Trowers & Hamlins

Sign up

Home » Resources » Blog » ECJ confirms Strict Interpretation of the In-house Exemption

ECJ confirms Strict Interpretation of the In-house Exemption
Trowers Public Insight

ECJ confirms Strict Interpretation of the In-house Exemption

Public authorities are increasingly using alternative business models to create more efficient ways of delivering services, especially in these times of austerity.  When developing these models, it is key to understand at an early stage when a public procurement procedure is required and when the 'in-house exemption' allows a contract to be awarded directly. 

The in-house exemption can be a useful tool for public authorities in awarding contracts, with time and cost savings.  However, the ECJ has previously interpreted the in-house exemption strictly and new case law has confirmed that public authorities need to tread carefully when applying this to horizontal in-house transactions.

Background to the In-house Exemption

The in-house (Teckal) exemption allows for direct award of contracts to an in-house entity where (1) the contract is awarded to an entity over which the authority exercises "a control similar to that which it exercises over its own departments"; (2) the entity has no private sector participation or funding; and (3) the entity carries out the principal part of its activities with the contracting authority. 

For 'similar control', the contracting authority must have a power to exercise decisive influence over both the strategic objectives and the significant decisions of the contract, and the control must be genuine, structural and functional.  The ECJ has also acknowledged that in some circumstances 'similar control' can be exercised jointly by a number of public authorities which are joint owners of the contractor.

There is also a shared services exemption (Hamburg waste case) which allows for direct award of contracts where there is cooperation between public bodies (without creating a separate entity) and (1) the cooperation relates to the pursuit of objectives in the public interest and (2) the cooperation does not prejudice any private undertaking as against its competitors. 

These exemptions have been confirmed and codified in the new Public Procurement Directive, which is due to be transposed into UK law within the next two years.

Does the Exemption Apply to 'Horizontal In-house Transactions?

A new judgment was issued by the ECJ in May this year, Case C-15/13 Datenlotsen Informationssysteme GmbH v Technische Universitat Hamburg-Harburg

In this case a university (the contracting authority) directly awarded an IT contract to a private company.  The university's purchases of products and services were controlled by a federal state and the private company was owned by several public bodies including the same federal state.  However there was no direct relationship of control between the university and the private company.

The ECJ held that the federal state only had partial control over the university, as it had control in matters of procurement but not in education and research.  Therefore 'similar control' did not exist and the in-house exemption could not apply.  Therefore the contract should have been subject to the public procurement rules.

As such, the ECJ did not examine whether 'horizontal in-house transactions' were acceptable, ie a situation in which the same contracting authority exercises similar control over two distinct entities, one of which awards a contract to the other.  Clarity has not been provided as to whether horizontal in house transaction can be covered by the in-house exemption, but for the time being this has also not been ruled out by the ECJ.

The ECJ also held the shared services exemption was not applicable in these circumstances as neither the university nor the private company were public authorities and the private company was not directly carrying out a public service task.