“Horizontal in-house transactions” – covered by the Teckal exemption?

The European Court of Justice has recently been asked to consider whether the Teckal exemption for in-house contracts should also exempt so called “horizontal in-house transactions”. That’s where, although there is no control as between the contracting authority awarding the contract and its appointed contractor, the two parties are each controlled by the same public body.

To date, the Teckal (or in-house) exemption has been strictly applied and the Courts have only endorsed direct awards as being outside the scope of the EU procurement rules where (1) the contracting authority exercises over the contractor a control similar to that exercised over its own departments, and (2) where the contractor carries out the essential part of its activities with the controlling authority. Case law has also confirmed that the test can be met where the contracting authority exercises the necessary control over the contractor jointly together with other contracting authorities.

In the current case, the Court had to consider whether to stretch this concept. The facts were that the University of Hamburg needed to procure an information management system. The University awarded the contract directly to Hochschul-Informations-System GmbH (HIS); HIS was a not-for-profit company, whose objectives were to assist educational institutions in their work via the provision of information management systems. One-third of HIS was owned by the German federal state, with the other two-thirds being owned by a group of local authorities (the city of Hamburg being one of these, owning 4.16% of HIS’s capital). A private sector provider, Datenlotsen, challenged the award, arguing the University had acted unlawfully as the requirements of the Teckal exemption had not been met.

Although it was common ground that the University did not control HIS, in its defence, the University argued that its contract with HIS should be regarded as a “horizontal in-house transaction”. Its position was that this should still fall within the Teckal exemption on the grounds that both parties (ie, the University and HIS) were ultimately controlled by the same public body ie, the City of Hamburg.

On the facts the Court concluded that the City of Hamburg did not have "similar control" over the University; its control was limited to procurement matters whereas the University had autonomy as regards its main activities of education and research. So it could not be said that the City of Hamburg “controlled” the University. The Court therefore did not have to consider whether the Teckal exemption could be extended to cover a new category of “horizontal in-house transactions” ie, where, although no control existed as between the contracting authority and contractor, both the contractor and contracting authority were nevertheless controlled by the same public body.

The Court also concluded that the exemption relating to “inter-municipal co-operation” did not apply here as, in the current context, neither the University nor HIS were public bodies co-operating in the performance of a public task they had to perform.

Comment

The Court left open the question of whether the Teckal exemption should be extended to “horizontal in-house transactions”. However, the uncertainty around this is set to be short lived now that the situation has been specifically addressed in the new public procurement directive (which came in to force at EU level on 17 April 2014 and which the Cabinet Office is hoping to implement in the UK by the end of 2014).

The new directive codifies the Teckal test in legislation for the first time. In addition, Article 12(2) appears to specifically permit an extension to the principles in Teckal in the form of “horizontal in-house transactions”, provided that the certain conditions, including the necessary structure of control, have been met (of course, in the Datenlotsen case, the University still would not have been able to demonstrate a sufficient degree of control over HIS in order for new Article 12(2) to be of any assistance).

While the new directive has no direct effect in UK until implemented through our own Regulations, even before then it is easy to see that a UK Court could have regard to its provisions were a case, which met the conditions for a horizontal in-house transaction, to come before it.

Contracting authorities seeking to take advantage of this position should nevertheless be mindful that to do so, in advance of the new directive’s implementation, is not without risk – particularly in the light of the European Court’s decision as discussed above. In addition, any exemption to the EU procurement regime, even once provided for in our own UK Regulations, will still be strictly interpreted, emphasizing the importance of ensuring that all the necessary conditions are fully met.

You can read the judgment in the case here