Copymoore Limited and others v Commissioners for Public Works Ireland
High Court rejects challenge to Framework Agreement brought by SME's
On 31 January 2013, the respondents issued a Request for Tenders ("RFT") through the National Procurement Service ("NPS") for a multi-supplier framework agreement for the supply of "monochrome and colour multi-function devices" ("the Framework Agreement"). A number of contracting authorities in the public sector were listed as clients of the Framework Agreement. The Framework Agreement was divided into five separate lots with the service specifications for the devices varying slightly per lot. The NPS estimated that expenditure under the Framework Agreement would be €25 million over its initial two year term, divided evenly between the lots.
The Framework Agreement was challenged by ten applicants, each of which constituted a small and medium sized enterprise ("SME's"). Six of the applicants had not submitted a tender on the basis that they considered their chances of success were non-existent as a result of the nature of the qualification criteria. These six applicants were therefore eligible to bring proceedings. McDermott J. relied on the case of Grossmann Air Services v Austria (C-230/02)  2 C.M.L.R. 2, where it was held that a tenderer who has not submitted a tender will have standing where their "successful participation in the process was made impossible due to the conduct of the contracting authority". The remaining four applicants who had submitted tenders as part of consortia were not eligible to bring proceedings. Their argument that they were eligible as they had been precluded from submitting a tender as individual companies was rejected by the Court.
Challenge to Qualification Criteria
The applicants sought to set aside the Economic and Financial Standing qualification criteria and the Technical and Professional Ability qualification criteria (together "the Qualification Criteria") on grounds that they were disproportionate and discriminatory. The Economic and Financial Standing criteria required that tenderers demonstrate a minimum annual turnover of €2 million for each lot. To tender for more than one lot, tenderers had to demonstrate a cumulative turnover. The Technical and Professional Ability Criteria required that tenderers be able to demonstrate a history of successful delivery of specified quantities of devices covered by the Lot to clients within a designated period. For example in respect of Lot 1, tenderers were required to demonstrate three orders of at least 30 devices to a client in the previous three years or 250 devices in total to clients over the previous three years. The applicants claimed that in setting the Qualification Criteria, the NPS acted contrary to the provisions of Regulations 17, 33 and 52 of the European Communities (Award of Public Authorities Contracts) Regulations 2006 (S.I. 329 of 2006) (“the Public Contracts Regulations 2006”) (since replaced by the European Union (Award of Public Authority Contracts) Regulations 2016).
Minimum Turnover Requirement
The applicants claimed that the minimum turnover level was manifestly disproportionate to the relevant market. In making this claim the applicants valued the relevant market (for the supply of printers and multi-functional devices in the State) at approximately €75 million. The market was distributed between 200-250 undertakings and the applicants claimed that only 7 to 8 undertakings would be capable of meeting the minimum turnover requirement of €2 million. The minimum turnover levels were disproportionate given that the average value of any contract likely to be made under the Framework Agreement was €26,000. The NPS rejected this claim arguing that that the turnover criteria had been set at a lower level than might otherwise have been set in accordance with official guidance and lower than previous framework agreements in the same area.
Applying the test of "manifest error", the Court concluded that the Economic and Financial Standing criteria were proportionate and reasonable. The NPS was entitled to seek to ensure continuity of supply and this was a legitimate, reasonable and proportionate reason for the Economic and Financial Standing Qualification Criteria. The spread of risk amongst seven tenderers reduced the risk of damage arising if one or more of the framework participants were unable to deliver.
The applicants also argued that their status as SMEs was not given any consideration when setting the criteria contrary to guidelines issued by the Department of Finance set out in Circular 10/10 (“Guidelines for Public Contract Authorities Facilitating the Participation of SMEs in Public Procurement”). This circular was replaced on 16 April 2014, after the initiation of the proceedings, by Circular 10/14. The applicants submitted that the improved guidance set out in Circular 10/14 set out the proper procedure which should have been adopted by the respondents in framing the RFT. In particular the applicants claimed that there was:-
- No adequate market analysis as required by Circular 10/14 (Clause 4.1) and as required by "good procurement practice";
- No engagement with or consultation with SME's in advance;
- No consideration of alternatives other than turnover levels;
- No consideration as required by Circular 10/10 and 10/14 of the needs of the individual contracts under the framework rather than the overall estimated value of the Framework Agreement.
The Court accepted the evidence of Mr. Mulvey of the NPS who described how he estimated the value of the market in accordance with the guidance set out in Circular 10/10 following a survey of the market place. The steps taken by Mr. Mulvey were set out in detail in the judgment. The NPS accepted they had not had regard to the individual drawdown numbers when setting the €2 million turnover requirement and submitted that the proper value of the Framework Agreement was the value of all of the individual contracts that might be entered into.
The Court found that the NPS set the turnover requirement in accordance with then applicable guidelines in respect of SMEs. In relation to the value of the average contract price under the Framework Agreement, McDermott J. accepted the estimate of €26,000 for draw-down contracts but considered that this was "not a figure which should bind or determine the estimate of the turnover criteria determined in accordance with the terms of the Directive". He considered that a reduction in the qualification threshold to a figure dependent upon an average individual contract price would likely defeat the purpose of the Framework Agreement and undermine the reliability and security of the supply of goods and services required by the contracting authority.
In considering the substance of the applicant's arguments, the Court seemed to accept, without engaging in any analysis on the issue, that the SME Guidelines created legally enforceable justiciable obligations. However the Court's conclusion on the facts seems to ignore Clause 4.6 of Circular 10/14 which states that the turnover limit for Framework Agreements should be set in general vis-à-vis the likely size of individual contracts or drawdowns in the framework.
Technical and Professional Ability
McDermott J. was not satisfied that the setting of the technical and professional ability requirements was the subject of a “manifest error” when measured against the principles of proportionality or equality or that they could be regarded as irrational or unreasonable. The NPS gave evidence that they had been set with regard to previous similar contracts. The Court was not satisfied that there was any legal basis upon which to challenge the criteria set on the basis of proportionality or non-discrimination or otherwise for failure to comply with the terms of the Directive and the Regulations transposing it.
Competition Law Arguments
The applicants argued that the Framework Agreement (a) would limit competition to supply the relevant products to all public sector purchasers to the successful tenderers for a minimum or two and a maximum of four years; (b) prevent the applicants from bidding for one or more of the Framework Agreement Lots due to the qualification criteria; and (c) was likely to foreclose the entire market for the duration of the agreement resulting in higher prices for private sector purchasers.
Therefore it was claimed that the qualification criteria were contrary to the provisions of Section 4(1) of the Competition Act 2002 (the "Competition Act") and that the Framework Agreement prevent, restricted or distorted competition in the market in breach of Regulation 33(6) of the Public Contracts Regulations 2006. It is worth noting that this provision prohibiting the use of framework agreements to prevent, restrict or distort competition is not explicitly included in the 2016 Regulations (although it is included in Recital 61 of the Directive 2014/24/EU)).
Before considering the substance of the arguments the Court considered firstly whether NPS could be considered an "undertaking" for the purposes of the Competition Act. The Court cited the leading decision of the Court of Justice of the European Union in FENIN v Commission  ECR 1-1979 which held that an organisation does not act as an undertaking simply because it is a purchaser in a given market. NPS provided a regulated scheme for the procurement of printers and consumables on behalf of the State with a view to maximising the purchasing power of the State. NPS were not engaged in procuring any goods or services. NPS were providing a public service with a public benefit and were not doing so as an undertaking. The provisions of the Competition Act therefore did not apply.
In relation to the argument of the perceived effects of the Framework Agreement on competition in the relevant market it was agreed that the relevant market was the market for the supply of printers and multi-functional devices in the State. The applicants produced an economist's report which concluded that as undertakings could not survive on the basis of sales to private customers alone, the Framework Agreement would lead to foreclosure of the entire market (not just in respect of public sector purchases).
Both economists for the applicant and for the respondent agreed that there would be grounds for competition concerns where the State element of the market reached between 20-30%. However they disagreed on the percentage of the market covered by the Framework Agreement in this case. Mr Massey, economist for the applicants, was of the view that the Framework Agreement covered between 20-40% of the entire market. This figure was reached on the basis of an estimate of €52 million for the market. Economist for the respondent, Dr. Bacon, submitted that the Framework Agreement covered 8-12% of the market (based on a total valuation of the market of €75 million). The Court preferred the evidence of the respondent's economist on this point. McDermott J. was not satisfied on the balance of probabilities to act on the figures submitted by Mr. Massey for the purpose of concluding that the Framework Agreement would exclude many of the 200 to 250 operators in the market or that the framework agreement was inherently anti-competitive under the Competition Act.
The applicants also alleged that the contracting authority was in a dominant position in the market. The Court rejected this argument without considering the issue of abuse finding that it had not been established that the public sector's share was large enough to result in the State assuming a dominant position as a result.
The applicants claimed that it was not possible for them to form relationships with other SME's to meet the RFT criteria as this would be in violation of Section 4 of the Competition Act 2002. Mr Massey for the applicants stated that any arrangement between the applicants to jointly tender would by definition involve an agreement on the prices to be charged which constitutes a cartel and agreement on which of them would supply which customers which constitutes a market sharing agreement. Both experts were satisfied that there were risks under the Competition Act in becoming part of a consortium. The Court noted the guidance issued by the Competition and Consumer Protection Commission for SME's engaged in consortium bidding in tenders. The Court also noted that the applicants in this case were not competitors as they operated in different parts of the country. The Court found that there was no basis to conclude that participation in consortia under the terms of the Framework Agreement gave rise inexorably to a breach of the Competition Act. This was not to say there are not risks which attach to such participation which must be considered as a matter of course.
The additional grounds argued by the applicants were also rejected by the Court. The applicants' claim that clarifications issued by the NPS in advance of the tender deadline altered the terms of the RFT in an impermissible manner was rejected. The Court also rejected the argument that the NPS did not have the authority to conclude Framework Agreements on behalf of any third party public sector clients.
The decision demonstrates the high standard which applicants are required to meet in challenging qualification criteria. One of the key takeaways from the decision was that McDermott J seemed to accept that the guidelines for SME's (Circular 10/14) created enforceable obligations. However the effect of this finding was curtailed with the rejection of the applicant's arguments in relation to the respondent's market analysis. In addition, despite the fact that the Guidelines suggest turnover levels for framework agreements being set at levels proportionate to the value of draw-downs, the Court concluded that the value of individual drawdowns was not a figure which should bind the Court.
The decision confirms the position that most contracting authorities will not be considered "undertakings" for the purposes of competition law. The findings of the Court in relation to the competition law arguments are not surprising particularly given the Court's conclusion on the State's share of the market (i.e. 8-12%). It is clear that if the State had a higher share of the market, the Court would have been willing to probe whether there was market foreclosure arising from this centralised framework agreement.
For further information, contact Anna-Marie Curran or any member of the EU, Competition & Procurement Group at A&L Goodbody.
Date Published: 27 January 2017