Structural funds

July 15th, 2016

Case C-460/14, brought by the City of Wroclaw in Poland, concerns the award of a public contract for the construction of a ring road in Wroclaw. The project benefited from EU financial assistance. The City stipulated in the tender specifications that the successful tenderer was to perform at least 25% of the works covered by the contract using its own resources. The public authority in Poland competent to verify proper use of the EU funding took the view that that stipulation infringed the principle of fair competition and therefore was inconsistent with Directive 2004/18/EC.  As a consequence, that authority imposed on the City a flat rate correction of 5% of the amount of eligible costs borne by public funds. The City challenged the financial correction before a Polish Administrative Court, which made a reference to the ECJ.

Directive 2004/18 coordinated at EU level national procedures for the award of public contracts above a certain value.  It aimed to ensure the effects of the principles of freedom of movement of goods, freedom of establishment, and freedom to provide services and the principles deriving therefrom, including the principles of equal treatment, non-discrimination and transparency. It also aimed to guarantee the opening-up of public procurement to competition. The Directive contained provisions on subcontracting, in order to encourage the involvement of small and medium-sized undertakings in the public contracts procurement market.  Pursuant to the first paragraph of Article 25 (“Subcontracting”), in the contract documents, the contracting authority might ask or may be required by a Member State to ask the tenderer to indicate in his tender any share of the contract he may intend to subcontract to third parties and any proposed subcontractors. Under Article 26 (“Conditions for performance of contracts”), contracting authorities might lay down special conditions relating to the performance of a contract, provided that these are compatible with EU law and are indicated in the contract notice or in the specifications.

Article 1(1) of Council Regulation No. 2988/95 provides: “For the purposes of protecting the European Union’s financial interests, general rules are hereby adopted relating to homogenous checks and to administrative measures and penalties concerning irregularities with regard to EU law”. Article 1(2) defines “irregularity” as “any infringement of a provision of EU law resulting from an act or omission by an economic operator, which has, or would have, the effect of prejudicing the general budget of the European Union or budgets managed by it, either by reducing or losing revenue accruing from own resources collected directly on behalf of the European Union, or by an unjustified item of expenditure”.  Article 2 provides in particular that administrative checks, measures and penalties shall be introduced in so far as they are necessary to ensure the proper application of EU law. They shall be effective, proportionate and dissuasive so that they provide adequate protection for the European Union’s financial interests.

Regulation No. 1083/2006 lays down general rules governing the Funds, i.e. the European Regional Development Fund, the European Social Fund and the Cohesion Fund, including principles and rules on financial management, monitoring and control on the basis of responsibilities shared between the Member States and the European Commission.

In its Judgment on 14 July 2016 the ECJ held that Directive 2004/18 prohibited a contracting authority such as the City of Wroclaw from stipulating that the successful tenderer for a public works contract was required to perform part of those works, specified in abstract terms as a percentage, using its own resources; and that Article 98 of Regulation 1083/2006, read in conjunction with Article 2(7) of that Regulation, must be interpreted as meaning that the fact that a contracting authority imposed a requirement, in the context of a public works contract relating to a project receiving EU financial aid, that the future contractor perform by means of its own resources at least 25% of those works, in infringement of Directive 2004/18, constitutes an “irregularity” within the meaning of Article 2(7) of that regulation, justifying the need to apply a financial correction under Article 98 thereof, in so far as it cannot be excluded that that infringement had an impact on the budget of the Fund at issue. The amount of that correction must be calculated by taking into account all of the specific circumstances which are relevant in the light of the criteria referred to in the first paragraph of Article 98(2) of that Regulation, namely the nature and gravity of the irregularity and the resulting financial loss to the Fund concerned.

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