A party seeking to restrict another's commercial activities must consider whether such terms are normal in similar, factual and contractual circumstances.
The 2014 Directive spells it out, though, in just its second Recital:
“Public procurement plays a key role in the Europe 2020 strategy… as one of the market-based instruments to be used to achieve smart, sustainable and inclusive growth while ensuring the most efficient use of public funds. [Previous procurement laws] should be revised and modernised in order to increase the efficiency of public spending, facilitating in particular the participation of small and medium-sized enterprises (SMEs) in public procurement, and to enable procurers to make better use of public procurement in support of common societal goals” (Recital 2)
The remaining Recitals, and the operative Articles, put the flesh on these bones, and this article focuses on a few examples of how the 2015 Regulations implement some key opportunities to achieve social, economic and/or environmental benefit through procurement processes. There is more, also, that is done to support the inclusion of SMEs in the public sector marketplace, [which will be the subject of a separate article].
For those that have doubted of the legitimacy of seeking to use procurement processes to address social, economic or environmental factors, the 2015 Regulations reflect the case law and the politics of Europe so that it is clear there are no significant barriers to doing so, so long as key concepts in European law are borne in mind. For those eager to ensure that procurement activity achieves the best possible results, the 2015 Regulations introduce some new methodology that might be helpful.
The most obvious – and in some senses the most significant – change is the introduction of “social aspects” linked to the subject matter of the contract into the list of acceptable contract award criteria in Regulation 67. This had long been recognised through case law – in particular by analogy with the already explicit “environmental” aspects – but nonetheless this is a useful clarification. In any case the subject matter of the contract has always been for the purchaser to decide, Europe not being particularly concerned about what you buy, only how you buy it.
But there are numerous other introductions and changes in the 2015 Regulations aimed at ensuring that maximum social value can be achieved through the commissioning cycle. In addition to those discussed below, there are also new rules about the reserving of public contractsto a ringfenced pool of competitors (click here for our previous piece on reserved contracts) and an increased focus on life-cycle costing as part of the price evaluation of tenders (click here for our thoughts on life-cycle costing).
A case that has become known as the Dutch Coffee case (European Commission v Netherlands C-368/1 All ER (EC) 804) is codified in Regulation 43. Its most helpful conclusion is in confirming that it is acceptable to require that products used within a contract be of fair trade origins. In terms of its codification, though, its impact is broader:
- a specific label can be used as means of proof to demonstrate that environmental, social or other characteristics that are part of the technical specifications, contract award criteria and/or contract performance conditions are met. This is provided that:
- the requirements of the label only concern criteria which are linked to the subject matter of the contract and are appropriate to define the contract’s characteristics (the purchaser may, if a label goes beyond its requirements, indicate which of the label’s requirements are necessary);
- the requirements of the label are based on objectively verifiable and non-discriminatory criteria;
- the label is established in an open and transparent procedure in which stakeholders participate;
- the label is accessible to all interested parties;
- the requirements for the label are set by a third party and bidders do not exercise a decision influence over that third party.
- If the purchaser requires a specific label, it must accept all labels that meet equivalent requirements. Where a bidder has demonstrably no possibility of obtaining a specified label (say, for example, it is only available to organisations registered in one country) within the time limits for reasons not attributable to that bidder, the purchaser must accept alternative means of proof that the bidder fulfils the same requirements.
- If a label goes beyond those requirements that are linked to the subject matter of the contract, the purchaser should not require the label as such, but instead can define the technical specification for the contract with reference to those parts of the label’s requirements that are linked and are appropriate to define the contract’s characteristics.
This shouldn’t affect the purchaser’s ability to require a tenderer to hold policies that are required by law – health & safety, or equalities, perhaps – but it does mean that policies and labels cannot be used as a shortcut to “ticking” the social value “box”. Purchasers must put thought into the specifications for their contracts so that the right outcomes are being sought, not just the right pieces of paper.
Compliance with Environmental, Social and Labour Laws
The Directive highlights in its Recitals that “it is of particular importance that Member States and contracting authorities take relevant measures to ensure compliance with obligations in the fields of environmental, social and labour law that apply at the place where the works are executed or the services provided and result from laws, regulations, decrees and decisions, at both national and Union level, as well as from collective agreements, provided that such rules, and their application, comply with Union law. Equally, obligations stemming from international agreements ratified by all Member States and listed in Annex X should apply during contract performance. However, this should in no way prevent the application of terms and conditions of employment which are more favourable to workers” (Recital 37). The laws specified in Annex X to the Directive include (amongst others) International Labour Organisation Conventions on forced labour, discrimination, equal pay, and the right to organise, and key environmental conventions including the Stockholm Convention on persistent organic pollutants.
The importance of complying with these core environmental, social and labour laws is built into different stages of the procurement process. A purchaser:
- may exclude a candidate at selection stage for a violation of the Annex X laws or with applicable obligations under EU or domestic environmental, social or labour laws or collective agreements (Regulation 57(8)(a)) (a purchaser also has the discretion to exclude a candidate for grave professional misconduct which could include the violation of any of the same laws);
- may also exclude a proposed subcontractor on the same basis (Regulation 71(8));
- may exclude a candidate where they become aware at any stage of the procurement process that any of the exclusion criteria arise;
- may decide not to award a contract to an otherwise winning bidder where the purchaser establishes that the tender does not comply with the Annex X laws or with applicable obligations under EU or domestic environmental, social or labour laws or collective agreements (Regulation 56(2));
- must, if it determines that a tender is abnormally low because of non-compliance with these same laws, reject the abnormally low tender (Regulation 69(5)).
While many of these may feel like situations that will not arise in reality, it is a worthwhile policy statement on the part of any purchaser to state its position regarding the exclusion of candidates and the rejection of tenders where any of these laws apply. And given that these rules apply equally to domestic labour laws as EU law, the new “National Living Wage” introduced in the recent Budget will fall within this camp – bidders not complying with the National Living Wage will find themselves at risk of being excluded from public contracts (and purchasers cannot legitimately expect bidders to price in such a way that rules out paying this National Minimum Wage, regardless of their budget for the contract).
Link to the Subject Matter of the Contract
The Directive is far more explicit than its implementing Regulations in confirming that:
“…the condition of a link with the subject-matter of the contract excludes criteria and conditions relating to general corporate policy, which cannot be considered as a factor characterising the specific process of production or provision of the purchased works, supplies or services. Contracting authorities should hence not be allowed to require tenderers to have a certain corporate social or environmental responsibility policy in place” (Recital 97)
While this wording is not replicated in the 2015 Regulations (as none of the Recitals are), it is an important point to bear in mind when setting contract award criteria or contract performance conditions. Requiring a tenderer to hold a specific corporate policy – which would apply to both the contract in question but also to the tenderer’s wider activities – will not be seen to be linked to the subject matter of the contract, meaning that it cannot be a contract award criteria – and, for that matter, cannot be a contract performance condition (see below).
Contract Award Criteria
Contract award criteria now expressly include social aspects for the first time at Regulation 67(2). These must (as must all award criteria) be linked to the subject matter of the contract. An indication of what “linked” might include is given at Regulation 67(5), which confirms that the criteria can relate to the works, supplies or services “in any respect and at any stage of their life cycle”. So, for example, the end-of-life disposal of supplies – so often where a final negative environmental impact is felt – can be taken into account alongside a product’s use during the term of the contract.
As well as “social, environmental and innovative characteristics”, Regulation 67(3) also allows “trading and its conditions” to form a contract award criteria. The Recitals to the Directive tell us that this can include, for example, reference to the fact that a product is “of fair trade origin, including the requirement to pay a minimum price and a price premium to producers” (Recital 97).
Contract Performance Conditions
In a similar way to Regulation 67 on contract award criteria, regulation 70 confirms that contract performance conditions may include “economic, innovation-related, environmental, social or employment-related considerations”. As for the award criteria, these must be linked to the subject matter of the contract. This is a change from the previous 2006 Regulations where no link between contract conditions and the subject matter of the contract was needed.
This makes a fundamental change to the way in which some purchasers will want to think about how they achieve social value through their contracts. While, in the past, for those nervous of treating social, economic or environmental considerations as being linked to the subject matter of the contract, there was always the option of including contract performance conditions which were not evaluated at tender stage (but nonetheless monitored through normal contract management), this option is no longer readily available. So for those that were over-cautious in the way they saw the subject-matter of their contracts, it is perhaps time to throw caution to the wind.
Requiring contract conditions to be relevant to the subject matter of the contract steers purchasers along the path of considering each contract it procures as a whole; no longer can an economic, social or environmental aspect of a contract be seen (as some would regrettably choose to see it) as a “bolt-on” to a contract. This reinforces what in any case would be good practice: that a purchaser should be thinking at pre-procurement stage about what it is buying, including any social, environmental or economic aspects to that purchase. Purchasers can no longer get away with thinking of social value as “added value” but rather must contemplate social, economic and environmental aspects as genuinely part of what they are buying, and plan accordingly.
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