December 20, 2016 - International Public Procurement

Consortium Bidding in European Government Contracts

brexitConsortium bids are relatively common in the European government contract sector.  But, under European law, what happens in a situation where a company which is part of a bidding consortium drops out during the procurement process?  If the previous composition of the consortium satisfied the authority’s pre-selection criteria, can the remaining companies continue with the process or would that be considered unfair to the other bidders?

The Court of Justice of the European Union (CJEU) has provided helpful clarification on how these consortium-related issues should be assessed in the EU.

The Banedanmark case

The case in which the CJEU issued its ruling (MT Højgaard and Züblin v Banedanmark) involved a consortium of companies bidding for the construction of a new railway line in Denmark.  Banedanmark, the Danish railway operator awarding the public contract, began the procurement process by a negotiated procedure under the so-called Utilities Directive (Directive 2004/17/EC on coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors–since updated in 2014).

The bidders were invited to lodge three successive tenders.  One bidder, Per Aarsleff, submitted its first tender in a consortium with another entity, E. Pihl og Søn, but that entity became insolvent during the bidding process.  Per Aarsleff, as the remaining consortium member, continued in the procurement process by itself and was eventually awarded the contract.  One of the unsuccessful consortia participating in the bidding process challenged this award on the basis that Per Aarsleff had not itself been pre-selected and, therefore, Banedanmark breached the equal-treatment and transparency principles under Article 10 of the Utilities Directive.

The Principle of Equality

Under EU law, government authorities are legally required to observe principles of equal treatment, non-discrimination and transparency in their procurement processes.

The question referred to the CJEU was whether the principle of equal treatment should be interpreted as precluding an authority from awarding a contract to a tenderer which was pre-selected only as part of a consortium and not in its own right, as was the case with Per Aarsleff.

The CJEU stated that the principle of equality cannot be strictly interpreted in a vacuum.  The procurement process must also provide for adequate competition.

In practice, the principles of equality and transparency mean that all tenderers must be in an equal position when submitting their tenders and must also be in a position of equality when their tenders are being assessed by the contracting authority.  All tenderers must have the same opportunities during the application process and must be subject to the same conditions.

If a member of a consortium of bidding companies has been dissolved after the consortium has been pre-selected, and the remaining companies still want to continue with the bidding process, the remaining members must satisfy exactly the same conditions as do the other bidders which compete for the project.  There will be no breach of the equality principle if the remaining parties continue participating in the negotiated procedure, as long as the following two conditions are met:

(1)     the remaining companies by themselves meet the contracting authority’s requirements; and

(2)     the remaining companies’ participation does not put the other tenderers at a competitive disadvantage.

The CJEU as well as the Danish Complaints Board, which referred this matter to the CJEU held that Per Aarsleff would have been successfully pre-selected if it had made the first bid by itself.  Also, there was nothing to suggest that the other bidding consortia were disadvantaged in any way by Per Aarsleff’s continuous participation in the bidding procedure.

The CJEU decided that the principle of equality did not itself prohibit Per Aarsleff from replacing the original consortium and continuing in the bidding process, as long as the two conditions mentioned above were satisfied.

“Competitive Disadvantage”

There were no specific rules applicable to this situation under either Danish or EU laws and, therefore, the CJEU had to fill the gap with its interpretation of the principle of equality.  Although this decision brings some degree of clarity to situations where one of the members of a consortium withdraws during the procurement process (in the sense that the remaining company must meet the contracting authority’s requirements by itself), it is not clear what the CJEU meant by a “competitive disadvantage”.  If the surviving bidding company is subject to the same criteria and the entire process must be carried out in accordance with the equality principle, it’s difficult to imagine in what ways the competing bidders may be disadvantaged.