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Clarification by the ECJ on the application of the in-house exception to the EU Public Procurement Rules

21 May 2014 #Public Sector

On 8 May 2014, the European Court of Justice (ECJ) ruled on the application of the in-house exception to the application of EU Public Procurement Rules. This is an area which has developed, since the ECJ first took a look at it in the case of Teckal SrL v Commune di Viano and Azienda Gas in 1999 (Teckal).

It is clear from EU Public Procurement Directive (the Directive) that contracts awarded, as between two contracting authorities, can fall within the relevant definitions of public works, public supply and public services contracts. Caselaw (Teckal and Commission v Germany (2009) being two of the most significant) introduced and then developed an exception which said that if a contracting entity awards a contract to another contracting entity, then the Directive will not apply where that first contracting entity exercises a degree of control over the second contracting entity which is similar to the degree of control that it would exercise over its own internal departments.  

The most recent case related to the award of a contract by a German university to a separate company (the Service Company), which was partly owned and controlled by the City of Hamburg. The City of Hamburg also controlled the purchase of products and services for the German university, and so it was argued that the reference to “similar control” was satisfied in this case because both the University and the Service Company were controlled by the City of Hamburg. 

In previous cases the ECJ had stated that, when considering whether there is “similar control”, the question is whether the University has power to exercise decisive influence over both the strategic objectives and significant decisions of the Service Company and is the control, which is exercised, genuine, structural and functional.

The ECJ held that there was no relationship of “similar control” between the University and the Service Company. The ECJ also looked at whether the element of control exercised by the City of Hamburg over the University was sufficient for it to be said that it had similar control over the University, and also the Service Company, to draw some sort of link. The court held that the City of Hamburg did not exercise the required level of control over the University and therefore did not develop that argument further. The ECJ therefore concluded that the contract between the University and the Service Company did not have, as its purpose, the carrying out of a public task which both had to perform. It therefore held that the Directive applied and the contract should have been subject to a formal procurement process.

There is a new directive dealing with public procurement, which was approved on 15 January 2014 and came into force in EU member states on 17 April 2014. EU member states have two years to implement them into national legislation. The new rules codify the law that originated in the Teckal case and has been developed since then in terms of public cooperation and the structure of such arrangements. The element of control remains key to the new directive (and will be contained in any regulations that are implemented by UK government). Although, therefore, the case was dealt with under the current (but soon to be previous) Directive, it will still provide helpful guidance once the new directive comes in.

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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