Exclusions from Public Procurement Procedures in the EU

With the new directive on Public Procurement (1), the EU legislator has strengthened the relevance of exclusions from public procurement procedures. In this respect, the list of exclusion grounds has not only been extended by adding several new grounds, the EU legislator also provides the Member States with broad discretionary power as to the implementation of the rules. Furthermore, the Directive introduces a so-called self-cleaning mechanism for economic operators affected by an exclusion ground striving to be readmitted to procurement procedures.

The Directive distinguishes between mandatory and discretionary grounds for exclusion. While a mandatory ground for exclusion obliges the contracting authority to proceed with an exclusion from the procurement procedure, such obligation does not exist with regard to the discretionary grounds. On the contrary, a contracting authority is free to refrain from an exclusion in the latter case. It is worth noting, however, that the Member States are free to implement all discretionary grounds as mandatory.

1. Mandatory exclusions

Mandatory exclusions are based either on the final conviction of an economic operator for one of the listed (criminal) offences or on a violation of obligations to pay taxes or social security contributions.

Conviction for criminal offence

First, the exclusion of a company from a procurement procedure is mandatory where it has been convicted by final judgement for one of the (criminal) offences referred to in the provision.(2) These offences do not solely relate to “white collar crimes” – such as corruption, fraud and money laundering (3) – but also include terrorist offences, child labour or other forms of trafficking of human beings. (4)

Wherever national criminal law – for example in Germany – does not provide for a conviction of legal entities and thus of the economic operator itself, it is particularly important that the new framework allows an exclusion also in case the conviction is imposed on a high-ranking representative of the company (such as members of the administrative, management or supervisory body of the entity or anybody who has powers of representation, decision, or control).(5) By contrast, the conduct of “normal” employees may not automatically be imputed to the company.

Breach of obligations relating to the payment of taxes or social security contributions

Second, Art. 57(2) contains a particularly relevant exclusion where an economic operator is in breach of its obligations relating to the payment of taxes or social security contributions. In this regard, an exclusion is mandatory if the respective breach has been established by a judicial or administrative decision having final and binding effect.(6) In the absence of such decision, Art. 57(2)(2) provides for a discretionary ground for exclusion, if the contracting authority is capable of demonstrating the violation by appropriate means.

It is noteworthy, however, that an exclusion is limited to cases where the debts falling within the scope of the exclusion ground have not yet been settled. By contrast, as soon as the company has fulfilled its obligations or has entered into an arrangement with the competent authority for the payment of its arrears, an exclusion is no longer admissible.(7)

Derogations from mandatory exclusion

Derogations from mandatory exclusions may be justified in cases of overriding reasons of public interest, for instance referring to public health or the protection of the environment.(8) In this context, the Directive gives the example of urgently needed vaccines or necessary emergency equipment which can only be purchased from a company affected by a mandatory ground for exclusion.(9)

Furthermore, the exclusion due to the non-payment of taxes and social security contributions is dispensable where it proves clearly disproportionate, and in particular

• where only minor amounts of taxes or social security contributions are unpaid,
• or in cases in which the economic operator was informed of the exact amount due at such time that it did not have the possibility to pay or undertake to pay the respective amount before expiration of the deadline for the public procurement procedure.

3. Discretionary exclusions

Discretionary grounds for exclusion confer upon the contracting authority the power to decide on a case-by-case basis whether or not a company needs to be excluded from a procurement procedure. However, as stated above, Member States are free to implement the discretionary grounds as mandatory. In this latter case, discretionary grounds are treated exactly the same way as mandatory grounds, thus automatically triggering exclusion.

The different discretionary grounds for exclusion primarily concern the integrity or the financial capacity of the company. Yet the EU legislator has introduced a certain number of new grounds, some of which are related to the equal treatment of all bidders. This is true especially with regard to an exclusion on grounds of conflicts of interest (Art. 57(4)(e)) and on prior involvement (Art. 57(4)(f)).

In the following, some of the most relevant grounds for exclusion are analysed more closely:

Bankruptcy or insolvency or winding-up proceedings

As the financial capability is crucial to the due fulfilment of a public contract, an exclusion may be justified in cases where an undertaking is bankrupt or the subject of insolvency or winding-up proceedings. In this context, the Directive also provides for an exception to the exclusion if the company in question can demonstrate that it is capable of performing the contract despite its financial situation.

Grave professional misconduct

One of the most important grounds for exclusion concerns “grave professional misconduct” on the side of the economic operator.(10) This ground has been used as a general catch-all provision under the previous legal framework. In this regard, the CJEU has considered grave professional misconduct to cover all wrongful acts which have an impact on the professional credibility of the economic operator.(11) It is not restricted to violations of ethical standards in the strict sense of the profession to which the economic operator belongs and which are governed by the disciplinary body of the respective profession.(12) However, the introduction of new exclusion grounds which, in the past, were considered to fall within the scope of professional misconduct – for instance regarding the exclusion for anticompetitive behaviour – has raised doubts whether this broad definition laid down by the CJEU is still applicable to the new legal framework. As these codifications only concern certain aspects of grave professional misconduct, it has to be assumed that the EU legislator did not intend to limit the scope of this ground for exclusion in general.

To give an example, a contracting authority may have recourse to the grave professional misconduct ground where a mandatory exclusion for one of the offences listed in Art. 57(1) is not permissible due to the absence of a final judgement. Instead of a conviction, the contracting authority then needs to demonstrate by any appropriate means that the offence qualifies as grave professional misconduct. For this purpose, use may be made of written testimonies, search orders, certificates or any other reliable document supporting the misconduct.

Distortion of competition

The new Directive now explicitly provides for the exclusion of an economic operator who has entered into agreements with other economic operators aimed at distorting competition.(13) This applies not only to agreements between companies with regard to the particular procurement procedure but rather to such anticompetitive agreement in general. However, with regard to the wording, it is unclear whether the new provision catches all situations covered by Art. 101(1) TFEU. In particular, the wording of Art. 57(4)(d) does not reference decisions by associations of undertakings and concerted practices. It is difficult to imagine why the EU legislator has (deliberately) limited the scope of application or what other reasons let him to use another wording in public procurement law. In any event, the legal implications of this diverging wording are unclear, in particular if the catch-all provision of grave professional misconduct applies in case of concerted practices.

In order to invoke the exclusion on grounds of distortion of competition, a contracting authority needs to dispose of “sufficiently plausible indications” for such anticompetitive behaviour. This requirement is undoubtedly fulfilled where an infringement of the ban on cartels has been found by the EU Commission or a national competition authority. However, it has been suggested that no formal adjudication of the infringement is required. The broad wording rather implies wide flexibility as to the nature of the evidence.

Conflicts of interest and prior involvement

An exclusion on grounds of conflicts of interest or prior involvement is not consistent with the other grounds for exclusion which relate either to a certain type of misconduct or the financial capability of a company. Furthermore, there is no link between these grounds for exclusion and the qualification of the economic operator with a view to the performance of the contract.

In this respect, the situation of conflict of interest concerns the impartiality of persons involved in the (award) decision of the contracting authority and thus the integrity of the decision-making process. By contrast, an exclusion on grounds of prior involvement targets companies which have comparative advantages over their competitors due to their prior involvement in the preparation of the procurement procedure. These advantages may for instance result from certain insider information on the contract to be awarded or from having influenced tender specifications and conditions for its own benefit. Both grounds for exclusion solely apply as ultima ratio, i.e. where the integrity cannot be ensured by any other means. They are only relevant for the particular procurement procedure in which a conflict of interest arises or in which there has been prior involvement of the company.

Deficiencies in the performance of a public contract

Poor performance of a public contract had been covered by the grave professional misconduct ground under the previous legal regime. Art. 56(4)(g) now provides an explicit ground for exclusion where a company has shown significant or persistent deficiencies in the performance of a substantive requirement under a prior public contract. Pursuant to Recital 101, such deficiencies may concern

• the failure to deliver or perform;
• significant shortcomings of the product or service delivered making it unusable for the intended purpose; or
• misbehaviour that casts serious doubts as to the reliability of the economic operator.

As an additional requirement, an exclusion presupposes that the violation of contractual obligations has led to early termination of that prior contract, damages or other comparable sanctions.(14) In other words, if the contracting authority under the previous contract has refrained from invoking such sanction, an exclusion cannot be based on Art. 57(4)(g). This gives rise to the question whether in these cases, the general catch-all provision of Art. 57(4)(c) can be considered to justify an exclusion on grounds of grave professional misconduct.

4. Readmission to public procurement procedures due to self-cleaning

What is self-cleaning?

Companies may avoid exclusion by adopting so-called self-cleaning measures. In case of sufficient self-cleaning, contracting authorities need to admit the respective company to the procurement procedure even if it is affected by a ground for exclusion. The measures to be adopted for sufficient self-cleaning depend on the type and gravity of the misconduct leading to an exclusion ground. By and large, they need to ensure that similar misconduct does not recur in the future. Self-cleaning generally consists of a certain number of different individual steps. Pursuant to Art. 57(6), these steps necessarily need to include the following:

• compensation for any damage caused by the criminal offence or misconduct;

• the comprehensive clarification of facts and circumstances by actively collaborating with the investigating authorities; and
• technical, organisational and personnel measures to prevent further criminal offences or misconduct.

Recital 102 provides further details on the latter requirement. These technical, organisational and personnel measures may consist in:

• the severance of all links with persons or organisations involved in the misbehaviour;
• appropriate staff reorganisation measures;
• the implementation of reporting and control systems;
• the creation of an internal audit structure to monitor compliance;
• the adoption of internal liability and compensation rules.

Although not expressly stated, the self-cleaning defence is not applicable to all grounds for exclusion since it is based on a prior misconduct of or within the company. This is why it may not be invoked in cases of conflicts of interest or prior involvement.

Example of possible challenges for self-cleaning in the field of anticompetitive behaviour

Where a company is at risk of being excluded from a procurement procedure for anticompetitive behaviour (Art. 57(4)(d)) it needs to be particularly prudent as to the requirement of damage compensation in the context of follow-on damages. In practice, it might prove difficult to determine the specific damage resulting from the anticompetitive agreement in question. In this respect, it must be asked if such agreement led to higher prices and, in the affirmative, who in the supply chain suffered the damage. The bidder is not forced by public procurement law to pay the amounts at dispute regardless of these considerations. Rather, the concept of self-cleaning (only) requires the company to agree on a payment for undisputed or judicially accepted damages.

End Notes:

(1) Directive 2014/24/EU of the European Parliament and the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EG.

(2) Art. 57(1).

(3) Art. 57 (1)(b), (c) and (e).

(4) Art. 57 (1)(d) and (f).

(5) Art. 57(1)(2).

(6) Art. 57(2)(1).

(7) Art. 57 (2)(3).

(8) Art. 57(3).

(9) Recital 100.

(10) Art. 57(4)(c).

(11) Forposta (C-465/11) December 13, 2012 at [27].

(12) Forposta (C-465/11) December 13, 2012 at [27].

(13) Art. 57(4)(d).

(14) Art. 57(4)(g).