Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
The recent decision of the European Court in LitSpecMet  has confirmed our long held view and the Opinion of the Advocate General in that case. This is that where a parent contracting authority relies upon the “Teckal”  exemption, now contained in Regulation 12 , to avoid tendering a contract with its subsidiary via OJEU, that subsidiary must follow the EU procurement rules for their own purchases.
The Regulation 12 exemption enables a contracting authority to avoid an OJEU tender process when contracting with a subsidiary that meets certain requirements, including that the contracting authority “controls” the subsidiary and that over 80% of the subsidiary’s business is with the contracting authority. The justification for the exemption, which UK case law  seems to confirm, is probably because the parent contracting authority and subsidiary are regarded as one organisation for the purpose of the EU procurement rules.
In addition to having subsidiaries which rely on Regulation 12, a contracting authority can have a subsidiary which is wholly “commercial”. Broadly speaking, the main objective of such a subsidiary will be to make a profit. It will not have to follow the EU procurement rules for its own purchases. However, it will not benefit from the exemption from tendering for contracts with its parent organisation.
From a contracting authority’s point of view, it would be great if they could set up a subsidiary they could contract with outside the EU procurement rules, with that subsidiary itself avoiding the EU procurement rules for its own purchases because it is “commercial”. This would provide a very easy way round a contracting authority having to follow EU procurement rules for its own procurements, simply by routing those procurements through a Regulation 12 subsidiary.
This is not possible, as Andrew Millross pointed out in his earlier e-briefing “Not having your cake and eating it”. We have always been of the view that “commercial” subsidiaries who act independently to make a profit cannot rely on the Regulation 12 exemption. The fact that they are “commercial” means they cannot be treated as being part of the same organisation as the parent contracting authority, which “meets needs in the general interest, not having an industrial or commercial character”.
For more information
Please contact Alistair Smith.
- LitSpecMet UAB v Vilniaus lokomotyvu remonto depas UAB, Case C-567/15
- Teckal Srl v Comune di Viano (Reggio Emilia), Case C-107/98
- Regulation 12 Public Contract Regulations 2015 which enacted the Teckal case
- Risk Management Partners v Brent LBC,  2 AC 34
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