of the contract which could be
subcontracted”, but ESA does not appear to see, or does not find it of
relevance, that the consequence of such a 30 % proportional limitation is that
30 % of the public procurement market is made unavailable to SMEs.
The third important difference between the
Norwegian and Italian rule, is that the Norwegian rule, unlike the Italian, has
exceptions. Norwegian contracting authorities can accept longer supply chains in
construction and cleaning contracts when it is “necessary to ensure adequate
competition” and where unforeseen circumstances mean that more links are
necessary for the contract to be performed. ESA dismisses the relevance of the
second since it only addresses practical issues. ESA dismisses the first, since
the condition for the exception is “to ensure adequate competition”. ESA means
that the condition for the case-by-case assessment should not be conditioned
upon the necessity of “adequate competition”, but on the necessity to achieve
the objective of the restrictive measure, i.e. to combat work related crime. I
agree with ESA that such an exception would better encompass the elements of
the EU/EEA proportionality test. In the overall proportionality assessment
however, I mean that the case-by-case possibility adds to the conclusion that
the Norwegian limitation is in accordance with the proportionality principle in
Article 18 of the directive.
The procedure is still ongoing between ESA
and Norway. ESA required
more information from Norway on the applicability of the exception, which was provided
by the Government in mid-February. ESA is now assessing whether to file an
infringement procedure before the EFTA court. Given the uncertainty ESA’s
position has stirred up, at least in the EFTA-states, and especially among municipalities
and labour unions, we can hope ESA actually files a lawsuit – and loses.
* The
Report is by the Executive Agency for Small and
Medium-sized Enterprises, published
4 June 2020, page 63-64. The report was updated in September 2020, where it is
stated on page 63: “This updated version of the report omits a paragraph on
subcontracting elements of this practice, which was included in the original
version. The paragraph has been removed pursuant to doubts which arose with
respect to the lawfulness of such elements.”
Photo credit: Erik den
yngre, via Wikimedia
commons
