Joint and several liability in #publicprocurement exercises. Right? Not always!

Given the wide ranging and often complex nature of some contracts advertised by the public sector in the Official Journal of the European Union (“OJEU”), it is not uncommon for economic operators bidding for such contracts to have to rely upon the capacity of other economic operators in order to fulfill the requirements of the contracting authority.

Indeed, it is a boilerplate clause in most, if not all, OJEU Contract Notice that an economic operator, if relying upon the capacities of other economic operators (be it sub-contractors, other companies in a Group or another consortium member) accept joint and several liability for the performance of the contract.

Case C-234/14, Ostas celtnieks SIA v Talsu is a useful reminder to Contracting Authorities that there are limits to how far a blanket requirement for tenderers to form a particular contractual structure can be applied, particularly as in this case, prior to contract award.

By way of background, the Latvian municipality of Talis published a €3M Works Contract Notice in the OJEU for the improvement of local roads infrastructure.  The tender documents indicated that if a bidder was relying upon the capacities of other contractors, it had to conclude a cooperation agreement or form a partnership prior to contract award.

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Image: Google Maps

Ostas celtnieks SIA challenged several aspects of the tender specification, but in particular paragraph 9.5 (below) of the tender documentation on joint and several liability, before Latvia’s Office for the Supervision of Public Contracts where it was partially upheld in February 2012.

 

“… in the event of the tenderer relying on the capacities of other contractors, it must indicate all the contractors involved and provide evidence that it will have at its disposal the resources necessary”; and,

If it is decided that the contract is to be awarded to that tenderer, it must, prior to the award of the contract, conclude a cooperation agreement with the contractors concerned and forward that agreement to the contracting authority.”

Paragraph 9.5 of the Tender Specification

Ostas celtnieks SIA appealed to the District Administrative Court seeking a judicial review and set aside of the Office for the Supervision of Public Contract’s decision.  In May 2013 the District Court held that paragraph 9.5 was “partially unlawful”.  Both the Municipality of Talis and the Office for Supervision of Public Contracts appealed this decision to the Latvian Supreme Court.

In their appeal, both public authorities argued that paragraph 9.5 of the tender specification was justified in order to reduce the risk of non-performance of the contract. Furthermore, that the absence of joint and several liability at bid stage meant that a public authority could not evaluate whether a contract would be performed in accordance with the tender submitted, and whether the contractors upon whose capacities a tenderer was relying upon would abide by their undertakings.

The Latvian Supreme Court stayed its proceedings and made a referral to the European Court of Justice on the following basis:

‘Must the provisions of Directive 2004/18/EC be interpreted as meaning that, in order to reduce the risk of non-performance of the contract, they do not preclude the specifications from containing the condition that, in the event of the contract being awarded to a tenderer which relies on the capacities of other contractors, that tenderer must, before the contract is awarded, conclude with those entities a cooperation agreement (which includes the particular items set out in the specifications), or set up a partnership with them?’

In its judgement, the ECJ reiterated established case law (see, in particular Swm Costruzioni 2 and Mannocchi Luigino, C‑94/12, paragraphs 29 and 33; Case C‑176/98 Holst Italia [1999], paragraphs 26 and 27; and, Case C‑314/01 Siemens and ARGE Telekom [2004] ECR I‑2549, paragraph 43).). and stated that a tenderer is able to rely on the capacities of other contractors in its bid, providing that it can prove to the Contracting Authority’s satisfaction that the joint resources will be available for it to perform the contract.

However, at paragraphs 28 and 29 of its judgement, the Court also stated that a tenderer is free to choose the legal nature of the links it intends to establish with the other entities on whose capacities it is relying and implied that such a freedom to choose a legal form of partnership or cooperation extended all the way up to contract award.

The effect of the Court’s decision in this case, and others, can be divined in the recital (15) of the 2014 Public Procurement Directive (2014/24/EU) which states, inter alia,

“…groups of economic operators, including where they have come together in the form of a temporary association, may participate in award procedures without it being necessary for them to take on a specific legal form. To the extent this is necessary, for instance where joint and several liability is required, a specific form may be required when such groups are awarded the contract.”

[Own emphasis]

In conclusion, both the judgment and the subsequent introduction of the 2014 Public Procurement Directives highlight that a “one size fits all” approach by Contracting Authorities in requiring joint and several liability by all economic operators participating in public procurement procedures without reference to proportionality (particularly in the case of those bidders only performing a subsidiary or minor role in contract delivery) may be vulnerable to legal challenge.

While it remains completely acceptable for Contracting Authorities to set certain conditions for the performance of contracts by groups or consortia of economic operators, such conditions need to be capable of objective justification and clearly related to the subject matter of the contract.

Requiring the appointment of a joint representation or a lead partner for the purposes of the procurement procedure or requiring additional information on a constitution may be viable alternatives to the unnecessarily prescriptive approach adopted (ultimately unsuccessfully) by the Municipality of Talis in this procurement exercise.