Case C-553/15, Undis Servizi – the Teckal exception is pants [judgment 2016, ECLI:EU:C:2016:935]

An important exception to the application of EU procurement law is where a public body awards a contract to a body that is akin to an ‘in-house’ body. Known as the ‘Teckal’ exception, its precise scope has undergone several refinements by the CJEU in recent years. However, one of the requirements of the Teckal exception is that an ‘essential part’ of the in-house body’s activities be devoted principally to the public body. The question now asked by the Italian Council of State is how an ‘essential activity’ should be assessed.

Background
Co.ge.sa is an Italian company that recycles urban refuse. It won a contract from an Italian local authority, the Comune di Sulmona.

Although the contract was with the local authority and thus in theory governed by EU public procurement law, this contract was not advertised and it was not subject to a competition organised in accordance with EU procurement law. This was because there is an important exception to EU procurement law known as the Teckal or ‘in-house’ exception. The exception originates in the CJEU’s judgment in Case C-107/98, Teckal ECLI:EU:C:1999:562.

However, Co.ge.sa. has a commercial rival, Undis Servizi. The rival objected to Co.ge.sa being awarded the contract. Indeed, it challenged the legality of the local authority’s decision before the administrative law court at first instance for the Province of Abruzzo (TAR Abruzzo). The first instance court dismissed the claim.

On appeal, Undis explained its belief the contract could not benefit from the ‘Teckal’ exception. Its main submission was that the authority could not be shown to be exercising the requisite degree of ‘similar control’ over Co.ge.sa as the authority would be able to exercise over an in-house body.

In that context, Undis pointed to a number of facts and circumstances. For example, it was a fact that the local authority was a minority shareholder in Co.ge.sa; however, under the the company’s articles of incorporation, minority shareholders had no say over the company’s choices. Furthermore, the articles of incorporation also indicated that any decisions of the company were not subject to administrative review by, for example, a judge at the TAR. Equally, it was a fact that despite there being a committee upon which all of Co.ge.sa’s shareholders sat, any opinion of that committee, for example on matters of social policy, could be ignored by the company. Undis also remarked that when attention was directed to Co.ge.sa’s sales and taxes of recent years, it appeared that Co.ge.sa’s main activity was not even waste disposal. In light of these factors, it believed that the Teckal exception was not applicable to the contract awarded by the local authority.

The eventual judgment of the appeal court was appealed up to the Italian Council of State.

At the Italian Council of State
The judges at the Italian Council of State noted that Italian legislation did not yet possess a specific provision governing the in-house or Teckal exception. The concept was a creature of EU law and attention therefore needed to be directed to EU Directives 2014/23, 2014/24, and 2014/25. Admittedly, those Directives were not in force when the Italian authority awarded the contract to Co.ge.sa., and that generated a minor issue of the obligation on the national judge in respect of direct effect, and the duty to interpret national law in conformity with the directive, and even the duty of sincere co-operation.

However, those doctrines might not apply, as the rules in the Directives might still apply in Italy even though they were not in force. This result could be achieved by recognising the combined-effect of two of the CJEU’s other judgments, which had the effect of creating a legal ‘standstill’ that would run from the moment when a Directive was published in the Official Journal right through to the time of its implementation. The first judgment was, C-129/96, Inter-Environnement Wallonie ECLI:EU:C:1997:628 and it established the need to avoid any measure which would affect the achievement of the Directive. The second judgment was C-268/06 Impact, ECLI:EU:C:2008:223 which contained the rule that national law cannot be interpreted in such a way that it would endanger the result expected of the Directive after its implementation.

That said, the Italian Council of State also thought that neither of those judgments were really applicable here. On the face of it though, that would not be fatal to the present reference. For whereas the Teckal exception might not have been enshrined in Italian law, the present reference was really all about the concept of the ‘main activity’, and that concept too was a creature of EU law, and it did exist at the time when the contract was made. Consequently, the Italian Council of State took the view that EU procurement law could be said to apply to the present case, together with the law surrounding the Teckal exception.

With that reasoning behind it, the Italian Council of State then picked up on the salient passage in Teckal, paragraph 50. The CJEU had reasoned:

In that regard, in accordance with Article 1(a) of Directive 93/36, it is, in principle, sufficient if the contract was concluded between, on the one hand, a local authority and, on the other, a person legally distinct from that local authority. The position can be otherwise only in the case where the local authority exercises over the person concerned a control which is similar to that which it exercises over its own departments and, at the same time, that person carries out the essential part of its activities with the controlling local authority or authorities.

The Italian Council of State observed that this paragraph in Teckal had subsequently been interpreted by the CJEU in Case C-340/04, Carbotermo et Consorzio Alisei ECLI:EU:C:2006:308. The novel issue in that case was whether it was possible to rely on the Teckal exception in a situation where the contract had been awarded to a company in which the contract-awarding authority was also a shareholder.

The CJEU in Carbotermo had reasoned at [63] that Teckal [50] would apply only if an undertaking’s activities were ‘devoted principally to that authority and any other activities are only of marginal significance’.

The CJEU had then set out a new test to enable judges to determine this:

63 In applying those principles, the undertaking in question can be viewed as carrying out the essential part of its activities with the controlling authority within the meaning of Teckal only if that undertaking’s activities are devoted principally to that authority and any other activities are only of marginal significance.

64 In order to determine if that is the case, the competent court must take into account all the facts of the case, both qualitative and quantitative.

65 As to the issue of whether it is necessary to take into account in that context only the turnover achieved with the supervisory authority or that achieved within its territory, it should be held that the decisive turnover is that which the undertaking in question achieves pursuant to decisions to award contracts taken by the supervisory authority, including the turnover achieved with users in the implementation of such decisions.

66  The activities of a successful undertaking which must be taken into account are all those activities which that undertaking carries out as part of a contract
awarded by the contracting authority, regardless of who the beneficiary is: the contracting authority itself or the user of the services.

67 It is also irrelevant who pays the undertaking in question, whether it be the controlling authority or third-party users of the services provided under concessions or other legal relationships established by that authority. The issue of in which territory those services are provided is also irrelevant.

Applying the Carbotermo requirements here, it appeared that lines of credit open to Co.ge.sa had to be taken into account when calculating the turnover.

That said, it was not altogether clear to the Italian Council of State what should happen when it came to the concept of the ‘essential activity’ in para 63 of Carbotermo, and whether account should be taken of other activities imposed on Co.ge.sa by the Region of Abruzzo – for the Region itself was a non-shareholder public administration, and the Region required the company to do work for non-shareholder public bodies and private companies.

A final aspect of the case concerned the connection between the concept of ‘essential activity’ in Carbotermo [63] and Article 12(5) of Directive 2014/24, which sets out specific criteria which, when satisfied, allow public contracts between entities within the public sector to fall outside of the Directive. The criteria are technical in nature and go to the heart of how to establish ‘control’. In light of Article 12(5), the Council of State wondered whether those criteria could apply in the present case notwithstanding the fact that the rule was not in force at the time when the in-house contract was awarded. The Italian Council of State thought that this might be possible because the rule in the Directive was designed to avoid distortions of competition in the market, and that policy was already enshrined in Articles 43, 46 and 89 of the EU Treaties.

In light of these legal uncertainties, Judge Maruotti and the bench did not know how to apply EU law correctly, and therefore decided to make a preliminary reference to the CJEU.

Questions Referred
According to the Curia website, the Italian Council of State has asked:

1. When the ‘essential activity’ undertaken by the controlled body is assessed, must an activity imposed on it by a non-shareholder public administration and undertaken in favour of non-shareholder public bodies also be taken into account?

2. When the ‘essential activity’ undertaken by the controlled body is assessed, must the contracts awarded to shareholder public bodies before the requirement of ‘similar control’ became applicable also be taken into account?