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Reliance on third parties: how, what, when?

Reliance on third parties: how, what, when?

Ever since the Siemens and Holst Italia judgements it has been a procurement law certainty that tenderers can rely on third parties for eligibility requirements for example. And although after the high-profile ruling of the Court in Interlocutory Proceedings in Arnhem in 2009, we thought that the doctrine was fully crystallised, a number of European rulings have yet again turned the Dutch practice upside down. Time to review what is permitted, what is compulsory and what is possible.

Reliance on third parties – satisfying eligibility requirements

The Public Procurement Act (PPA) states that tenderers can rely on the skills and capacity of third parties, to satisfy the reference requirements for instance. Section 2.94 paragraph 1, for example, stipulates:

“An entrepreneur may for a specific government contract, rely on the technical skills or professional qualifications of other natural or legal persons, irrespective of the legal nature of his ties with those natural or legal persons, provided he demonstrates that the resources required for the performance of the government contract are available to him.”

Three issues are noteworthy in this section:

  1. An entrepreneur can rely on the capacity and skills of third parties. The question is then: how?
  2. Irrespective of the legal ties with the third party. Can the contracting authority impose restrictions on this?
  3. The resources of the third party must be available to the entrepreneur. How does the entrepreneur have access to those resources and does this require the actual engagement of the third party/parties?

From the view of (legal) certainty, contracting authorities often tended to stipulate that reliance on a third party was not permitted. The European Court of Justice made short work of this practice. It was determined, first in Holst Italia and later in Siemens that this right of tenderers may not be restricted. The Court in the Siemens judgement ruled:

“As the Court ruled in points 26 and 27 of the Holst Italia judgement, the purpose and wording of those provisions show that a person cannot be eliminated from a procedure for the granting of government contracts for services solely on the ground that he proposes to use resources for the contract which are not its own but belong to one or more other entities. This implies that a service provider who himself does not satisfy the minimum conditions for participating in a tendering procedure for a government contract for services, can rely on the skills of third parties on which he intends to rely towards the contracting authority if the contract is awarded to him.
(…)
As the Commission of the European Communities noted on good grounds, directive 92/50 does not preclude a prohibition or a restriction on the use of subcontracting for the performance of essential parts of the contract precisely in the case where the contracting authority has not been in a position to verify the technical and economic capacities of the subcontractors when examining the tenders and selecting the best tenderer.”

The Court ruled that the right to rely on third parties may not be restricted by the contracting authority unless it relates to essential elements of the contract and the contracting authority is not given the opportunity to assess the suitability of the third party/parties during the assessment of the tenders.

This also means that the reliance on a third party must already be made in the tender. With the introduction of the European Single Procurement Document, tenderers have the obligation to state this in the ESPD. In view of the Siemens-judgement, it is self-evident that if a tenderer does not refer to a third party in the ESPD, this third party cannot be introduced at a later stage if it were to become clear that the tenderer itself does not independently satisfy the requirements. In that case, the tender is invalid.

Actual engagement of third parties?

After the Arnhem judgement, all seemed hunky-dory. In particular after the Supreme Court had brought the Dutch practice in line with European case law. This was until the Court in Interlocutory Proceedings in Arnhem had to answer the question whether the reliance on third parties requires that the third party, whose skills or capacity are relied upon, must actually be used in the performance of the contract. The Court in Interlocutory Proceedings ruled as follows:

“Naturally, in that case the tenderer must, if the work has definitely been awarded to him, make use of that third party in the performance of this contract. Otherwise the situation arises where an insufficiently experienced tenderer is going to carry out the work on his own, with all possible associated consequences. It can therefore not be the intention to create a situation in which a party that does not satisfy the competency requirements relies on the experience of a third party without subsequently actually engaging this third party. (…)”

A perfectly logical judgement in my opinion. Without the engagement of the third party, the contracting authority runs the risk that an unsuitable contractor will carry out the work. For that reason, logically, it was (virtually) a standard requirement of contracting authorities that a third party whose skills or capacity are relied upon must actually be engaged in the performance of the contract.

But with the new judgement of the European Court of Justice this practice seems to have come to an end. As a result of a request for a preliminary ruling relating to a Polish invitation to tender, the Court ruled on the right to rely on third parties that:

“(…) it is conceivable that the exercise of that right may be restricted in specific circumstances, having regard to the subject matter of the contract concerned and its objectives. Such is the case, in particular, where the skills of a third party which are necessary for the performance of that contract, cannot be transferred to the candidate or the tenderer, so that the latter may rely on those skills only if that third party entity directly and personally participates in the performance of that contract.”

In this ruling, the ECJ needs rather a lot of words to conclude that it may only in special circumstances be a requirement that the third party who is relied upon is actually engaged in the performance of the contract. This because, according to the Court, it is a limitation of the right to rely on third parties and such a restriction is in principle excluded. Indications that this may be allowed to be a requirement could be:

  • specific (technical) skills and knowledge;
  • the use of special technology.

The Advocate-General in his Opinion already addressed these special circumstances. He concludes that the requirement of actual engagement of the third party is in particular possible in respect of contracts with a high technical specialist level.

The Court did however rule that the third party must in some way be involved in the performance. A pure formal reliance on a third party is therefore not permitted. Tenderers are well advised to secure this involvement by means of a subcontracting agreement. In my view, contracting authorities are still allowed to assess in which way the third party is involved during the tendering procedure. If there is no involvement of the third party, this can be a reason to as yet declare the tender invalid. After all, the Court also ruled that the reliance may not be a mere formality.

Legal ties and evidence of availability

How it must be proved that the necessary skills and capacity of third parties are available to the tenderer is not set out in the PPA. The European Court of Justice is (understandably) silent on this issue as well. The question is therefore whether the contracting authority may put requirements on the legal ties a tenderer must have with the third party in the context of the performance of a contract. And so, as a consequence, on the evidence a tenderer must deliver for this.

In a Latvian tender process, the contracting authority required that for a reliance on the capacity or skills of third parties the tenderer entered into a collaboration agreement with the third party/parties of which the content was prescribed by the contracting authority, or that the tenderer formed a partnership with the third party/parties.

On this the Court ruled that

“The tenderer (…) is free to choose the nature of the legal ties he wishes to enter into with the other entities on whose capacity or skills he relies to carry out a particular contract and to choose in which way these ties can be demonstrated.”

Furthermore, a contracting authority is not permitted to oblige a tenderer

“before the awarding of the contract, to enter into a collaboration agreement or a partnership.”

It is therefore at all times for the tenderer to decide how he legally shapes the collaboration with the third party and how he proves to have access to the resources of this third party. The contracting authority may not put restrictions on this.

And now?

For Dutch practice, in particular the actual engagement of the third party was important. The Court appears to have put a line through that. So what now? On the basis of case law there are a few rules of thumb:

  • The actual engagement of a third party whose capacity and skills are relied upon may no longer be a requirement as a matter of course. It must be assessed for each contract whether and for which eligibility requirements it may be demanded that the third party carries out the relevant work.
  • Tenderers cannot suffice with a merely formal reliance on the skills and capacity of third parties. The third party who is being relied on must be involved in the performance of the work.
  • It is for the tenderer to determine in what manner he demonstrates to be able to have access to the relevant resources of the third party on whom he relies. The contracting authority may not attach conditions to this. If the contracting authority is of the view that the submitted means constitute insufficient evidence, the contracting authority will have to substantiate this.

By Joris Bax, lawyer specialising in procurement and construction law.

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