Conference @ Chambre des Métiers of Luxembourg – “Subcontracting in public procurement”

It is mainly in the Grand Ducal Regulation of 8 April 2018 on public contracts that questions of subcontracting are dealt with.

Article 24(2) of the aforementioned regulation of 8 April 2018 stipulates that in the event of a public procurement procedure in the form of a general contractor, the latter will be obliged to present its subcontractors when submitting its tender, “under penalty of inadmissibility“.

In this case, the subcontractor will be subject to a number of obligations:

• provide a DUME, as recommended by the ministerial authorities (in French):

• Complete the form for the award of contracts by general contractors, as set out in the compulsory application model (in French) drawn up by the CRTI-B :

• have signed a pre-contract for sub-contracting with the general contractor;

• submit all the documents required to check that there are no grounds for exclusion (police record, tax and social security certificates, etc.):

Furthermore, according to Article 24 (3) of the aforementioned regulation of 8 April 2018 on public contracts, a subcontractor is prohibited from bidding in parallel as a main bidder or as a partner in a temporary company.

From a case law point of view, the Luxembourg courts have had occasion to rule on disputes in which the classification of a subcontractor in a public contract was open to discussion.

A company is sometimes dismissed for failing to declare its subcontractors, on the grounds, for example, that they were acting as mere suppliers.

In one case, a bidder challenged before the administrative court the decision to award a contract to a competitor who had allegedly subcontracted a significant part of the contract: the custom manufacture of electrical cabinets. This service exceeded the maximum portion stipulated in the specifications. The contracting authority argued that this was a simple supply, with no subcontracting involved.

Relying on the case law of the French Cour de Cassation, the administrative court ruled on 25 February 2013 that :

For there to be subcontracting, both the main contract and the subcontract must be contracts for work and services, i.e. contracts providing for an obligation to perform, not an obligation to transfer ownership (“donare”), with the subcontractor consequently being under an obligation to the main contractor to achieve a result.

Taking into account its importance in relation to the subject matter of the contract, the court found that there was a subcontracting relationship that exceeded the threshold.

In a second case, the judges of the administrative court again took into account the specific nature of the services to be performed, as well as their importance as shown in the schedule, in order to identify a genuine subcontracting relationship that went beyond the incidental nature of the work:

In any event, the claimant company insisted that in this case the transportation of hazardous materials could not, because of its low level of complexity and the fact that it was accustomed to carrying out this type of pollution clean-up work, be considered as a genuine subcontract, and that on the contrary it was an implementation that was incidental to the performance of the main purpose of the contract, This ancillary nature is explained both at the level of the service itself and at the level of its eventuality, in the sense that it would not be given that such materials would necessarily have to be transported during the performance of the contract.

 

Given the disagreement between the parties as to the scope of the main object of the contract at issue, the court is required to analyse, before any other progress is made, whether or not the decontamination work and therefore also the task of removing the polluted soil fall within the scope of the main contract or whether this work can be analysed as a mere ancillary service.

2. Public contract performance phase

As far as the performance phase of a public contract is concerned, and given that this is a relationship of a civil nature, the principles of contract performance – identical to those of private law – will apply to a large extent.

These principles will, however, have to be modulated for public contracts, where the obligations inherent in transparency issues will require the contracting authority to be notified, for example, of any change in the subcontracting constellation or in the proportion of work subcontracted.

In this sense, Article 24(4) of the Grand Ducal Regulation of 8 April 2018 on public contracts will introduce an obligation to obtain the prior agreement of the public purchaser, stating the reason for the planned change:

(4) The general contractor may not, after submission of his tender and during the term of the contract, exchange one or more of his subcontractors, nor change the share of the work allocated to each of them, except in duly justified cases and with the consent of the contracting authority.

The following are to be considered as duly justified cases within the meaning of the preceding paragraph :

– the cases referred to in Article 105(4)

– the cases listed in Article 44, paragraph 1, points b) and c) of the law,

– exclusion from participation in public contracts,

– bankruptcy

– serious breach of the conditions of the subcontract.

Such an obligation should not be overlooked, as the Court of Justice of the European Union has had occasion to examine the extent of the implications of a breach in this respect.

In this case, a company had replaced a subcontractor on a public contract without the consent of the contracting authority.

After discovering this substitution, the contracting authority terminated the contract and, during a subsequent public procurement procedure, decided not to take its tender into consideration because of this past breach.

Faced with a question as to the legitimacy of this exclusion, the CJEU had decided in a judgment C-267/18 of 3 October 2019 to hold that:

38. In those circumstances, the answer to the question referred is that Article 57(4)(g) of Directive 2014/24 must be interpreted as meaning that the subcontracting, by an economic operator, of part of the works under a prior public contract, decided upon without the contracting authority’s authorisation and which led to the early termination of that contract, constitutes a significant or persistent deficiency shown in the performance of a substantive requirement under that public contract, within the meaning of that provision, and is therefore capable of justifying that economic operator being excluded from participation in a subsequent public procurement procedure if, after conducting its own evaluation of the integrity and reliability of the economic operator concerned by the early termination of the prior public contract, the contracting authority which organises that subsequent procurement procedure considers that such subcontracting entails breaking the relationship of trust with the economic operator in question. Before deciding such an exclusion, the contracting authority must however, in accordance with Article 57(6) of that directive, read in conjunction with recital 102 thereof, allow that economic operator the opportunity to set out the corrective measures adopted by it further to the early termination of the prior public contract.

A final question that regularly arises concerns the direct payment of a subcontractor, particularly in the event that the subcontractor is faced with a default by the main contractor.

This direct payment is based on article 7 of the law of 23 July 1991, the purpose of which is to regulate subcontracting activities, which states that “The subcontractor shall be paid directly by the client for the part of the contract or contract for which he is responsible. Payment is compulsory even if the principal contractor is bankrupt or under controlled management“.

In order for direct payment to be used, two conditions must be met:

• Acceptance of the subcontractor;
• Approval of the subcontractor’s payment terms;

Because there is no real obligation on the contracting authority to accept it, direct payment is rarely used in public contracts.

This is because public purchasers are reluctant to multiply the number of parties sending them invoices, and article 105(5) of the public procurement regulations even states that :

In the event of subcontracting, except in the case referred to in Article 33, paragraph 1, subparagraph 6, of the law, the successful tenderer remains solely liable and solely creditor with regard to the client, without prejudice to the provisions of the law of 23 July 1991, the purpose of which is to regulate subcontracting activities.

For more information on subcontracting in public procurement, please contact our law firm.