Contracting authorities are commonly offered pilots, trials or wholly "free of charge" goods, works or services. Contractors wishing to break into a new market, or expand their market share, often take a commercial view to undercut their competition.
The Public Contracts Regulations 2015 ("Regulations") and the public procurement directives, define a public contract as "contracts for pecuniary interest concluded in writing between one or more economic operators and one or more contracting authorities and having as their object the execution of works, the supply of products or the provision of services". It has always been clear that "pecuniary interest" has a wider application than simply cash payments in return for the goods, works or services.
A recent case from the Court of Justice of the European Union (C‑606/17 IBA Molecular Italy Srl v Azienda ULSS n. 3 and others) has provided helpful guidance on the issue of how free of charge contracts are treated by the procurement rules.
The procurement was for medicinal products used for radiological examinations. A private hospital (the Sacro Cuore) undertook to supply the medicinal product free of charge to nine regional public hospitals. The only payment under each contract was for the transport costs of a flat rate of EUR 180 per delivery.
The main supplier of the product in Italy challenged the lack of a procurement process to award the contracts to the Sacro Cuore.
At first instance the Italian Court dismissed IBA's claim on the basis that the products were supplied free of charge, and the delivery costs did not amount to "direct consideration". Following an appeal, the Italian Council of State recognised that this was not correct but held that the contract was exempt from the procurement regime because it amounted to a "public/public" contract to which the public procurement regime does not apply.
The CJEU disagreed and confirmed that:
1.Sacro Cuore receives a "significant economic advantage" from a public authority under the arrangements;
2. The "usual legal meaning of ‘for pecuniary interest’" includes circumstances where each of the parties undertakes to provide a service in exchange for another;
3. The transport costs, which were paid by a public sector grant, were sufficient to bring the arrangement into the scope of the public procurement regime. This is the case even where "the costs of production and distribution of that product are not fully covered by that grant or by the transport costs".
4. The arrangement was not a "public/public" collaboration or 'Teckal' type arrangement, because the Sacro Cuore is a private hospital. Therefore, the arrangement was not exempt from the public procurement regime.
This is an interesting case which confirms the importance of looking carefully at "no cost" or "free" contracts offered to public bodies. Although very specific on its facts, the case confirms the established principle that "pecuniary interest" must be looked at purposively. There does not need to be a direct economic benefit to the contractor.
Commonly, introductory arrangements at no cost will be linked to a later contractual obligation to purchase a minimum amount of the goods, works or services. Clearly such arrangements can and do often fall within the scope of the public procurement regime. Depending on the value and subject matter of the contract, a failure to advertise the contract (or use a valid framework) would amount to an illegal direct award, vulnerable to a range of legal remedies.
For more information or advice please contact David Hansom, Partner, on 0207 876 4127/ firstname.lastname@example.org or your usual contact at Clyde & Co.
Contract awarded outside a public procurement procedure — Definition of ‘contracts for pecuniary interest’