Public Procurement Law

From Max-EuP 2012

by Heike Schweitzer

1. Concept and function

The term ‘public procurement’ denotes the purchase of goods, services and public works by governments and public utilities. In the European Union, public procurement is estimated at about 16 per cent of the Union’s GDP. In certain markets, the state has the position of a monopsonist. Irrespective of their market position, the demand-side behaviour of public entities can differ from that of private undertakings. This is due, in particular, to a special commitment to public policy goals and to the privileged access to public funds such that public entities are not subject to the full pressure of market forces. Moreover, public procurement has been frequently plagued by problems of corruption.

National rules on public procurement have typically aimed at guaranteeing economic efficiency, public austerity and at preventing corruption. On the other hand, they have left untouched the state’s possibility to base its procurement decisions on public policy goals. The legal technique of regulating public procurement has differed considerably between the Member States. In some Member States (eg France, Belgium, Spain, Portugal) the public procurement procedure as well as the resulting contract are part of the public/administrative law sphere. This implies that the tendering authority is automatically bound by the fundamental rights, including the principle of equal treatment. In other Member States (eg Germany, the Netherlands, Great Britain, Ireland, the Scandinavian countries), public procurement takes place within the sphere of private law (see for the German law, BVerwG (Federal Administrative Court), 5 February 2007, NJW 2007, 2275, paras 6 ff). The acceptance of a bid is seen as an offer to conclude a private law contract. In these jurisdictions, private bidders traditionally enjoyed no special public law protection against discriminatory treatment. The rules regulating the public procurement procedure were public law rules as they were part of the budgetary laws of the state, but the internal rules of budgetary laws were interpreted not to protect individual rights (with regard to public procurement procedures below the thresholds set out in the EU Public Procurement Directives (Directive 2004/17 of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors; Directive 2004/18 of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts), this continues to be the law in Germany: see BVerfG (Federal Constitutional Court), 13 June 2006, NJW 2006, 3701 para 57; BVerwG, 5 February 2007, NJW 2007, 2275, paras 11 ff).

EU law takes a fundamentally different approach to public procurement law. It flows primarily from the fundamental freedoms (fundamental freedoms (general principles)) that also apply to the demand-side behaviour of the state. The individual rights that the fundamental freedoms protect correspond to a public interest in the realization of the internal market: the predominant function of EU public procurement law is to eliminate barriers to cross-border market access. By ensuring transparent, open tendering procedures, EU public procurement law aims to counter the widespread protectionist practices of favouring domestic bidders and help establish undistorted competition among all.

The demand-side behaviour of the state can also be captured by the EU competition rules (competition law (international)): in certain relevant markets—eg in the building sector or with regard to infrastructure facilities—the state will typically possess buyer power. However, the FENIN judgment (CFI Case T-319/99 [2003] ECR II-357 para 37; confirmed by ECJ Case C-205/03 P – FENIN [2006] ECR I-6295) has considerably truncated the scope of application of the competition rules to the state in this regard.

2. EU public procurement law

a) The fundamental freedoms as the basis of EU public procurement law

Under EU law, the Member States are obliged to ensure that public procurement of potential cross-border relevance takes place on a non-discriminatory basis, to eliminate all direct or indirect restraints for cross-border tendering that follow from national procurement rules or practices and to enable real and undistorted competition. This follows directly from the free movement rules. From these general principles, the ECJ has derived certain standards for the design of public procurement procedures. It has in particular emphasized the importance of equal treatment and transparency (ECJ Case C-324/98 – Telaustria [2000] ECR I-10745 paras 60 ff; ECJ Case C-231/03 – Coname [2005] ECR I-7287 paras 17 ff; ECJ Case C-347/06 – spa ASM Brescia [2008] ECR I-5641 paras 57 ff; ECJ Case C-91/08 – Wall AG [2010] ECR I-0000 (nyr) paras 30 ff).

The principles derived from EU primary law leave broad discretion to public procurement authorities. In order to open up national procurement markets more effectively, the EU has, based on Art 114 TFEU/95 EC, passed a number of procurement directives which define more specifically the rules public procurement authorities must obey whenever the procurement volume passes certain thresholds (see below). Public procurement which falls outside the scope of the directives—eg because the contract volume lies below the relevant thresholds or because the relevant contract is not considered a ‘public contract’ within the meaning of the directives (eg service concessions)—must be assessed directly under the fundamental freedoms (fundamental freedoms (general principles)). The European Commission has summarized the principles relevant for these procurement procedures in a communication issued in 2006 ([2006] OJ C179/2).

b) The ‘substantive’ Public Procurement Directives

The EU’s first Public Procurement Directive—a directive on public work contracts—was passed in 1971. A directive on public supply contracts followed in 1976. Neither directive achieved its goal to effectively open national procurement markets. As a consequence, the Procurement Directives underwent repeated reforms. In 2004, the secondary law of the EU on public procurement was merged into two directives:

(1) Directive 2004/18 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts. The personal scope of Dir 2004/18 is restricted to ‘contracting authorities’, ie the state, regional or local authorities, or bodies governed by public law, and thus to procurement entities which, due to a particular commitment to the public interest and access to state resources, are not fully subject to the market logic. The substantive scope of application of the directive extends to all contracts for pecuniary interest concluded between economic operators and public contracting authorities which have as their object the execution of works, the supply of products or the provision of services and which have an estimated value equal to or greater than the thresholds set out in Arts 7–8. Below those thresholds, the costs of the intense behavioural regulation resulting from the Procurement Directives are thought to outweigh the expected benefits.

(2) Directive 2004/17 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sector (the Utilities Directive). Its substantive scope is defined with a view to the exercise of specific activities in the relevant sectors set out in Arts 3–7. Its personal scope of application extends beyond public contracting authorities to private contracting entities which engage in those activities and operate on the basis of special or exclusive rights granted by a competent authority of a Member State (Art 2(2)(b) Dir 2004/17).

In order to create equal opportunities for all bidders and to prevent preferential treatment of local bidders, the Procurement Directives require public procurement authorities and sectoral procurement entities to base their procurement decisions on the criterion of cost-effectiveness in some form. Backed by far-reaching duties of publicity and transparency, the legal commitment to this criterion helps counteract the weakness or absence of market control. However, compliance with the rules of the Procurement Directives can be costly and it significantly constrains the flexibility and discretion which naturally occurs when private firms contract with others. This explains why the personal and the substantive scope of the directives are cautiously limited: the circumstances that may come within their scope are only those where regulatory oversight is necessary with a view to creating an open, undistorted cross-border competition for public contracts and where the additional costs seem justified (for the applicability of Dir 2004/18 to public sickness insurances see ECJ Case C–300/07 – Oymanns [2009] ECR I4779 para 59).

The Public Procurement Directives do not apply to activities performed in-house. The decision about the degree of vertical integration is left to the discretion of the state. The European Court of Justice (ECJ) has extended this rationale to services provided by entities which are legally distinct from the contracting authority where, firstly, the contracting authority exercises a control over the distinct entity in question which is similar to that which it exercises over its own departments and, secondly, that entity carries out the essential part of its activities with the controlling public authority or authorities which control it; (see ECJ Case C-107/98 – Teckal [1999] ECR I-8121 para 50; ECJ Case C-26/03 – City of Halle [2005] ECR I-1 para 49; ECJ Case C-295/05 – Asemfo/Tragsa [2007] ECR I-2999 paras 55 ff).

All contracts which fall within the scope of the Public Procurement Directives are subject to a standardized procurement procedure. This procedure is divided into three separate phases: publication of the contract notice which shall provide all potential bidders with the information needed for preparing an offer; the verification of the suitability of tenderers or, if applicable, the selection of candidates to be invited for tendering, which shall establish their technical and/or professional ability and economic and financial standing; and the award of the contract. The overriding purpose of the regulation of all three phases is to ensure that the procurement procedure is based on transparent, objective and verifiable criteria.

Special rules apply to public procurement of military equipment and security equipment which is particularly sensitive. These rules are set out in Dir 2009/81. According to Art 346 TFEU/296 EC, Member States can exempt defence and security contracts if this is necessary for the protection of their essential security interests.

c) Contract award criteria and the consideration of public policy goals

A core aim of EU public procurement law is to ensure that the decision regarding to whom to award the contract—the central decision of any procurement procedure—is taken on objective and non-arbitrary grounds. With this objective in mind, the Procurement Directives commit the public procurement entities to an economic efficiency criterion which can take two different forms (Art 53 Dir 2004/18). The procurement entity can base the award of a contract on the criterion of the lowest price or, alternatively, on the criterion of the most economically advantageous offer. In the first case, the competition between bidders is reduced to competition solely on price. In the second case, the procuring entity can also consider additional selection criteria that are justified by the subject matter of the contract in question, but they must specify the relative weighting of the selection criteria in the contract notice. Article 53 sets out a non-exhaustive list of possible selection criteria, eg quality, aesthetic and functional characteristics, environmental characteristics, cost-effectiveness and after-sales services. Ultimately, all criteria must allow for the determination of the ‘most economically advantageous offer’. Moreover, the criteria must allow for an objective comparison between offers.

Among the particularly controversial issues of EU public procurement law is the question if, and under what circumstances, public procurement authorities may base their procurement decision on macroeconomic or general policy goals, eg on a tenderer’s special contribution to environmental protection or social policy goals, or on a tenderer’s special commitment to human rights. The ECJ has addressed this issue in a number of cases (in particular ECJ Case C-31/87 – Beentjes [1988] ECR 4635; ECJ Case C-225/98 – Nord-Pas-de-Calais [2000] I-7445; ECJ Case C-513/99 – Concordia Bus [2002] I-7213). In two communications the European Commission has proposed to draw general conclusions from this case law (Interpretative communication of the EU Commission on the possibilities for integrating social considerations into public procurement, COM(2001) 566 fin; and Interpretative communication of the EU Commission on the possibilities for integrating environmental considerations into public procurement [2001] OJ C333/13). The Commission’s long-held view that the execution of a contract lies outside the scope of the Procurement Directives has become the basis of Art 26 of Dir 2004/18 according to which ‘[c]ontracting authorities may lay down special conditions relating to the performance of a contract, provided that these are compatible with Community [Union] law and are indicated in the contract notice or in the specifications. The conditions governing the performance of a contract may, in particular, concern social and environmental considerations’.

The question as to what conditions are compatible with Union law—ie what conditions may be thought not to restrict market access and not to discriminate—is left unanswered by Art 26.

d) Requirements for the national implementation of EU procurement law and for the provision of remedies under national law

The practical relevance of the substantive duties set out in EU public procurement law hinges on an effective enforcement of the relevant rules. This is the function of both public enforcement by way of infringement proceedings brought by the European Commission against the Member States and of private enforcement actions brought by bidders before national courts. Both avenues of enforcement have been tightened by the recent jurisprudence of the ECJ.

With a view to public enforcement, the ECJ has held that a Member State that has failed to provide public notice of a contract in violation of public procurement rules is obliged to terminate the contract concluded (for breaching EU law) as long as it has not been fully executed. The adverse effect on the free movement rules arising from the disregard of the provisions of the Public Procurement Directives persists throughout the entire performance of the contracts concluded in breach thereof (ECJ Case C-503/04 – Commission v Germany [2007] ECR I-6153, para 29). A Member State cannot plead principles of legal certainty and the protection of legitimate expectations, the principle pacta sunt servanda or the right to property in order to justify the failure to implement a judgment by the ECJ obliging that Member State to terminate the contract (ibid, paras 36, 38).

As regards private enforcement, it is in principle for the Member States to provide adequate enforcement procedures and effective remedies under national law. In doing so, the Member States are bound by the EU law principles of equivalence and effectiveness: procedures and sanctions for the infringements of EU law must be equivalent to procedures and sanctions for the violation of national laws; and the Member States must provide appropriate, adequately deterrent sanctions that ensure the effective enforcement of EU law (ECJ Case C-91/08 – Wall AG [2010] ECR I-0000 (nyr) paras 63 ff). The Remedies Directives—Dir 89/665 of 21 December 1989 on the coordination of the laws, regulations and administrative provisions relating to the application of review procedures to the award of public supply and public works contracts and Dir 92/13 of 25 February 1992 coordinating the laws, regulations and administrative provisions relating to the application of Community rules on the procurement procedures of entities operating in the water, energy, transport and telecommunications sector, both amended and tightened by Dir 2007/66—specify these general rules of EU law and formulate minimum requirements for the legal protection of applicants and/or tenderers under national law. The procedural rules help strengthen the individual rights which the Procurement Directives are meant to protect. At the core of the Remedies Directives is the obligation on the Member States to provide for a fast and effective judicial review for any alleged infringements of the rules set out in the Procurement Directives or the national rules implementing them. A review procedure must be available for any person with an interest in a specific public contract who has suffered damage or risks suffering damage due to an alleged infringement of the relevant rules. The review procedure must, for example, allow for the review of allegedly discriminatory technical specifications or award criteria in the public notice or in the contract documents. The review of the award of the contract is of particular relevance.

In line with the ECJ’s jurisprudence, Dir 2007/66 forbids the Member States from combining the award of the contract with the conclusion of the contract. A contract may not be concluded before the expiry of a period of at least 10 calendar days with effect from the day following the date on which the contract award decision is sent to the tenderers and candidates concerned. If a review procedure is initiated, the standstill period will normally be extended until the independent review body has taken a decision on the tenderer’s application. Member States must, in particular, provide effective, proportionate and dissuasive sanctions for the following infringements: a breach of the standstill period and the award of a public contract without prior publication of a contract notice in the Official Journal of the EU (a so-called ‘direct award’). According to Dir 2007/66, the sanction to be applied in both cases is to render the concluded contract void. In individual cases alternative sanctions can be imposed, such as fines or a shortening of the term of the contract in question. An award of damages will not suffice. The consequences resulting from the invalidity of a contract are to be determined by national law.

3. Repercussions of EU procurement law on the law of the Member States

EU public procurement law has forced the Member States to implement far-reaching changes to their traditional procurement rules. For quite some time, Germany fiercely opposed the rule provided by the Remedies Directives ensuring effective protection of the individual rights and interests of tenderers and candidates as it was incompatible with the traditional German view of procurement law as purely internal budgetary law. It was only in 1999 and after two successful infringement procedures by the EU Commission before the ECJ that German procurement law was brought into line with the requirements of the Procurement Directives and the Directives on Remedies as concerns public contracts meeting the thresholds set out in the Procurement Directives. The relevant framework rules are now set out in the 4th part of the German law against restrictions of competition (GWB) and are complemented by a number of more detailed regulations on public works, services and professional services.

Public contracts below the relevant thresholds continue to be outside the scope of the procurement rules laid down in the GWB and the system of protection of individual rights on which they are based. Here, the traditional view of procurement law as purely internal budgetary law persists. In an order of 13 June 2006 the German Federal Constitutional Court (BVerfG) confirmed the existence of an individual right of each tenderer to have its offer considered on the basis of the criteria relevant for the public contract at issue. But it rejected a constitutional mandate to create a system of private enforcement that would effectively protect this primary right. In view of the procurement authority’s countervailing interest in a rapid execution of the contract, as well as the interest in legal certainty of the successful bidder, the legislature may limit the remedies available to the unsuccessful bidder to damages. A duty to inform the unsuccessful bidder about the decision on the award of the contract in advance, ie before the conclusion of the contract, could not be derived from constitutional law.

The European Commission, on the other hand, tends to favour effective protection of the primary right of any tenderer/applicant to be considered for the contract from the fundamental freedoms (fundamental freedoms (general principles)), even for public contracts below the thresholds set out in the Procurement Directives (see EU Commission, Interpretative communication on the Community law applicable to contract awards not or not fully subject to the provisions of the Public Procurement Directives [2006] OJ C179/02; for limiting principles see ECJ Case C-91/08 – Wall AG [2010] ECR I-0000 (nyr) para 65). Germany has unsuccessfully challenged this Communication before the General Court of the European Union (GC) (Case T-258/06 – Germany v Commission, nyr).

Literature

Fritz Rittner, ‘Öffentliches Auftragswesen und Privatrecht’ (1988) 152 ZHR 318; Gerhard Kunnert, WTO-Vergaberecht (1998); Sue Arrowsmith and Martin Trybus, Public Procurement: The Continuing Revolution (2003); Ernst- Joachim Mestmäcker and Heike Schweitzer, Europäisches Wettbewerbsrecht (2nd edn, 2004) ch 9; Jan Byok and Wolfgang Jäger, Kommentar zum Vergaberecht (2nd edn, 2005); Christopher Bovis, EU Public Procurement Law (2008); Marc Bungenberg, Vergaberecht im Wettbewerb der Systeme (2007); Martin Burgi, ‘Von der Zweistufenlehre zur Dreiteilung des Rechtsschutzes im Vergaberecht’ [2007] Neue Zeitschrift für Verwaltungsrecht (NVwZ) 737; Meinrad Dreher, ‘§§ 97 ff GWB’ in Ulrich Immenga and Ernst-Joachim Mestmäcker (eds), Wettbewerbsrecht, vol 2 (4th edn, 2007); Wissenschaftlicher Beirat beim Bundeswirtschaftsministerium (BMWi), expert opinion ‘Öffentliches Beschaffungswesen’ of 12 May 2007; Alexander Egger, Europäisches Vergaberecht (2008); Uwe Blaurock (ed), Der Staat als Nachfrager (2008); Sue Arrowsmith, The Law of Public and Utilities Procurement (2nd edn, 2009); Sue Arrowsmith and Peter Kunzlik, Social and Environmental Policies in EC Procurement Law (2009).

Retrieved from Public Procurement Law – Max-EuP 2012 on 19 May 2022.

Terms of Use

The Max Planck Encyclopedia of European Private Law, published as a print work in 2012, has been made freely available in 2021 as an online edition at <max-eup2012.mpipriv.de>.

The materials published here are subject to exclusive rights of use as held by the Max Planck Institute for Comparative and International Private Law and the publisher Oxford University Press; they may only be used for non-commercial purposes. Users may download, print, and make copies of the text files being made freely available to the public. Further, users may translate excerpts of the entries and cite them in the context of academic work, provided that the following requirements are met:

  • Use for non-commercial purposes
  • The textual integrity of each entry and its elements is maintained
  • Citation of the online reference according to academic standards, indicating the author, keyword title, work name, and date of retrieval (see Suggested Citation Style).