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Print articleNew legislation on the direct award of contracts to affiliated companies
June, 2012 - Kristian Pedersen and Erik Olsson
On the 10 May 2012, the Swedish parliament enacted a permanent exemption to the Swedish Public Procurement Act (2007:1091) (“LOU”) for the direct award of contracts to affiliated companies.[1]Parliament also decided to enact an option for municipalities and county councils to delegate the competence to make decisions in relation to public procurement procedures to central purchasing bodies. The new rules will enter into force on 1 January 2013 but the rules on direct awards to affiliated companies will apply retroactively to awards made prior to this date.
The main rule is that all purchases of goods, services or works made by a contracting authority are to be preceded by a procurement procedure in accordance with LOU. This applies in relation to all suppliers, i.e. including affiliated companies, such as wholly owned subsidiaries of the contracting authority. There are, however, a number of exemptions from this rule. One of these exemptions is the one stated in chapter 2 section 10 a) of LOU, meaning that certain purchases of a procuring authority from affiliated companies are exempted from the public procurement rules if certain criteria are fulfilled.
The new rules will replace the previous temporary exemption in chapter 2 section 10 a) of LOU, and will differ to some extent from them.
The new rules are applicable to all contracts concluded between a contracting authority and a legal person or joint committee (according to the Swedish local government act, “KL”) provided that
1. the contracting authority exercises control over the legal person or the joint committee similar to the that which it exercises over its own departments (the control-criterion); and
2. the legal person or the joint committee carries out the essential part of its activities with the controlling contracting authority or authorities (the activity criterion).
Both the control and activity criterion have been developed in the case law of the Court of Justice of the European Union (“CJEU”) and are sometimes referred to as the Teckal criteria since that where first discussed by the court in case C-107/98 Teckal.
The biggest difference compared to the current exemption in LOU is that the new exemption can be applied by all types of contracting authorities, i.e. not only state and local authorities, but also bodies governed by public law, such as municipal companies. The new rules also make it possible to abstain from procurement in “reverse situations”, i.e. where the controlled entity purchases goods, services or works from the contracting authority exercising control.
According to the assessment of the government in the preparatory work, it is more uncertain if the exemption can be used for horizontal awards, i.e. awards between two sister companies in a group of affiliated companies, which are both under the control of the same contracting authority and carry out the essential part of their activities with this authority. On the one hand, the functional view point of the CJEU, suggests that there would also be room for allowing an exemption in these situations. On the other hand, it is difficult to claim that two sister companies exercise control over one another in accordance with the control criterion. In the opinion of the government, this question will have to be resolved by the courts, and ultimately by the CJEU.
The parliament’s decision also means that KL will be amended in some regards. Through the new rules the council of the municipal and county councils will be obliged to ensure that the objects of a certain company owned by a municipal or a county council will be stated in the articles of association, together with the local government principals controlling the company in question.
Furthermore, the articles of association must contain an obligation for the company to seek the opinion of the council when making decisions of principle importance.
Thereafter, the municipal executive board will annually decide on whether each company has conducted its activities in accordance with the local government principles and if these activities have been in accordance with the objects of the company as stated in the articles of association. This decision is to be presented to the council together with the annual financial statements of the company. If the municipal executive board finds that the activities of a certain company have exceeded the objects of the company or the local government principles, the executive board is to suggest measures to be taken to correct this development.
The new rules in KL increase the ability of municipalities and county councils to exercise control over their companies. These control measures will most likely make it easier for municipalities and county councils to ensure that the control criterion in the Teckal exemption is fulfilled. The new rules in KL can, therefore, be said to work as a complement to the new rules in chapter 2 section 10 a) of LOU.
Finally the parliament’s decision makes it possible for municipalities and county councils to delegate the competence to make decisions in relation to public procurement procedures to central purchasing bodies, i.e. to contracting authorities that procure on the behalf of others. Due to certain limitations in KL, this has not been previously possible and municipalities and county councils have been forced to make their own award decisions in public procurements. This has been very burdensome in larger coordinated procurements with several contracting authorities. The new rules will address this problem by allowing municipalities and county councils to delegate the right to make award decisions to central purchasing bodies.
All in all, it can be said that the new rules, both in LOU and KL, align with the previous proposals of the OFUKI-committee[2] and thus does not offer any big surprises. Our assessment is that the rules will lead to an increase in legal certainty and predictability in some aspects that have previously been uncertain. There are, however, some remaining questions regarding how the Teckal criteria will be interpreted and applied by the courts. It is, inter alia, uncertain if awards can be made between sister companies in a municipal company group without undergoing procurement according to LOU.
[1] Preparatory work: Prop. 2011/12:106, Offentlig upphandling från eget företag – och vissa andra frågor.
The main rule is that all purchases of goods, services or works made by a contracting authority are to be preceded by a procurement procedure in accordance with LOU. This applies in relation to all suppliers, i.e. including affiliated companies, such as wholly owned subsidiaries of the contracting authority. There are, however, a number of exemptions from this rule. One of these exemptions is the one stated in chapter 2 section 10 a) of LOU, meaning that certain purchases of a procuring authority from affiliated companies are exempted from the public procurement rules if certain criteria are fulfilled.
The new rules will replace the previous temporary exemption in chapter 2 section 10 a) of LOU, and will differ to some extent from them.
The new rules are applicable to all contracts concluded between a contracting authority and a legal person or joint committee (according to the Swedish local government act, “KL”) provided that
1. the contracting authority exercises control over the legal person or the joint committee similar to the that which it exercises over its own departments (the control-criterion); and
2. the legal person or the joint committee carries out the essential part of its activities with the controlling contracting authority or authorities (the activity criterion).
Both the control and activity criterion have been developed in the case law of the Court of Justice of the European Union (“CJEU”) and are sometimes referred to as the Teckal criteria since that where first discussed by the court in case C-107/98 Teckal.
The biggest difference compared to the current exemption in LOU is that the new exemption can be applied by all types of contracting authorities, i.e. not only state and local authorities, but also bodies governed by public law, such as municipal companies. The new rules also make it possible to abstain from procurement in “reverse situations”, i.e. where the controlled entity purchases goods, services or works from the contracting authority exercising control.
According to the assessment of the government in the preparatory work, it is more uncertain if the exemption can be used for horizontal awards, i.e. awards between two sister companies in a group of affiliated companies, which are both under the control of the same contracting authority and carry out the essential part of their activities with this authority. On the one hand, the functional view point of the CJEU, suggests that there would also be room for allowing an exemption in these situations. On the other hand, it is difficult to claim that two sister companies exercise control over one another in accordance with the control criterion. In the opinion of the government, this question will have to be resolved by the courts, and ultimately by the CJEU.
The parliament’s decision also means that KL will be amended in some regards. Through the new rules the council of the municipal and county councils will be obliged to ensure that the objects of a certain company owned by a municipal or a county council will be stated in the articles of association, together with the local government principals controlling the company in question.
Furthermore, the articles of association must contain an obligation for the company to seek the opinion of the council when making decisions of principle importance.
Thereafter, the municipal executive board will annually decide on whether each company has conducted its activities in accordance with the local government principles and if these activities have been in accordance with the objects of the company as stated in the articles of association. This decision is to be presented to the council together with the annual financial statements of the company. If the municipal executive board finds that the activities of a certain company have exceeded the objects of the company or the local government principles, the executive board is to suggest measures to be taken to correct this development.
The new rules in KL increase the ability of municipalities and county councils to exercise control over their companies. These control measures will most likely make it easier for municipalities and county councils to ensure that the control criterion in the Teckal exemption is fulfilled. The new rules in KL can, therefore, be said to work as a complement to the new rules in chapter 2 section 10 a) of LOU.
Finally the parliament’s decision makes it possible for municipalities and county councils to delegate the competence to make decisions in relation to public procurement procedures to central purchasing bodies, i.e. to contracting authorities that procure on the behalf of others. Due to certain limitations in KL, this has not been previously possible and municipalities and county councils have been forced to make their own award decisions in public procurements. This has been very burdensome in larger coordinated procurements with several contracting authorities. The new rules will address this problem by allowing municipalities and county councils to delegate the right to make award decisions to central purchasing bodies.
All in all, it can be said that the new rules, both in LOU and KL, align with the previous proposals of the OFUKI-committee[2] and thus does not offer any big surprises. Our assessment is that the rules will lead to an increase in legal certainty and predictability in some aspects that have previously been uncertain. There are, however, some remaining questions regarding how the Teckal criteria will be interpreted and applied by the courts. It is, inter alia, uncertain if awards can be made between sister companies in a municipal company group without undergoing procurement according to LOU.
[1] Preparatory work: Prop. 2011/12:106, Offentlig upphandling från eget företag – och vissa andra frågor.
[2] SOU 2011:43, Offentlig upphandling, från eget företag?! – och vissa andra frågor
Footnotes: Kristian Pedersen, |
