Conflicts, errors and explaining evaluation results: European Dynamics v EUIPO

Yesterday I taught a module on tender evaluation, part of the residential weekend at King’s College London for the Public Procurement Regulation in the EU postgraduate course. One of the cases we discussed was European Dynamics v European Union Intellectual Property Office (T-556/11) and the appeal by EUIPO, subject of a recent opinion from Advocate General Mengozzi (C-376/16). The original case, brought under the Financial Regulation which governs procurement by EU institutions, is notable for its detailed discussion of manifest errors of assessment, conflicts of interest, exclusion for corruption and the duty to give reasons to unsuccessful bidders. It’s also notable for being one of the few cases won by serial litigant European Dynamics/Evropaïki Dynamiki (ED), with the General Court annulling the award of contract and finding ED was entitled to damages (it had claimed over EUR 6 million).

The challenge related to a multi-operator framework agreement to provide IT services to the EUIPO, which was set up on the ‘cascade’ model (i.e. a primary provider plus two reserves). ED came fourth in the competition, despite obtaining the highest score on each of the three technical criteria. It challenged the decision on three grounds: failure to exclude the other bidders based on alleged conflicts of interests and corruption, numerous alleged manifest errors of assessment in the evaluation of the technical and financial criteria, and the level of detail provided by EUIPO regarding the scoring of its tender. As each of the issues is highly relevant to contracting authorities and entities operating under the 2014 procurement directives, it is worth examining both the General Court’s judgment and AG Mengozzi’s opinion, which relates solely to the duty to give reasons.

Conflicts of interest and corruption

The first alleged conflict of interest related to the participation of PwC Spain in one of the consortia admitted to the framework. PwC UK and PwC Belgium had been involved in drafting the tender specifications. When this was brought to EUIPO’s attention, they sought clarification from the consortium leader, who responded that i) there were no structural links between PwC Spain and the entities involved in drafting the tender specifications ii) PwC UK and PwC Belgium were bound by a confidentiality clause and had not disclosed any information related to the specifications and iii) PwC Spain had only been asked to participate in the consortium six days prior to the tender deadline and had no involvement in the preparation, drafting, pricing or sign-off of the technical tender. On the basis of this response, EUIPO concluded that no unfair advantage could have been gained. While some scepticism about the efficacy of Chinese walls within corporate groups may be natural, the existence of a specific confidentiality obligation, together with the lack of opportunity to influence the content of the tender, does seem to greatly reduce the risk of a conflict affecting a tender.

Under the 2014 directives, the duty on contracting authorities to prevent conflicts of interest is balanced against the right of a bidder to demonstrate that it could not have gained an unfair advantage. This is an issue which must be considered from the early planning stages, particularly in IT or other complex tenders where external input is often needed to prepare specifications. While contracting authorities may require companies preparing specifications to refrain from bidding for the main contract, they may not be able to bind other companies in the same corporate group – and the proportionality of this approach might in any case be questioned. The General Court found that in this case EUIPO had fulfilled its duty to investigate and there was no conflict of interest. The Court also appeared to attach significance to the fact that the consortium had scored lower on the technical criteria than European Dynamics – in my view this does not in itself mean that no unfair advantage was gained, as any such advantage may have been outweighed by other factors.

A second alleged conflict of interest arose from the fact that one of the bidders had also bid for a second framework being established by EUIPO, which would involve developing specifications for, and monitoring work carried out under, the first framework. At the time of the tender in question, no contracts had been awarded under this framework. European Dynamics itself was also eventually admitted to the second framework, leading EUIPO to argue that if the conflict of interest argument succeeded on this count ED would also have to have been excluded from the procedure and would lose its claim for damages. In the event, the Court did not consider the claim valid, as the second framework was not yet in existence at the time of the disputed tender. This raises an interesting question regarding the possibility under Art. 57.4 of Directive 2014/24/EU to apply exclusion grounds at any point when the contracting authority becomes aware of a problem. EUIPO had specifically referred to the possibility that holding a contract under the other framework might amount to a conflict of interest and result in exclusion, however as this was not the case at the time of the tender it had not excluded the second consortium.

Finally, ED alleged that Siemens, a key partner in one of the successful consortia, should have been excluded on the basis of its admissions of fraud, corruption and bribery in cases brought in Germany and the United States, and its payment of fines to settle those cases. While Siemens had not been convicted of any crime, the Court found that EUIPO had failed to seek the necessary evidence of this required under the Financial Regulation. EUIPO had not requested an ‘extract from the judicial record’ in relation to this and other grounds of exclusion as required under the Financial Regulation, instead allowing Siemens to rely on a solemn declaration. It had also only received the declaration from one of the two Siemens entities involved in the consortium. The General Court held that it had breached its duty to seek evidence in respect of the grounds of exclusion. Is this also a duty under the 2014 directives? Bidders are able to rely upon self-declarations (including the ESPD) to prove that they comply with the exclusion grounds in the first instance, but contracting authorities must seek documentary evidence in relation to the exclusion grounds prior to contract award. They may also do so at any earlier point where this is necessary for the proper conduct of the procedure. In situations where there are clear grounds to suspect a company of wrongdoing, this obligation is likely to be activated (see my previous blog below about the Rolls-Royce deferred prosecution agreement).

Manifest errors of assessment

ED also advanced a large number of claims of manifest errors of assessment, roughly half of which were upheld by the Court. In relation to the financial evaluation, ED challenged both the formula and the way in which it was applied by EUIPO. The financial evaluation consisted of two parts: 70 marks were assigned based on the average day-rate tendered (with the lowest average rate receiving full marks and other bids marked proportionately) and 30 marks were assigned based on the average efficiency ratio (based on the number of days required to carry out three hypothetical jobs, with the lowest average again receiving the highest score). ED’s challenge to this formula was rejected as they had not established either that EUIPO deviated from its published methodology or that it was unlawful. Arguably any cost evaluation formula which is divided into parts which are weighted separately is capable of giving rise to distortions (for example, if a bidder had a high average rate but was extremely efficient, they might score lower than a bidder who had a higher overall cost but a low daily rate) – however ED did not succeed in demonstrating this.

Duty to give reasons

The third claim raised by ED concerns the duty to give reasons for decisions, and specifically to explain the basis on which bidders ‘lose marks’ in technical and financial evaluations. The concept of bidders losing marks must be treated with caution in my view, as in most evaluation techniques it is not the case that each tender starts out with full marks and points are then deducted for specific shortcomings. Rather, tenders gain marks where they demonstrate performance against a qualitative award criterion; if a tender does not respond to an award criterion at all, it should score zero under that criterion. To deduct marks suggests that there is a putative ‘perfect tender’ to which each bid is being compared. While some contracting authorities do in fact use model tender answers, this can make evaluation formulaic and detract from a genuine exercise of discretion on the part of evaluators. It is also inappropriate where specifications are output- or performance-based, as there will be more than one way to gain full marks under qualitative criteria.

While ED had received its scores and the scores of each of the three successful bidders, it sought a full copy of the evaluation report and copies of the successful tenders. The General Court had previously held in a case brought by ED against the Commission (C-629/11 P) that there was no obligation to disclose all details of the analysis of each tender, the evaluation report or the successful tender(s). In TNS Dimarso (C-6/15), the Court of Justice held that disclosure of evaluation methodology was not required under the procurement directives. In this case however, the General Court found that the reasons given by EUIPO had been inadequate because they did not make clear the relationship between the evaluation of the various technical criteria and sub-criteria and the points ‘deducted’, or provide a breakdown of the points. The Court thus appeared to introduce a higher standard of disclosure than has previously been contemplated in EU case law on tender evaluation. Advocate General Mengozzi’s opinion, delivered on 28 September 2017, upheld the General Court’s approach and dismissed EUIPO’s appeal on this ground. He sought to distinguish Case C-629/11 P on the basis that in that case the weighting of sub-criteria had been clear, whereas in this case the weighting was undisclosed.

In some ways this case perhaps says less about the duty to give reasons and more about choice of evaluation method. EUIPO had adopted one of those unfortunate, but common (at least in recorded case law) evaluation methods which results in only a very small number of marks separating tenders on the technical criteria. To me this almost always indicates a failure to use the marks available to properly distinguish between bids, keeping in mind that they are being compared to each other and not to some ideal standard. Contracting authorities may be better off using intervals spread across the whole range of marks to score technical criteria. Otherwise there is effectively a distortion of the published marking scheme – as the full range of marks may be used to score cost whereas only a very limited range of marks is used to score quality. The result is that cost ends up having a heavy influence on the final result, even when there is not a large spread of tendered costs.

As so often in procurement, it is when the contracting authority itself generates detailed rules but then fails to explain or follow them that it gets into trouble. Regardless of whether the Court of Justice chooses to follow AG Mengozzi and the General Court on this point, contracting authorities are well advised to apply relatively simple scoring methods for technical criteria, explain them in the tender documents, and give tenderers a full statement of reasons which shows how they have exercised their discretion in evaluation.

Socially responsible public procurement after Brexit: Will it get easier?

Abby Semple | 6 June 2017

EU rules have often been portrayed as a barrier to including social considerations in public contracts. Undoubtedly, having rules about competition limits the scope for implementing social policies if these discriminate against non-local suppliers. But outside of such discriminatory policies, the 2014 directives offer a wide range of options to pursue socially responsible public procurement (SRPP). For example, there is an increased ability to reserve contracts for social enterprises or programmes employing disabled and disadvantaged workers. While not a derogation from competition, contracts can be reserved for organisations where at least 30% of the workforce is disabled or disadvantaged. There is also now a clear ability to address social considerations such as fair trade in award criteria, a position written into the directives following the European Court of Justice's judgment in the Dutch Coffee case (C-368/10). Bidders who have been convicted for child labour or people trafficking, as well as those who have failed to pay taxes or social security, must be excluded from tenders.

Perhaps most significantly, the 2014 directives contain a 'mandatory social clause' requiring governments to ensure that environmental, social and labour laws are observed in the performance of public contracts. This includes obligations under applicable collective agreements, and was one of the many amendments introduced by the European Parliament during the negotiation of the new directives. While England and Wales chose not to transcribe this article directly in the 2015 Public Contracts Regulations (PCR), it still has effect and is embodied in various other provisions - for example the obligation to reject tenders which are abnormally low due to non-compliance with such laws or collective agreements. Contracting authorities can also verify compliance on the part of parent companies or subcontractors where reliance is placed on these by the bidding company. Tenders which are based on illegal social dumping can therefore be rejected, even if the company has not been convicted of an offence.

While these may seem like relatively modest measures, they represent a substantial evolution from previous directives - and reflect the involvement of the ECJ and European Parliament as well as Member States. In particular, they offer substantially more support for SRPP than other international instruments concerned with procurement - including the WTO Government Procurement Agreement (GPA) and Comprehensive Economic and Trade Agreement (CETA) with Canada. In a recent paper comparing these agreements with the EU directives, I identify a number of areas in which the GPA and CETA appear to restrict social procurement measures which would be allowed under the directives. For example, neither agreement explicitly allows rejection of abnormally low tenders based on non-compliance with social or labour law, and the use of third-party labels (such as the Fair Trade mark or SA 8000) is also not endorsed. While these agreements are more general in nature than the EU directives and also less widely enforced, the lack of a clear legal basis for SRPP is a cause for concern given the vastly different social protection systems which exist in the countries which are party to them.

Turning to Brexit, the extent to which contracting authorities are able to pursue socially responsible procurement will be one of many issues to be resolved as the UK leaves the EU. It seems unlikely in the short term that the PCR or the remedies regulations will be repealed. However as noted previously on this site, public bodies may come under renewed pressure both to 'buy British' and to implement social policies such as employment skills and training via public contracts. These objectives need to be separated and careful consideration given to any proposals to change the legal framework. Any change in policy or practice is certain to come under scrutiny in the context of trade talks with the EU, and may also arise if the UK finds itself relying on WTO rules. The EU is still considering adopting a regulation on third-party access to its public procurement market, which would apply price penalties to companies from countries which do not open their own public contracts to competition. Aside from the trade implications, discriminatory procurement policies tend to undermine value for money and effectiveness in public service delivery. This is why the work done at EU level (with heavy UK input) to reconcile social protections with fair competition is so important.

One of the key areas where these two objectives have seemed to conflict is over the question of wages paid to workers on public contracts. While the Posted Workers Directive (PWD) makes clear than minimum wages set out in laws, regulations, administrative provisions and certain collective agreements can be applied, there has been greater doubt around living wage[1] policies in public contracts. The Scottish government engaged in correspondence with the European Commission on this issue several years ago; at that time it was advised against including the living wage as a mandatory condition for award of contracts. However two developments since that time suggest a shift in EU law which may make implementation of the living wage easier. The first is the aforementioned Dutch Coffee judgment, which endorsed the use of award criteria based, inter alia, on the payment of wage premiums to workers in developing countries. This creates an arguable case for use of award criteria based on the living wage, as I have set out in a paper to be delivered in Nottingham. The second factor is the proposed change to the PWD which would allow enforcement of a broader range of pay-related conditions in host Member States, rather than just minimum wages.

Questions such as the application of a living wage in public contracts have been subject to a detailed legal and political bargaining process within the EU. The balance reflected in the procurement directives and PWD is neither final nor static - it is subject both the ECJ's ongoing interpretation and to legislative change. In this area, as many others, disentangling these bargains and cross-references to allow the UK to take an à la carte approach is far from easy. Moreover, it is not clear that the UK's constituent regions would wish to make the same choices from that menu. Divorcing the text of ex-EU legislation from the evolving body of EU law in the manner set out in the Government's March 2017 White Paper may lead to unintended consequences and risks creating a stricter, rather than more flexible, regime for UK contracting authorities. This would occur where CJEU case law is 'fossilized' in the manner set out in the White Paper, and where flexibilities introduced by the revision of the PWD, for example, do not form part of UK law. While a hard Brexit involving reversion to WTO rules might provide some additional flexibility on living wage issues, it is also likely to be accompanied by severe economic pressures which would undermine both the public and private sector's ability to pay a living wage to employees in the United Kingdom.

[1] In the UK, the Living Wage Foundation has since 2001 calculated the rate of pay necessary for workers to meet basic needs given prevailing prices, including a small margin for unexpected expenses. The Living Wage has typically been 20-30% higher than the national minimum wage, with the separate London Living Wage being 30-40% higher. Voluntary commitments to pay the Living Wage have been made by some 2900 private and public sector organisations in the UK. This should be distinguished from the 'National Living Wage' introduced under the National Minimum Wage (Amendment) Regulations 2016, which is the legal minimum for workers aged 25 and over (£7.50 per hour as of April 2017).