The European Court of Justice has recently been asked to consider whether the Teckalexemption for in-house contracts should also exempt so called ‘horizontal in-house transactions’. That’s where, although there is no control as between the contracting authority awarding the contract and its appointed contractor; the two parties are each controlled by the same public body. 

To date, the Teckal (or in-house) exemption has been strictly applied and the Courts have only endorsed direct awards as being outside the scope of the EU procurement rules where (1) the contracting authority exercises over the contractor a control similar to that exercised over its own departments, and (2) where the contractor carries out the essential part of its activities with the controlling authority. Case law has also confirmed that the test can be met where the contracting authority exercises the necessary control over the contractor jointly together with other contracting authorities. 

In the current case, the Court had to consider whether to stretch this concept. The facts were that the University of Hamburg needed to procure an information management system. One of the potential suppliers it investigated was Hochschul-Informations-System GmbH (“HIS”); HIS was a not-for-profit company, whose objectives were to assist educational institutions in their work via the provision of information management systems. One-third of HIS was owned by the German federal state, with the other two-thirds being owned by a group of local authorities (the city of Hamburg being one of these, owning 4.16% of HIS’s capital). The second potential supplier was a private company, Datenlotsen Informationssysteme GmbH, the claimant in this case. 

The University decided to directly award the contract to HIS without following any procurement process. Datenlotsen challenged the award, arguing the University had acted unlawfully as the requirements of the Teckal exemption had not been met. 

Although it was common ground that the University did not control HIS, in its defence the University argued its contract with HIS should be regarded as a “horizontal in-house transaction”. Its position was that this should still fall within the Teckal exemption on the grounds that both parties (i.e. the University and HIS) were ultimately controlled by the same public body i.e. the City of Hamburg. 

The Court made short shrift of this, holding that the exemption did not apply. It went back to first principles and looked at the purpose behind the Teckal exemption, which was to recognise that it would be undesirable for the procurement law regime to positively force public bodies to employ outside entities, in circumstances where they wished to carry out their public functions through use of their own internal resources. However, that was not the case here. There was no internal link between the University and HIS; it owned no share capital in HIS and had no say in its management. It would undermine the principles on which the Teckal exemption was based, to extend its limited application (which had been clearly defined by case law) to the current situation. 

In any event, the Court concluded the City of Hamburg did not have ‘similar control’ over the University as its control was limited to procurement matters whereas the University had autonomy as regards its main activities of education and research. So it could not be said that the City of Hamburg ‘controlled’ the University. The Court therefore did not have to consider whether the Teckal exemption could be extended to cover a new category of “horizontal in-house transactions” i.e. where, although no control existed as between the contracting authority and contractor, both the contractor and contracting authority were nevertheless controlled by the same public body. 

The Court also concluded that the alternative exemption relating to ‘inter-municipal co-operation’ did not apply here as in the current context neither the University or HIS were public bodies co-operating in the performance of a public task they had to perform. 

Comment: 

The Court left open the question of whether the Teckal exemption should be extended to ‘horizontal in-house transactions’. However, the uncertainty around this is set to be short lived now that the situation has been specifically addressed in the new public procurement Directive (which came in to force on 17 April). 

The new Directive codifies the Teckal test in legislation for the first time and will be implemented in our own UK Regulations in due course (current predictions are by the end of the year). Article 12(1) states that a contract awarded will not be caught by the Directive if (to paraphrase): 

  • the contracting authority exercises over the contractor concerned a control which is similar to that which it exercises over its own departments (“similar control” in this context means the contracting authority exercising “a decisive influence over both strategic objectives and significant decisions” of the contractor. It includes where this control is exercised by another body, provided that other body is itself controlled by the contracting authority); and 
  • more than 80 % of the activities of the contractor are carried out in the performance of tasks entrusted to it by the controlling contracting authority or by other bodies that are themselves controlled by that contracting authority; and 
  • there is no private sector ownership of the contractor, with certain exceptions. 

Article 12(2) appears to specifically permit an extension to the principles in Teckal in the form of “horizontal in-house transactions”, provided that the conditions or Article 12(1) as listed above have been met. Article 12(2) states the exemption to the Directive will apply where (to paraphrase): 

A controlled legal person, also being a contracting authority awards a contract to its controlling contracting authority, or to another entity that is also controlled by that controlling contracting authority. In the Datenlotsen case, of course, the City of Hamburg had insufficient control over the University and HIS to fall within the conditions of Article 12(2) and at the time of the transaction the new Directive did not, in any event, apply. 

But, once the Directive has been implemented in the UK, it is reasonably clear that, provided the necessary conditions are met (including, in particular, sufficient control) horizontal in-house transactions will be a new breed of Teckal which fall outside the scope of the public procurement regime. Whilst the new Directive has no direct effect in UK until implemented through our own Regulations, even before then it is easy to see that a UK Court could have regard to its provisions were a case, which met the conditions for a horizontal in-house transaction, to come before it. 

Contracting authorities seeking to take advantage of this position should nevertheless be mindful that to do so, in advance of the new Directive’s implementation, is not without risk – particularly in the light of the European Court’s decision as discussed above. In addition, any exemption to the EU procurement regime, even once provided for in our own UK Regulations, will still be strictly interpreted, emphasising the importance of ensuring that all the necessary conditions are fully met.

You can read the judgement in the case here .