The ECJ Sea Judgement: Some further guidance on the “in house” exemption

In its Sea Judgement of 10 September 2009 (C-573/07), the European Court of Justice (ECJ) further clarifies its “in-house” jurisprudence. More specifically, it goes more deeply into the notion of control. Indeed, following the landmark judgement in the Teckal case, contracting authorities granting a public contract do not have to apply the public procurement rules if the contractor, which is a distinct legal entity, is subject to the same control by the contracting authority as the departments of the contracting authority and if the contractor carries out the essential part of its activities with the controlling local authority or authorities.

The facts of the Sea case

This case was about a dispute over the award of a contract for waste collection, transport and disposal services. The Italian municipality of Ponte Nossa, which had previously awarded the contract to Sea, became a minority shareholder in Setco, whose shares were all held by municipalities, even though its Articles of Association allowed private parties to acquire shares. Subsequently, the municipality of Ponte Nossa awarded the aforementioned contract to Setco without organising a tender procedure.

Sea claimed that this constituted an infringement of Community law, of the provisions on free movement and freedom of establishment as well as of the provision on competition law relating to public undertakings. Sea argued that the municipality of Ponte Nossa did not control Setco in the same manner as it controlled its own departments.

Can contracting authorities exercise the required control if private investors can enter the awardee’s capital?

The ECJ discussed the provision making it possible for private investors to own the capital of Setco. It held that the ownership by a contracting authority of all the shares in an entity serves as an indication of the existence of the required “control”. The ECJ also recalled its jurisprudence stating that a contracting authority does not exercise “control” over an entity if a private party holds part of the shares in that entity (even in case of a minority shareholding).

In the case at hand, the ECJ struck a balance by taking into account the fact that, at the moment the contract was awarded, none of its shares were held by a private party, nor was there any sign that this would become the case in the near future. Therefore, the mere possibility that a private party could acquire shares in Setco was not sufficient to raise doubts as to whether “control” was being exercised.

Is it possible for a contracting authority holding a minority shareholding in a company to exercise control over that company?

This question was recently addressed by the ECJ in its Coditel judgement. According to the Coditel jurisprudence, the control does not necessarily need to be individual, but can be exercised jointly. This point of view was confirmed in the Sea judgement.

What should be the nature of such “control”?

Basically, the control should provide the contracting authority with a power of decisive influence over the strategic objectives as well as over the significant decisions of the company. In order to assess whether this requirement was fulfilled with regard to Setco, the ECJ examined two aspects.

The first was the question of whether Setco was a market-oriented company. If it was, then the existence of “control” would be difficult to prove. From Setco’s Articles of Association, the ECJ inferred that Setco did not provide services outside the territory of the shareholding municipalities, and that it had been founded solely to manage public services for the aforementioned municipalities. Nonetheless, the ECJ also established that Setco did provide services to private clients. However, the ECJ stated that if such “market-orientated services” were only “incidental” to its core activities, the contracting authority can still exercise the required “control” over the entity, albeit that the ECJ did not rule on this in this case. It was left for the national courts to examine whether or not this is the case.

Secondly, the ECJ looked into the control mechanisms specified in Setco’s Articles of Association. It appeared that they not only contained a requirement for a general meeting and a board of directors, as required under Italian law, but that they also established control committees, (i.e. the joint committee and the technical committee) to ensure that Setco would be controlled in the same manner as its own departments. Moreover, mechanisms were established to ensure that the committees fulfilled a genuinely important role, for instance by obliging the general meeting to obey the committee’s guidance and instructions and forcing the Board of Directors to take into account the committees’ competences. However, the ECJ concluded that it was for the national courts to assess the effectiveness of the provisions regarding the control mechanisms.

Conclusion

Examining whether the “control” requirement is fulfilled or not seems set to remain a hot topic in Community law. After the Coditel and the Stadreinigung Hamburg cases, the ECJ has had yet another chance to go deeper into the issue of in-house exemptions.

The Sea judgement confirms to a large extent the jurisprudence of the ECJ. In addition, the Court took the opportunity to further explore under which circumstances the criteria for “control” are met. It results from the Sea judgement that this implies a factual assessment which makes it difficult to predict whether the “in house” exemption is correctly applied.