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Encouragement to service providers: authorities cannot stretch the ‘in-house’ exception to public procurement

27 May 2014

The Court of Justice of the European Union (CJEU) has issued a powerful reminder to contracting authorities that the so-called 'in-house' exception to the public procurement regime is construed strictly. 

The 'in-house' exception operates if certain conditions concerning the control a contracting authority exercises over the proposed provider are satisfied, a public tender process is not required. 

The recent judgment confirms that any links between contracting parties falling short of the conditions for exemption will mean a tender is required.

Out of control?!

The decision related to a procurement by the Technical University of Hamburg-Harburg, who contracted with a not-for-profit higher education IT systems provider, HIS, for the provision of an information management system. 

It did not run a public tender process for this contract. 

However, before entering into the deal, the University had also considered the rival system offered by the Claimant, Datenlotsen Informationssysteme (DI).

DI subsequently brought an action in the German Courts, which decided at first instance that there was not the requisite degree of shared control between the University and HIS for the award to the latter to qualify for the 'in-house' exception. 

However, on appeal the question of whether a contract between two entities under the control of the same body (which itself constitutes a contracting authority under the Public Sector Directive 2004/18) will be a regulated procurement under the rules.

CJEU ruling: 'In house' means 'in-house'!

The CJEU's decision on the referral from the German appeal courts seems to make a clear statement in relation to the in-house exception from the EU public procurement regime: namely, the exception is to be narrowly interpreted. 

The requirements of the exception, laid down in Case C-107/98 Teckal SrLv Commune di Viano & Azienda Gas [1999] ECR-I-81821, are that:

  • the contracting authority exerts decisive influence over the contractor similar to that which it exercises over its own internal departments
  • the contracting entity carries out the "essential part" of its activities with the controlling contracting authority.

In which case the contracting authority can be said to be employing its own resources.

However, in this case, the CJEU ruled that because the University held no equity or voting share in HIS and had no legal representative in its management, there could be no justification for allowing the University to rely on the in-house exception and avoid the procurement process. 

Furthermore, in relation to the second condition, the CJEU noted that the parties could not be said to share common control under the City of Hamburg because the City's control did not relate to the University's research and education functions; rather, merely, to its procurement activities. 

As a result, the contractor was not performing the 'essential part' of its activities in conjunction with the controlling authority, which in this case was the City of Hamburg.

Comment: ask the authority questions!

This case demonstrates the importance of probing a contracting authority on any 'in-sourcing' decision. The proposed supplier may have tenuous links under Teckal, meaning that the lack of a compliant procurement will constitute an illegal direct award.

You should also be aware of the possibility of judicial review in such circumstances, on the basis that the authority has not properly benchmarked its 'in-sourced' solution against what the private sector can offer. 

This provides an alternative route of challenge in the event the 'in-house' exception can be validly relied on by the authority in question.

This article was written by Rory Ashmore.

For more information please contact Rory on +44 (0)20 7427 1031 or rory.ashmore@crsblaw.com