In-House Exception according to public procurement law

Although, it could seems that Public Procurement Law adjusts so called „in-house“ exception, which entitles contracting authority to not act under a regime of law quite unequivocally, in this case, in practice is not so clear. We can demonstrate it on actual decision of the Office for the Protection of Competition in case of town Dobříš.[1] So, it is appropriate to summarize conditions for in-house exception regard to this decision.

In-house exception

In house exception in this article is vertical cooperation according to Section 11 of Public Procurement Law (“Law”), which defines that award of public contract is not a contract concluded between the contracting authority and another legal person as the economic operator shall not be considered the award of a public contract.

For a vertical cooperation have to be concurrently fulfilled these conditions

• the contracting authority itself or in joint cooperation with other contracting authorities exercises over such person a control which is similar to that which it exercises over its own departments,
• there is no capital participation of another person in the controlled person
• more than 80 % of the activities of the controlled person are carried out in the performance of tasks entrusted to it by the controlling contracting authority (or controlling contracting authorities or by other legal persons controlled by that controlling contracting authority (or controlling contracting authorities) as its own departments).

Some aspects of in-house exception

Before we start analysing particular conditions of in-house exception, it is important to point out that conditions of vertical cooperation is necessary to perceive restrictively and the contracting authority who decides to not conclude a contract to not act under the Law and in-house exception, has to be able to prove fulfilling of all legal conditions.[2] Before application of the in-house exception is also possible to recommend contractual authorities to make legal analyse that they fulfil all conditions for application and that they have all documents to prove it.

“The control which is similar to that which it exercises over its own departments”

The meaning of “the control which is similar to that which it exercises over its own departments” is written in the Section 11 subsection 2 of the Law, it means that it exercises a decisive influence over both strategic objectives and significant decisions of the controlled legal person (simultaneously). It is a different type of an influence than the one in the Corporations Act, the Law demands that the control is de facto (contrary, in Corporations Act is just about the possibility to exercise influence). According to specialised literature[3] is necessary this rule of interpretation in Section 11, Subsection 2 of the Law take as rebuttable presumption.

“In joint cooperation with other contracting authorities exercises over such person a control”

What does it mean, that economic operator is controlled by contracting authority in joint cooperation with other contracting authorities is more precisely written in Section 11 subsection 3 of the Law. The decision-making body, which is mentioned in section 11 subsection 3 of the Law is the one that de facto exercises a decisive influence over both strategic objectives and significant decisions of the controlled legal person, so mostly it is governing body which does business management. However, in particular cases, this body could be also controlling body (mostly with governing body) or other bodies of an economic operator.

“More than 80 % of the activities of the controlled person are carried out in the performance of tasks entrusted to it”

The average turnover is the key for determination of percentage activities according to Section 11 subsection 1 paragraph c) of the Law, if the activity which is the subject-matter of the contract is fully paid by its recipients. Where such turnover may not be determined then, with regard to vertical cooperation, total costs of such a legal person shall be used as the grounds for calculation. According to of the Office for the Protection of Competition which is mentioned at the beginning of the article (“Decision”) and specialised literature it is necessary to determine the turnover on the base of profit and loss account

According to Czech and European jurisprudence[4], between activities of the controlled legal person which were assigned by controlling contracting authority, it is necessary to include all assigned activities, which  were assigned by the controlling contracting authority regardless who is the real receiver of this activities, i.e. also activities assigned for legal persons controlled by the contract authority (for example subsidiary of the contracting authority). According to the Decision, it doesn't include activities which were assigned to the economic operator by the contracting authority in favour of other contracting authorities who don't control the economic operator.

Percentage of activities is calculated according to Section 13 subsection 2 of the Law as the sum of the 3 years preceding the accounting period in which the contract was awarded.[5] According to the Decision is decisive the average value of 3 subsequent period, so i tis not necessary to fulfil rate of conditions individually each year. If happened a situation because of which the indicator of the percentage of activities in the 3 years preceding the accounting period is not objectively relevant, i.e. the economic operator started the activity later or his activity was reorganised it is not necessary to assess the percentage of activities as the sum of 3 years preceding, it tis enough that the conditions were credibly reached, especially based on plans of activities.

The Decision of the Office for the Protection of Competition was about the problem of percentage of activities according to Section 11 subsection 1 paragraph c) of the Law. The Office for the Protection of Competition judged the situation (in a simplified way) when town Dobříš awarded the in-house exception contract with the subject who didn't fulfil the condition of  the percentage of activities in the 3 years preceding the accounting period, the town Dobříš know this problem and planed to solve it in the future by reorganisation of this economic operator (but in the time of conclusion of a contract the town did not even start the reorganisation or decided about it).

The Office for the Protection of Competition said, that this procedure is inadmissible, because the precondition for the calculation of the percentage of the activities 3 years not preceding the accounting period, but 3 future years of activities is the real reorganisation of the economic operator, not just planning of doing it. According to the Office for the Protection of Competition, in the time of award of contract, has to exist the objective reason why the calculation of the percentage of activities according to 3 years preceding would not be relevant.

Conclusion

In conclusion, we would like to sum up the above – even the in-house exception, which at first sight seems clear and easy to applicate, hides some ambiguousness in interpretation and risks for the contracting authority which can be caused by bad interpretation and application. We recommend to contracting authorities like first, to properly consider if the exception can be used and store all documents, which they can use as evidence that they fulfil conditions.