The ECJ has given further guidance on when public contracts can be directly awarded without competitive tender to an in-house company. According to the well established Teckal judgment the public procurement rules will not apply to an in-house contract where (i) the procuring entity exercises over the contractor "a control which is similar to that exercised over its own departments" and (ii) provided the contractor carries out "the essential part of its activities with the controlling authority".

Teckal did not address a number of issues. It was unclear, amongst other things, whether the first condition could ever be satisfied where there was private participation in the contractor. Further, it was also unclear whether the procuring entity would have the requisite degree of control over the contractor where ownership was shared with a number of other contracting authorities.

In the recent case of Sea Srl v Comune di Ponte Nossa (C-573/07), the ECJ has confirmed that:

  1. the existence of control cannot be ruled out simply because there is a possibility that the share capital of the contractor might be opened up to private investors in the future
  2. however, where there is private participation in the contractor either at time of award or during the term of the contract the contract can no longer be considered an in-house contract and the rules will apply
  3. it is possible for control to be exercised jointly by all local authorities that own the contractor.

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The ECJ has given further guidance on when public contracts can be directly awarded without competitive tender to an in-house company. According to the well established Teckal judgment the public procurement rules will not apply to an in-house contract where (i) the procuring entity exercises over the contractor "a control which is similar to that exercised over its own departments" and (ii) provided the contractor carries out "the essential part of its activities with the controlling authority".

Teckal did not address a number of issues. It was unclear, amongst other things, whether the first condition could ever be satisfied where there was private participation in the contractor. Further, it was also unclear whether the procuring entity would have the requisite degree of control over the contractor where ownership was shared with a number of other contracting authorities.

In the recent case of Sea Srl v Comune di Ponte Nossa (C-573/07), the ECJ has confirmed that:

  1. the existence of control cannot be ruled out simply because there is a possibility that the share capital of the contractor might be opened up to private investors in the future
  2. however, where there is private participation in the contractor either at time of award or during the term of the contract the contract can no longer be considered an in-house contract and the rules will apply
  3. it is possible for control to be exercised jointly by all local authorities that own the contractor.

More specifically, the ECJ held that:

  • although not entirely conclusive, the fact that the procuring entity holds, together with other public authorities, all the share capital in the contractor, is an indication that that entity exercises control over that company similar to that which it exercises over its own departments;
  • private participation in the contractor, even in the form of a minority shareholding, renders it impossible for a procuring entity to exercise over that company control similar to that which it exercises over its own departments;
  • the time for determining whether there is private participation in the contractor is the time of award of that contract. In exceptional circumstances it may be necessary to take into account certain events occurring after the date of award. This may be the case where shares in the contractor are transferred to a private undertaking shortly after award as a means of circumventing the rules;
  • the mere fact that shares in the contractor could be sold to private investors is not in itself important unless, at the time of contract award, there exists a real prospect in the short term of the shares being sold to a private undertaking;
  • where the capital of the contractor is wholly public and there is no actual sign of any impending opening of that company's capital to private shareholders, the mere fact that private persons may hold capital in that company is not enough to support the conclusion that the requisite degree of control does not exist;
  • however, if private shareholders were to be admitted during the term of the contract, this would constitute a material change and the contract would have to be put out to competitive tender. The entry of private shareholders would be deemed to constitute an alteration of a fundamental condition of the contract;
  • a public authority with a minority shareholding can still exercise control over the contractor jointly with other public authorities;
  • in determining whether the requisite degree of control exists, it is necessary to consider all relevant circumstances. The control must be sufficient to give the contracting authority decisive influence over the strategic decisions of the company;

In determining whether the second condition of Teckal is met, namely that the contractor should carry out the essential part of its activities with the controlling authorities, the ECJ provided the following guidance:

  • the fact that the contractor supplies some services to the private sector does not in itself mean that the condition is not met provided its private sector activities are merely incidental to its core activity;

Finally, the ECJ concluded that control exercised over a company by its shareholder authorities may only be regarded as similar to that exercised over its own departments when:

  • the contractor's activity is limited to the local authority's territory and carried out essentially for its benefit, and
  • the authority (through its representation on the company's statutory bodies) exercises "conclusive influence" on both the company's strategic objectives and its significant business decisions.

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This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 25/09/2009.