ECJ rules that a commercial company wholly owned by a contracting authority can be subject to procurement law

On 5th October 2017, the European Court of Justice gave its ruling in the case of LitSpecMet UAB v Vilniaus Iokomotyvu remonto depas UAB and another [2017] EUECJ C-567/15 on referral from the Regional Court of Vilnius, Lithuania (Vilniaus apygardos teismas).

The question before the Court was, firstly, whether a private company, Vilniaus lokomotyvų remonto depas UAB  (“VLRD”) established in 2003 following a restructuring of Lietuvos geležinkeliai UAB (the state railway company, Lithuanian Railways; or “LG”) which provided a rolling stock repair services to LG, the state railway company, be considered a contracting authority within the meaning of Article 1(9) of the now repealed Directive 2004/18 (broadly speaking, Article 2(1)(4) in the “new” Directive 2014/24/EU).

Secondly, the ECJ was invited to consider the question within the context of the fact that less than 10% of VLRD’s revenue came from its rolling stock repair services to the state railway company, LG? The remaining 90% coming from purely commercial activities.

The ECJ sidestepped the earlier Opinion of AG Campos which focussed on the competition aspects of the case, and considered that the crux of the matter before itself was whether VLRD constituted a “body established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character”, as specified by Article 1(9) of the 2004 Directive.

After consideration, the ECJ found that VLRD may well be a public contracting authority, albeit the facts in this case were for the referring Lithuanian court to decide. It came to this decision on the basis that the provision of rolling stock repairs to the Lithuanian state railway company, LG, was the primary reason why VLRD had been created, even though four-fifths of its revenues now came primarily from commercial sources.

Therefore, the Court held, its founding purpose had not been the accumulation of profits, but rather the provision of a service to the state railway company, indisputably another contracting authority. The second question as to the 90%/10% split of profits was considered irrelevant by the Court in coming to its decision of whether VLRD was a public body or not, the only important consideration was the intention at the [2003] foundation of the subsidiary company, VLRD, by LG.

This is an important decision for contracting authorities, particularly for those who wish to form subsidiaries which are not to be subject to the EU Public Procurement Directives and associated legislative constraints incumbent upon public authorities, particularly where the Teckel and Hamburg exemptions are being relied upon.   The original intention and purposes behind the establishment of the operating subsidiary will be, if this judgement is to be followed to its logical conclusion, where the Courts will begin their assessment should similar cases present themselves in future.