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 ‘Teckal test’ was best summarised as a two part test:
- the ‘control test': the parent must exercise over the subsidiary a control that is equivalent to the control it has over its own departments; and
- the ‘activities test’: the subsidiary must carry out the essential part of its activities with the purchaser.
The 2015 Regulations codify and slightly amend the Teckal test at Regulation 12. Regulation 12(1) sets out three cumulative conditions that must be fulfilled for an organisation to be a Teckal subsidiary. These are:
(a) the contracting authority exercises over the subsidiary a control which is similar to which it exercises over its own departments;
(b) more than 80% of the activities of the subsidiary are carried out in the performance of tasks entrusted to it by the controlling contracting authority or by other legal persons controlled by that contracting authority; and
(c) there is no direct private capital participation in the subsidiary, with the exception of non-controlling and non-blocking forms of private capital participation required by applicable national legislative provisions, in conformity with the Treaties, which do not exert a decisive influence on the subsidiary.
The control test
Regulation 12(3) defines what is meant by ‘control’: the controlling contracting authority must exercise “a decisive influence over both strategic objectives and significant decisions” of the controlled subsidiary. It is helpful to have a clear definition of ‘control’ and it is likely that many organisations will be able to demonstrate this element of the test where, for example, the parent company appoints the majority of the directors to the board of a subsidiary, or by reserving strategic and significant decisions to the contracting authority as member or shareholder of the subsidiary.
The activities test
The inclusion of the 80% figure in Regulation 12(1)(b) is a significant step forward in terms of the percentage of activities that must be carried out in the “performance of tasks entrusted to it” by the parent company. Previous case law suggested that the threshold was likely to be between 85% and 90% of activities that must be carried out ‘with’ the parent. The 80% threshold will, therefore, give some welcome flexibility to Teckal vehicles seeking to carry out a higher proportion of their activities with third parties (i.e. 20% rather than 10%-15%).
The use of the words “entrusted to it” may change the traditional interpretation of the activities aspect of the Teckal test as this phrase replaces the word ‘with’. ‘Entrust’ is not defined in the 2015 Regulations, but it is sensible to interpret this as meaning that the purchaser must formally entrust activities in the subsidiary through a contract or, potentially, some other arrangement. Arguably, the use of the words “entrusted to” widens the scope of activities that can fall within the 80% figure. This is because, in theory, a parent could ‘entrust’ the delivery of certain activities to the Teckal subsidiary that might not have previously fallen with the scope of the Teckal test.
In practice, it remains to be seen whether the use of the word “entrust” will have any impact and it is likely that case law will be developed in this area to get a better idea of what activities can legitimately be “entrusted”. This may, though, take several years to develop.
No private capital participation
Regulation 12(1)(c) is actually a codification of the Stadt Halle  case, which followed Teckal and confirmed that Teckal could not apply if any of the share capital of the subsidiary was ‘privately owned’. The existence of private share capital was considered to mean that the necessary level of control was not established since the private shareholders would be motivated by the need to make a profit. There is continuing debate about what constitutes ‘private capital participation’ in this context.
Upwards, downwards and sideways
Regulation 12(2) helpfully confirms that where Teckal subsidiaries of the same parent are contracting authorities, they also benefit from the exemption; that is, one Teckal subsidiary can contract directly with another Teckal subsidiary with the same parent. Equally, a Teckal subsidiary can contract directly with its parent.
Regulation 12(4) confirms that where contracting authorities jointly control an entity the same exemption applies, provided that the conditions in Regulation 12(4) are satisfied. Joint control is complicated, as it not only requires the ‘control’ test (as described above) to be satisfied jointly by the relevant contracting authorities, but it also requires:
- the ‘decision-making bodies’ of the controlled entity to include representatives from each controlling contracting authority (although the controlling contracting authorities, or a group of them, can together appoint a representative); and
- the controlled entity not to “pursue any interests that are contrary to those of the controlling contracting authorities”. This aspect may be more difficult to satisfy where a ‘controlled’ entity carries out multiple activities in different sectors, or its parent contracting authorities have varying agendas. If the controlling contracting authorities each have different interests, it will be harder for the Teckal subsidiary to act in accordance with all of them.
Cooperation between purchasers
Regulation 12(7) partially codifies the Hamburg  case, but also supplements and amends it. It contains potentially useful provisions allowing a contract for ‘co-operation’ between two or more contracting authorities to be exempt from the 2015 Regulations provided the following conditions are met:
- the contract has the “aim of ensuring that public services they have to perform are provided with a view to achieving objectives they have in common”;
- the “implementation of that co-operation is governed solely by considerations relating to the public interest”; and
- the contracting authorities “perform…less than 20% of the activities concerned by the co-operation” on the open market.
This could potentially allow two contracting authorities to provide services to each other without the need to run a full procurement process or to set up a jointly-owned company. The drafting of the contract will be the key to making this viable in practice, as it will need to clearly demonstrate that the parties are co-operating in the public interest in relation to services they have to provide.
The use of the words ‘have to perform’ suggests that there must be some statutory or regulatory obligation imposed on the contracting authorities to provide the particular services they intend to co-operate on (see Stadt Düren ). This would seem to exclude any discretionary services that contracting authorities might provide, and possibly any organisation that does not have statutory duties (e.g. a housing association), although this has not yet been tested.
This area of law as a whole is very technical and it can be important to take appropriate advice before entering into arrangements involving ‘Teckal subsidiaries’ or when changing any arrangements that you believe benefit from the Teckal exemption.
For more information
 Teckal SRL v Comune de Viano, Case C107-98
 Stadt Halle, RPL Recycling park Lochav GmbH -v- TREA Leuna, Case C-26/03
 Commission v Germany Case C-480/06
 Piepenbrock Dienstleitstungen GmbH & Co KG v Kreis Düren Case C-386/11
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