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Does the in-house exemption apply to a non-profit organisation?

Print publication

15/05/2014

Case C-574/12 Centro Hospitalar v Eurest Portugal was a case referred to the ECJ by the Portuguese court. It was a challenge by Eurest to the direct award of a five-year catering contract by Centro Hospitalar de Setúbal, a Portuguese public hospital, to the Serviço de Utilização Comum dos Hospitais (SUCH), a non-profit entity. Eurest was a competitor of SUCH and argued that the contract should have been put out to procurement. Centro Hospitalar argued it was covered by the in-house exemption that was established by the Teckal [1] case.

The Teckal exemption
The Teckal case set the rule that a contract does not need to be procured if it is awarded to an entity:

  • Over which the contracting authority exercises “a control similar to that which it exercises over its own departments”
  • Which has no private sector ownership or control
  • Which carries out “the essential part” of its activities with the contracting authority. Subsequent case law has 90 per cent. as a rule of thumb for the essential part.

This has now been codified in the new Public Procurement Directive, Article 12 (although “the essential part” is at least 80 per cent.).

Advocate General’s opinion
The Advocate General decided that the Teckal exemption was not met because:

  • 23 of the 88 participants in SUCH were private sector organisations. The twist was that they were all non-profit making and some were charities. The Advocate General decided that whether they were profit-making or not made no difference. They were still entitled to compete with commercial entities for public contracts, so awarding them a contract directly put them in a position of advantage as against their competitors.
  • Even though the Centro Hospitalar had the majority of voting rights in SUCH, it did not have “control similar to that which it exercises over its own departments” due to the participation of the private entities, whose interests may not always coincide with the public interest.
  • SUCH’s constitution allowed it to carry out up to 20 per cent. of its activities on the open market. The Advocate General ruled that this was in excess of what was permitted by the Teckal exemption.

Comment
This is only an Opinion of the Advocate General and does not bind the Court of Justice of the European Union, although it may be persuasive. It has to some extent been overtaken by legislation, as the new Procurement Directive sets 20 per cent. as the limit of activities that can be carried out for third parties. It also confirms previous case law, such as Stadt Halle [2], that any participation by the private sector will fail the Teckal test. What it does do is confirm that not-for-profit and social sector organisations are also classed as private organisations. This means procurement law still needs to be carefully considered when an authority is seeking to award a contract to a not-for-profit organisation in which it has an interest.

[1] Case C-107/98 Teckal Srl v Comune de Viano
[2] Case C-26/03 Stadt Halle v TREA Leuna