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Delegation between local authorities

14 June 2013

European court strikes down purported delegation between local authorities

On 13 June 2013, the Court of Justice of the European Union (CJEU) considered whether a contract which purported to assign the task of cleaning certain office, administrative and school buildings constituted a public services contract under the EU public procurement rules. The case arose from a reference by a German court.

The contract at issue concerned a contractual arrangement in Germany between an association of local authorities and one of the member authorities involving the transfer of responsibility for the cleaning services to the member authority for an initial two year pilot phase. Under the contract, the member authority was permitted to use the services of third parties to fulfil this task (it planned to use a company it owned to carry out the services) and would receive financial compensation for the costs that it would incur. The association retained some supervisory power over the delegated services however in that it could unilaterally terminate the contract in the event of improper implementation by the member authority.

The referring German court sought clarification on whether such a delegating agreement constituted a public services contract that was subject to the EU public procurement rules. In a brief yet very significant judgment, the CJEU looked at the substance of the arrangement and held that the contract at issue was indeed a public services contract. It made the following important points:

  • it was immaterial that the remuneration to be provided for the services was limited to the reimbursement of the expenditure incurred to provide the agreed service. The arrangement had all the hallmarks of a public services contract in that it was for a contract for services in return for financial compensation with the awarding authority retaining supervisory authority over the proper execution of the task
  • the contract did not satisfy the Teckal in house exemption as the necessary degree of control could not be established and the member authority was not carrying out the essential part of its activities for the association
  • neither did the contract satisfy the Commission v Germany exemption. This exempts exclusive public-public co-operation arrangements where no private provider of services is placed in a position of advantage and implementation of that cooperation is governed solely by considerations and requirements relating to the pursuit of objectives in the public interest. The aim of the contract at issue did not appear to establish such co-operation to fulfil a public task that both parties had to perform. By authorising the use of a third party to fulfil the task, it was also placing that third party at an advantage vis-à-vis its competitors.

This case raises many questions about the application of the EU public procurement rules to purported statutory delegations between local authorities, in particular the extent to which a delegating authority can retain supervisory authority over the arrangement.

It was a significant factor in this case that the arrangement resulted in the member authoritys company receiving a distinct competitive advantage over its competitors on the cleaning services market also. The case therefore sends a clear message to authorities that the Commission v Germany exemption cannot be used where it would have a distortive effect on competition.

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Peter Ware

Peter Ware

Partner and Head of Government Sector

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