Despite the uniform approach on subcontracting, national courts still address the ECJ questions on quantitative limitations of subcontracting. In one of my 2018 post‘s I have precisely predicted the outcome of the Vitali SpA v Autostrade per l’Italia SpA (Case C-63/18), the Judgment was delivered on 26 September 2019. The ECJ reiterated that across-the-board quantitative restrictions of subcontracting is contrary to the Directive 2014/24. The new case concerns the same 30% limit on subcontracting however the scrutiny is made against the old Directive 2004/18.
Summary of the Case C-402/18 Tedeschi Srl v C.M. Service Srl
Rome University La Sapienza announced a cleaning service tender above EU threshold. The losing tenderer challenged the result alleging that (i) the winner intended to subcontract more than 30% of the contract and (ii) that the remuneration of subcontractors is less than 20% in relation to unit prices resulting from the award – which was contrary to Italian law. The first Tribunale amministrativo regionale annulled the award. On appeal the Consiglio di Stato raised doubts on whether the Italian restrictions in the case are in line with the EU law and referred the case to the CJ. The national court asked whether the principles of freedom of establishment and freedom to provide services, Article 25 of Directive 2004/18 are against the enforcement of a national regulation according to which (i) subcontracting cannot exceed the quota of 30% of the total value of the contract, and (ii) the prices for the subcontracted services cannot be less than 20% from the unit prices resulting from the award.
On the 30% limit on subcontracting rule
The ECJ reconfirmed its earlier case law that the contracting authority has the right to prohibit the use of subcontractors whose capabilities it has not been able to verify (Wrocław – Miasto na prawach powiatu, C‑406/14, EU:C:2016:562, p. 34). It unequivocally argued that a limitation imposed across-the-board on the use of subcontractors that is abstracted to a certain percentage (30% limit) regardless of the ability to check the capabilities of subcontractors and the nature of the tasks is incompatible with Directive 2004/18 (p. 38)
The Court did not accept the Italian Government plea that this limitation is aimed at making public procurement less attractive and consequently would prevent the phenomenon of mafia infiltration into public procurement (p. 40). To this end, the Court endorsed the view that combating the phenomenon of infiltration of organized crime in public procurement is a legitimate objective that can justify a restriction (p. 44). Nonetheless, a restriction such as that went beyond what was necessary to achieve the objective and required a bespoke evaluation of each case (p.45, 48). Accordingly, a 30% limit on subcontracting puts pressure on the tenderer to personally perform the public contract, even where the contracting authority would be able to verify the eligibility of the subcontractors (p. 48).
The Court concluded that the objective could be achieved by less restrictive measures, i.e. requiring the tenderer to provide the subcontractors identities at the tender stage, in order to allow the contracting authority to carry out verifications of the proposed subcontractors at least in cases considered to represent an increased risk of infiltration of organized crime (p. 49).
20% remuneration derogation limit
The second question was a novelty for the Court and concerned clarifications on compliance of a general rule which limits the possibility of reducing the prices applicable to subcontractors’ services by more than 20% compared to the prices resulting from the award (the 20% limit).
The Court followed the same pattern reasoning as in the 30% limit rule. The Court noted that the 20% limit was generally and abstractly defined and across-the-board applied irrespective of the economic sector, nature of the activity and applicable legal framework (p. 58). In doing so, the CJEU deduced that this may undermine the opportunities offered by the Directive 2004/18, i.e. to take advantage of the prices offered by subcontractors’ and thus, ensure more competition and access of SMEs to public procurement (p. 59). Although the 20% limit could be qualified as “social consideration”, the Court rightly decided that such a limitation went beyond what was necessary because it applied without exceptions, independently of any legal or social protection objectives, and failing to take into the equation the fact that the same economic and legal treatment is applicable to both employees of the tenderer and of the subcontractor. (p. 63-66).
The Court stressed that the viability of the tender and the good performance of the contract can be ensured by requiring (i) tenderers to indicate the subcontracted part and subcontractor’s identity (ii) replacement prohibition of subcontractors if the latter could not be checked against suitability and capacity requirements and (iii) verification against abnormally low tender provisions (p. 68-72). The CJEU finally highlighted that the tenderer cannot be penalised for negotiating a good price with his subcontractor (p. 74).
This case adds to the long list of cases addressing restrictions of subcontracting issue (Siemens case C-314/01 ECLI:EU:C:2004:159,Wrocław case C‑406/14 ECLI:EU:C:2016:562, Borta case C-298/15 EU:C:2017:266, Vitali SpA v Autostrade per l’Italia SpA Case C-63/18 ECLI:EU:C:2019:787). This list illustrates the irritating allergy subcontracting causes to public procurement governmental stakeholders.
In addition, these cases demonstrate that the text on subcontracting either in the old Directives or in the new one is generally not sufficiently comprehensive with the aim sought. Thus, the line of reasoning offered by the CJEU should be noted by the Commission in an eventual reform of the public procurement Directive.
As noted by the Court the texts on subcontracting from ‘Article 71 of Directive 2014/24 reproduces, in essence, the wording of Article 25 of Directive 2004/18’ (Vitali SpA v Autostrade per l’Italia SpA Case C-63/18 ECLI:EU:C:2019:787 p.29), with additional improvements in the new Directive. The text of Article 71 of Directive 2014/24 is cautious in its wording without overstepping the ‘no-consensus’ friction line. This leaves an unnecessary interpretation burden on side of the Member States and contracting authorities.
In my 2018 post I have argued that the provision on subcontracting should be modernised in the light of the above-mentioned case-law:
- The Directive should say that subcontracting is as a general rule allowed and encouraged and may be limited in exceptional cases.
- Exceptional cases when restriction of subcontracting may be allowed:
- Direct performance obligation – found in Article 63.2. This norm restricts subcontracting emphasising that ‘certain critical tasks be performed directly by the tenderer itself’ (Swm Costruzioni case). This provision geographically should be located in the article on subcontracting.
- When the contracting authority is unable to scrutinise the subcontractor against exclusion grounds and qualification requirements – this is on case-by-case basis.
- Other exceptional cases provided that the principle of proportionality is observed.
- Reliance on third parties for backing such criteria as ‘educational and professional qualifications’ or the ‘relevant professional experience’ means that that third party will perform directly the works or services for which these capacities are required [Article 63.1.1] – this triggers a form of mandatory subcontracting scenario.
- The general obligation to disclose subcontractors at the tendering stage or the part of the tender the tenderer intends to subcontract if the subcontractors are unknown at this stage. Currently Article 71.2 uses the word ‘may’ in lieu of ‘should’.
- Absence of contracting authority’s approval any subcontractor should not be admitted to perform the public contract, unless otherwise mentioned in the tender documents.
- The Directive needs more and clear rules on limitations concerning ‘subcontractors of subcontractors” or how deep the supply-chain could go. The more deeper the supply-chain the more harder is to monitor compliance. This is particularly important for high value infrastructure procurement where subcontracting is mostly used and should be encouraged to stimulate qualitative specialisation of suppliers.
- The Directive is silent with respect to competition law concerns. Subcontracting usually implies a vertical agreement [which theoretically could be caught by 101 TFEU]. And although this is a matter to be addressed by the competition legal framework, it would give enormous legal certainty for contracting authorities lacking such expertise. Downstream market narrow specialisation of subcontractors coupled with exclusivity and non-compete clauses may potentially partition artificially the market and affect competition on that market.