Procurement in a nutshell – looking again at the Teckal exemption

On 8 December 2016, a preliminary ruling by the Court of Justice of the European Union (CJEU) in Undis Servizi Srl v Comune di Sulmona and others (C-553/15) added to the body of case law interpreting the Teckal exemption for contracts awarded by contracting authorities (CAs) to legal persons under their control.

Please click here and here for our previous updates about the Teckal exemption.

Revisiting the Teckal exemption

To begin, it is useful to revisit the basic Teckal principles. The CJEU established that, in certain circumstances, work conducted by a legal entity other than a Contracting Authority (CA) may be regarded as work completed under an in-house arrangement.

The exemption was codified in regulation 12 of the Public Contracts Regulations (PCR) 2015. Three cumulative conditions must be met for the exemption to apply:

• the contracting authority exercises over the legal person concerned a control which is similar to that which it exercises over its own departments;
• more than 80% of the activities of the controlled legal person are carried out in the performance of tasks entrusted to it by the controlling contracting authority or by other legal persons controlled by that contracting authority (the essential activity test); and
• there is no direct private capital participation in the in-house company.

Regulation 12(4) provides for “joint control” by confirming that the exemption also applies where two or more CAs jointly control a legal person, provided that the conditions regarding essential activities and private capital participation are met.

Applicability of pre-Directive case law

The Undis case was decided under Directive 2004/18. Recital 31 of Directive 2014/24 indicates that pre-directive case law is still relevant. The principles laid down by case law must be considered and therefore regulation 12 must be considered in this wider context.

The facts of the case

On 30 September 2014, the Italian municipality of Sulmona awarded a contract for waste management to Cogesa. Cogesa is a wholly owned public capital company, owned by several municipalities in the province of Abruzzo. Sulmona held 200 out of 1,200 (16.6%) shares in the company.

On 30 October 2014, the shareholder municipalities agreed to exercise joint control – similar to that exercised over their own departments – over Cogesa. In addition to the tasks entrusted to it by the controlling authorities, Italian legislation required Cogesa to treat and recover urban waste of municipalities which were not shareholders of the company.

The contract award was challenged by a commercial rival of Cogesa, Undis.

Undis argued that the contract could not benefit from the Teckal exemption because the first and second conditions relating to control and the essential activities test had not been met due to the following:

• Sulmona was a minority shareholder in Cogesa.
• The agreement of 30 October 2014 post-dated the contract award.
• Cogesa’s company statute conferred on constituent bodies a degree of independence incompatible with the concept of control.
• Cogesa had not met the requirement for the successful tenderer to perform the essential part of its activities with the CAs due to the proportion of its overall activity which had been undertaken for non-shareholder municipalities.

The decision of the CJEU

The matter of whether or not Cogesa met the requirements for the Teckal exemption to apply was ultimately one for the Italian courts to decide, based on the specific facts of the case.

However the CJEU’s consideration of the case has provided some useful guidance on the court’s approach to control and the essential activities test:

• In regard to the agreement for joint control by the CAs it did not matter, in this case, that this post-dated the contract award.
• Another interesting decision on chronology was that ongoing activities of Cogesa –which pre-dated the control agreement – should be taken into account when assessing the essential activities test. Those activities should be regarded as ones performed for the CAs, rather than for third parties.
• Moreover, activities carried out by Cogesa for the CAs prior to the control agreement – which had ceased before the agreement was made – could also be taken into account for the assessment. The Court considered that such activity “may be indicative of the importance of the activity” that the controlled entity is planning to carry out for its shareholder authorities following their agreement on control.
• The fact that activities performed by Cogesa for non-shareholder municipalities had been imposed by legislation made no difference to their classification as activities for third parties.

Why is this important?

In the current climate, as CAs face continued strain on their budgets, the need to drive efficiency and save costs puts focus on alternative delivery structures and shared services.

This decision will be of particular interest to CAs looking more closely at such opportunities. Having an awareness of what sort of arrangements might come within the scope of the Teckal exemption and what might lie outside it will help CAs to plan with a greater degree of certainty.

That being said, CAs should remain mindful that when considering the essential activities test, a court will take into account all the facts of the case, both qualitative and quantitative and therefore each case will depend on its own particular circumstances.

How can I find out more?

If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.