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Recent Developments in EU and UK Procurement: Competition Requirements, Organizational Conflicts of Interest and Subcontracting Rules

By Louise Huson, Dr Sharon Fitzgerald | DLA Piper

In the aftermath of the potential De la Rue challenge to the Home Office’s award of passport delivery services to Gemalto, we look at the EU Commission’s challenge to the Austrian State’s decision to award similar services directly to an Austrian national.

As contracting authorities build capacity for “front-ending” projects, the potential for conflict of interest between consultants advising on early scoping issues and subsequently bidding in the project’s procurement has to be managed carefully. We look at the Vakakis case, and continuing in the conflict of interest vein, the Ecoservice projektai case on potential collusion between associated tenderers. And lastly we look at CCS’ Action Note to promote supply chain visibility – is it simply a market transparency and statistical exercise, or could private sector contractors see themselves being pulled into a parallel world of regulated procurement?

Competitive tendering is not always a risk to State security and sensitive information :The EU Commission objected to the direct award of contracts for the production of chip passports, identity cards and other similar documents to a company (OS) established specifically for that purpose pursuant to Austrian law. The Austrian government argued that contracting in this way protected its essential security interests, and was therefore an excluded contract, the procurement of which was not caught by EU procurement regulations. Only by using OS which had production and storage facilities within Austria, could it safeguard the authenticity and veracity of the documents and guarantee the protection of sensitive data. The Commission disagreed, contending that whilst the need to protect personal information and guarantee document production is in the public interest, that does not make it an essential security interest. The Austrian government had not shown that a competitive procurement was completely impossible, on the basis that that it would undermine confidentiality obligations and security supervision arrangements. The European Court agreed with the Commission. It held that a member state cannot simply invoke “essential security interests”, it must show that the security interests it is pursuing could not have been attained within a competitive tendering procedure. Security and confidentiality arrangements can be imposed contractually on any organisation, whether established in Austria or another member state, and can be enforced by imposing contractual penalties. Austrian state officials could also impose security controls, such as visits and inspections of the premises of the successful tenderer during the operational phase of the contract. Failing to consider measures such as these, and instead seeking to have the contracting opportunity completely excluded from the procurement rules, was disproportionate.

Case C-187/16 European Commission v Republic of Austria

What level of due diligence is required to show that a conflict of interest does not distort competition? : Six consortia bid for a contract to establish a National Food Authority in Albania. A was successful and Vakakis claimed damages, on the basis that the EU Commission had failed to investigate an apparent conflict of interest reported to it by several tenderers. A’s food expert had not only participated in its bid, but had also contributed to procurement documents prepared by the Commission. Subsequently, the Commission did not query what it knew to be a misrepresentation, when A submitted a declaration that it was not aware of any conflict of interest. Reiterating the Fabricom line of case law (that only a real (and not a hypothetical) conflict of interest can lead to a tenderer being excluded from a procurement process), the European Court held that a contracting authority must carefully and impartially examine circumstances that display features of a conflict of interest. Here the Commission relied on a statement from A that although its food expert appeared to have drafted part of the procurement documents, in fact he had only supplied general information that was used by the Commission to draft two particular paragraphs. The decision not to exclude a tenderer who is the subject of an allegation of conflict of interest can only be taken on condition that the contracting authority is certain that the tenderer is not in such a situation, and has not enjoyed a strategic advantage as a result of the perceived conflict. Although the Commission had looked at certain e-mails and other documents to seek to understand the food expert’s involvement, A’s statement that there was no conflict, was ultimately not substantiated. Contracting authorities must be proactive in investigating apparent conflict of interest and conduct a thorough due diligence exercise. This case shows that they must also demonstrate a paper trail with real probative value.

Case T-292/15 Vakakis v European Commission

Tenderer responsibility on a conflict of interest : This case clarifies that related tenderers are not obliged on their own initiative to disclose the links between them. This was in the context of potential collusion between two subsidiaries of the same parent company, who took part in a waste collection procurement. The contracting authority had not asked for any declaration of non-collusion. Nevertheless, one subsidiary submitted its own declaration that it was taking part in the procurement autonomously and independently of any other economic operator, and that it would be happy to supply to the contracting authority a list of economic operators with whom it was connected. The procurement had been conducted pursuant to Directive 2004/18/EC. The court confirmed that to comply with the obligation of transparency and equal treatment in 2004/18, a contracting authority must investigate and verify any evidence which calls into question the autonomous and independent character of tenders it receives – and which might influence its obligation to run an impartial procedure. Directive 2014/24/EU which replaces 2004/18 codifies these case law principles; in particular it requires contracting authorities to “take appropriate measures to prevent, identify and mitigate conflicts of interest”. Conflicts of interest can be illusive creatures, and usually only become apparent when the concept is raised as a priority at the outset of, and discussed between those participating in, a procurement – both on the purchasing and buying teams. For those following best practice, the question raised in this case should not arise. Having a clear conflict of interest policy in place which requires a declaration of no conflict of interest and a non-collusion certificate from all tenderers, is the first step towards ensuring that the duty to “identify” has been complied with.

Case C-531/16 Ecoservice projektai (formerly “Specializuotas transportas”)

How onerous is the Government’s new Supply Chain Visibility policy? : Working with small and medium-sized enterprises (SMEs) is a ministerial priority to drive innovation and support economic growth. By 2020, the government plans to spend one third of its goods and services budget with SMEs. Therefore, PPN 01/18 requires central government bodies to contractually procure that their key suppliers advertise subcontracting opportunities (as well as details of the sub-contracts awarded) on Contracts Finder. Key suppliers will also be asked to provide data on sub-contractor and SME. The PPN applies to all “new procurements valued above £5 million per annum commencing from 1 May 2018 which are subject to the Public Contracts Regulations 2015” and “subcontract opportunities arising from that contract above a minimum subcontract threshold of £25,000”. The “Contracts Finder User Guide : Public Sector Contractors Supply Chain Notices” 22 March 2018 – published in parallel with the PPN – explains that the relevant section of the Contracts Finder site will include the following disclaimer – “Supply chain notices are business-to-business transactions, and are not bound by the same rules and restrictions as public sector contracts”. The guidance makes it clear throughout that PCR’15 only applies to public contracts, and that concepts such as the right to challenge a contracting authority for the way in which it has managed a procurement or the right to a standstill period during which a tenderer can decide whether it has grounds to challenge, are not concepts which would apply to privately let sub-contracts. The government is right to make this distinction clear. The procurement rules exist to prevent government purchasing practices, such as favouring national industry, from distorting competition within the EU. The purchasing decisions of private sector entities for the most part will be determined by purely commercial criteria, which usually ensures that the private sector makes its purchases from the most competitive source. Formal procurement processes are therefore unnecessary for the private sector. However, there is an “additional text” box on the relevant form on Contracts Finder in which main contractors would be prudent to scope their intentions – ie. that, in spite of having publicised a sub-contract, they may or may not issue a tender, they may start but then choose to abandon its procurement or they could simply choose to make a direct award to sub-contractors with whom they have a longstanding relationship.

Crown Commercial Service Procurement Policy Note 01/18 – supply chain visibility

Compliments of DLA Piper, a member of the EACCNY