Public Procurement - Decision of the European Court of Justice on the award of a public contract by a public body to an entity controlled by it

On the 11th May 2006 the European Court of Justice (ECJ) handed down its decision in the case Carbotermo SpA, Consorzio Alisea v Commune di Busto Arsizio, AGESP SpA (C-340/04) which is an important ruling dealing with the award of a public contract without a call for tenders.

The contracting authority (Commune di Busto Arsizio) had awarded a contract for the supply of fuel, maintenance and management of heating installations in its buildings worth €8,450,000 to AGESP SpA.

The entire shareholding in this company was held by a company in which the contracting authority held 99.98% of the shares. The complainants were two undertakings that took proceedings to challenge the decision of the contracting authority to award this contract without a call for tenders.

The Italian Court referred the questions raised regarding the proper interpretation of the Directive governing public supply contracts to the ECJ.

The contracting authority had argued that it was legally entitled to award the contract without a call for tenders on two grounds; first because the entity in question was controlled by it in the same way as its own departments were and secondly because that entity carried out an essential part of its activities within the municipality concerned.

The Court held that the contracting authority did not have the equivalent degree of control over this company to that which it had over its own departments. The Court held that as the board of directors of the company itself and its holding company (in which the relevant shareholding was held) had broad managerial powers with the freedom to exercise these powers independently of the contracting authority this meant that the supply contract in question was subject to the Directive and had been awarded in breach of the requirements of the Directive

This is an important decision with ramifications for all public bodies that are considering the award of public contracts to entities in which that public body has ownership or partial ownership. Such relationships do not excuse the application of the Procurement Directives.

For further information please contact:
Patrick Ryan at pryan@kilroys.ie

© Kilroys Solicitors May 2006