When a contracting authority concludes a public contract without having carried out a competitive award procedure in accordance with the public procurement rules (i.e. a direct award), that contract is potentially at risk of being subject to an ineffectiveness ruling. In the UK, these rules are set out in Regulation 47K of the Public Contracts Regulations 2006 ("PCR"), which transposes rules contained in Article 2 of Directive 89/665/EEC (the "Remedies Directive"). An ineffectiveness ruling means (in the UK) that the contract will be prospectively (but not retrospectively) ineffective, but the courts must also impose a civil penalty on the offending contracting authority and may impose damages.
An authority can resist ineffectiveness proceedings by publishing a voluntary ex-ante transparency notice ("VEAT") in the Official Journal of the EU ("OJEU"), a defence which is provided for in Regulation 47K(3) PCR. In order to rely on that defence, an authority must have:
- considered the award of the contract without prior publication of a contract notice to be permitted by the PCR;
- had published in the OJEU a voluntary transparency notice expressing its intention to enter into the contract – accordingly to Regulation 47K(4)(iii), a VEAT must include "a justification of the decision"; and
- not entered into the contract for a period of at least 10 day beginning with the day after the date on which the voluntary transparency notice was published in the OJEU.
This recent CJEU case, Ministero dell'Interno v Fastweb (Case C-19/13), arose from litigation relating to the Italian legislation which transposes the Remedies Directive rules on VEAT notices and casts some light on the use of VEATs.
Facts and procedural history
The facts of the case relate to a public contract for the supply of electronic communications services between the Italian Ministry of the Interior ("MI") and Telecom Italia. A seven-year contract between the parties was due to expire on 31 December 2011 and, on 15 December 2011, a decision was made to extend the arrangement beyond the 31 December 2011 expiry date without holding a competitive tender process.
A competitor of Telecom Italia, Fastweb, challenged the direct award before a regional administrative tribunal ("TAR"), seeking a declaration of ineffectiveness. MI sought to rely on the defence that it had published VEAT notice and observed the 10-day standstill period. In the VEAT notice, MI stated that a direct award was justified under procurement law because there was only one economic operator capable of performing the contract for "technical reasons" (the sister provision in English law is Regulation 14(a)(iii) PCR).
The TAR held that:
- MI was not entitled to rely on the direct award provision because it had extended its contract with Telecom Italia for reasons of expediency, rather than for "technical reasons"; and
- the contract was not, however, ineffective because the conditions [on VEAT notices] had been complied with.
Both findings of the TAR were appealed to the Consiglio di Stato which held that the TAR was correct to find that MI had incorrectly relied on the direct award provision. In relation to the second question, Fastweb argued that to allow an authority to rely on the VEAT defence where its justification was not reasonably formed would be contrary to:
- the right to an effective remedy and a fair hearing under Article 47 of the European Charter of Fundamental Rights; and
- the principle of non-discrimination.
CJEU'S decision of 11 September 2014
The Consiglio di Stato referred two questions to the CJEU:
- if the three conditions in relation to the use of VEAT notices are satisfied, are national courts always precluded from declaring the contract to be ineffective even if it is established that a direct award has not been made in compliance with public procurement law; and
- if national courts are always barred from doing so, is the relevant provision in breach of the right to an effective remedy and the principle of non-discrimination?
In relation to the first question, the CJEU held where the three conditions for the use of a VEAT notice are fulfilled, a national court cannot declare a contract to be ineffective. However, in reaching such a determination, the court must consider if the authority "acted diligently and whether it could legitimately hold that the [conditions for a direct award] were in fact satisfied." In other words, it is insufficient for an authority simply to state that the use of a direct award is justified – it must be able to show that it had a bona fide belief that its use was justified.
In light of the Court's answer to the first question, the second was no longer relevant to the determination of the case. However, the Court did note that the setting of time-limits (even as short as a ten-day limit) was permissible in the interests of achieving legal certainty and that the publication required by the VEAT guarantees the transparency of the process. Moreover, the principle of non-discrimination is not infringed by the VEAT notice provision because publication offers aggrieved competitors a means of finding out about the authority's behaviour, and the 10-day standstill allows them time to commence a challenge.
This case confirms that in order successfully to rely on the VEAT defence to ineffectiveness proceedings, authorities must have formed a bona fide belief that they were entitled to follow a direct award route. It is unclear precisely what steps should be taken by authorities to prove that the belief was bona fide, but a prudent authority might be expected to retain legal advice, detailed internal notes, board minutes, etc., which record the authority's rationale.
A decision to publish a VEAT notice has always involved something of a delicate balancing act. If an authority has strong grounds for believing that it is acting appropriately in directly awarding a contract, it is arguable that publishing a VEAT notice is unnecessary and may invite a challenge (however unlikely that challenge is to succeed). Conversely, if an authority has weak grounds for directly awarding a contract, publication risks alerting competitors to this fact.
The effect of this judgment is that VEAT notices no longer offer the legal certainty they once did that an ineffectiveness claim can be avoided so long as the contract is not executed before the 10-day standstill period has elapsed. A potential challenger which discovers an "expired" VEAT notice, the use of which has not been properly justified, can begin an ineffectiveness challenge up to six months after contract award. The fact that the standstill period has elapsed will be meaningless if the challenger is correct in its view that a direct award was impermissible. To that extent, authorities with weak grounds for using a direct award are likely to be less cavalier in publishing VEAT notices in future, and may in fact see little benefit to doing so.