James Goudie QC, 11 Kings Bench Walk Chambers

PREVIOUS SPEAKERS:

James Goudie QC
Head, 11 Kings Bench Walk Chambers

ILS, 20 April 2004

Title: "Contracting Out: Public Procurement, TUPE and Pensions"

INTRODUCTION

In particular sectors UK domestic legislation will regulate contracting out. For example, in relation to local authorities the applicable rules will include:-

(2) The "Best Value" regime under the Local Government Act 1999 and ODPM Circular 3/03, the Annexes to which include a Code of Practice on Workforce Matters in Local Authority Service Contracts; and

All public sector bodies (as to the characterisation of which there is a good deal of case law) are,

(2) "Public authorities" for the purposes of the Human Rights Act 1998 ("the HRA") and the European Convention of Human Rights.

One effect of contracting out is that an employer which is a public authority for HRA purposes will be replaced by an authority which is unlikely to be a public authority for HRA purposes. See Poplar HARCA v Donoghue [2002] QB 48, R (Heather) v Leonard Cheshire Foundation [2002] 2 All ER 936, R (Haggarty) v St Helens MBC (2003) 6 CCLR 352, the House of Lords, House of Commons Joint Committee on Human Rights Report, "The Meaning of Public Authority under the Human Rights Act", Seventh Report of Session 2003-2004, HL Paper 39, HC 382, and Aston Cantlow PCC v Wallbank [2003] 3 WLR 283.

PUBLIC PROCUREMENT

The currently applicable public procurement regime derives from the following four EU Directives. Council Directive 93/37, which regulates public works contracts and which was implemented by the Public Works Contracts Regulations 1991; Council Directive 93/36, which regulates public supply contracts and which was implemented by the Public Works Contracts Regulations 1995; Council Directive 92/50, which regulates public services contracts and which was implemented by the Public Services Contracts Regulations 1993 ("the Services Regulations"); and Council Directive 93/38, which regulates public utilities contracts and which was implemented by the Utilities Contracts Regulations 1996. (The Council of Ministers and the European Parliament have adopted a legislative package updating these Directives.)

The Directives have direct effect against UK public authorities as emanations of the UK State. See Fratelli Costanzo SpA v Comune di Milano [1990] 3 CMLR 239, in which the original form of the Works Directive (Directive 71/305/EEC) was applied to the Municipality of Milan (despite the absence of implementing legislation). Moreover, the implementing Regulations must be construed so far as possible to accord with the Directives as interpreted by the European Court of Justice ("the ECJ").

The public procurement regime applies to contracts above specified threshold monetary values. For services contracts (other than those entered into by central government), the threshold value is in the region of £140,000: Regulation 7 of the Services Regulations.

The Regulations all have a similar form. In general, they impose a two-stage process for the evaluation of tenders for contracts. At the first stage, the suitability of the contractors may be considered. At the second stage, the tenders of those contractors who have been judged suitable must be evaluated.

At the first stage of evaluation, contracting authorities may have regard only to considerations which relate to:-

(2) The contractor’s economic and financial standing (Regulation 15 of the Services Regulations); and

(3) The contractors’ technical capacity (Regulation 16 of the Services Regulations).

At this first stage, regard may be had to workforce matters only to the extent that such matters fall within one of the three above categories. Given the scope of these three categories under the Regulations there is little opportunity to have regard to such matters (although, as an exception to this, it should be noted that under Regulation 16(l)(b)(i) of the Services Regulations regard may be had to the educational and professional qualifications of the contractor’s employees).

At the second stage of evaluation, contracting authorities must select either the offer with the lowest price or the offer which is "most economically advantageous to the contracting authority". See Regulation 21(1) of the Services Regulations. If a contracting authority intends to award a contract on the basis of the offer which is the most economically advantageous, it must state the criteria on which it intends to base its decision, where possible in descending order of importance, in the contract notice or, where appropriate, the invitation to tender.

The Regulations provide a non-exhaustive list of the criteria which may be used to determine which offer is the most economically advantageous. None of the listed criteria relate to the terms and conditions of service of the contractor’s employees.

In Case C-31/87 (Gebroeders Beentjes BV v Netherlands [1988] ECR 4635 ("Beentjes") the ECJ considered a refusa1 to award a works contract to Beentjes which was based, inter alia, on the fact that the company was not in a position to employ long-term unemployed persons. The relevant European legislation at the time was Directive 71/305/EEC, which was similar in form to Directive 93/37. The ECJ said at paragraph 20:-

The ECJ, at paragraph 28, noted that Beentjes’ inability to employ the long-term unemployed was a consideration that bore no relation to either the considerations relevant to the evaluation of contractors or to the criteria relevant to determining the most economically advantageous offer. However, in line with its reasoning at paragraph 20 the ECJ held that the question whether such a criterion was compatible with the relevant Directive depended on whether it was directly or indirectly discriminatory in terms of the ordinary principles of European law: paragraphs 29 to 30.

The ECJ’s approach in Beentjes was followed in Case C-225/98 Commission v France, unrep, 26 September 2000. In that case the Commission complained that the French authorities had expressly set forth as an award criterion in certain works contract notices a condition relating to employment linked to a local project to combat unemployment. The French government argued that its approach was lawful in the light of Beentjes and sought to emphasise that the award criterion at issue was not a "primary criterion, the purpose of which is to make it possible to determine which is the most advantageous tender, but a ‘secondary criterion’ which is not decisive". The ECJ noted that Article 30(1) of the Works Directive required contracting authorities either to select the lowest tender or to select the most economically advantageous tender. It then stated:-

The Commission had argued that a distinction should be drawn between a condition of performance of the contract and a criterion for the award of a contract. Beentjes, said the Commission, concerned the former rather than the latter. The ECJ rejected this argument. It noted at paragraph 52 that the condition at issue in Beentjes relating to the employment of long-term unemployed persons "had been used as the basis for rejecting a tender and therefore necessarily constituted a criterion for the award of the contract"

On the basis of Beentjes and Commission v France, it would seem that, at present, an authority may have regard to employment and social considerations in selecting tenders and may require contractors to agree to contractual terms that seek to further employment policy aims without infringing the public procurement regulations. (In so doing the authority will, of course, still have to comply in any event with the relevant EU Treaty articles).

The recent case of Concordia Bus Finland Oy Ab v Helsingin Kaupunki C-513/99 [2003] 3 CMLR 20, which concerned the use of a contract award criterion that was related to environmental considerations, offers a degree of support to this conclusion. Like employment and social considerations, environmental considerations are not mentioned in the lists of contract award criteria given in the procurement directives. Nevertheless, the ECJ in Concordia held that such criteria could be used provided that "they are linked to the subject-matter of the contract, do not confer an unrestricted freedom of choice on the authority, are expressly mentioned in the contract documents or tender notice, and comply with all the fundamental principles of Community law, in particular the principle of non-discrimination" (Concordia, at paragraph 64).

It is however to be noted that there remains uncertainty as regards the degree to which regard may be had to social, employment and environmental considerations during a tendering exercise that is subject to EC procurement law. In particular, the Commission continues to maintain its position that such policy aims may be pursued using contractual terms but that such considerations may not be used as contract award criterion (see the Commission’s Interpretive Communication on Social Considerations OJ C121/2 of 29 April 2002).

The Internal Market Directorate General of the Commission appears to rely on the judgment in Case C-380/98 R v HM Treasury ex parte the University of Cambridge, [2000] 1 WLR 2514 ("Cambridge University") as authority for the proposition that the choice of tender can be based only on economic, rather than broader, considerations.

In Cambridge University the ECJ was considering which bodies fell within the scope of the Directives. It would appear that the Internal Market Directorate General have in mind paragraphs 16 and 17 of the judgment, where the court stated:-

Consequently, the aim of the directives is to avoid both the risk of preference being given to national tenderers or applicants whenever a contract is awarded by the contracting authorities and the possibility that a body financed or controlled by the State, regional or local authorities or other bodies governed by public law may choose to be guided by considerations other than economic ones (see, to that effect, Case C-44/96 Mannesmann Anlagenbau Austria and Others v Strohal Rotationsdruck [1998] ECR 1-73, paragraph 33, and [Case C-360/96 Gemeente Arnhem, Gemeente Rheden v BFI Holding [1998] ECR 1-6821], paragraphs 42 and 43)."

The source for the proposition in paragraph 17 that the Directives aim to avoid tender-selection for non-economic reasons is the second case referred to, Gemeente Anthem, Gemeeente Rheden v BFI Holding ("BFI Holding’) In BFI Holding the ECJ, in deciding whether or not a particular body fell within the European procurement regime, implicitly suggested at paragraph 43 that the Directives were aimed at preventing regard being had to considerations which were not economic in nature.

Although BFI Holding supports the suggestion that only economic considerations should be considered during the procurement process, I do not consider that the support offered is of great significance given that the ECJ was not specifically addressing itself to the question of whether non-economic considerations could be taken into account during procurement.

It should be noted that the literal wording of the Directives does, to my mind, suggest that the Directives exhaustively set out the considerations to which regard may he had during procurement (contrary to what is said in paragraph 20 of Beentjes). This, in my opinion, militates against the view that the Beentjes approach will always be followed by the ECJ in the future. However, at present, it appears that the reasoning of the Court in Beentjes, Commission v France and Concordia is likely to represent the current state of European law.

Therefore, as long as the requirement upon a contractor is not discriminatory, it will not be contrary to European procurement law for a UK. public authority to insist upon that requirement as part of procurement contracts. However, if such a criterion is to he applied then under European law it must be mentioned in the contract notice: Beentjes at paragraphs 36 and 37. The position has very recently been restated by the ECJ, and Beentjes and Concordia followed, in another case concerned with environmental preferences, Case C-448/01, EVN AG v Austria [2004] 1 CMLR 22, where it was held that use of renewable energy sources was an acceptable criterion provided that it was made transparent before the tender procedure began and was not in discriminatory terms. The ECJ reaffirmed (paragraphs 31-39) that the public procurement Directives could not be interpreted as meaning that each of the award criteria used by the contracting authority to identify the most economically advantageous tender had necessarily to be of a purely economic nature. It was open to the contracting authority when choosing the most economically advantageous tender to choose the criteria on which it proposed to base the award of contract, provided that they were linked to the subject-matter of the contract, did not confer an unrestricted freedom of choice on the authority, were expressly mentioned in the contract documents or the tender notice, and complied with all the procedural rules and fundamental principles of Community law, in particular the principle of non-discrimination. It followed that, provided that they complied with the requirements of Community law, contracting authorities were free not only to choose the criteria for awarding the contract but also to determine the weighting of such criteria, provided that the weighting enabled an overall evaluation to be made of the criteria applied in order to identify the most economically advantageous tender.

On 23 October 2003 in the House of Lords the Government was asked whether they believed the draft European Union Public Procurement Directive (referred to at the end of paragraph 4 above) will enable environmental and social needs to be taken into account. The Parliamentary Under-Secretary of State at the DTI, Lord Sainsbury, replied (WA 189):-

EUROPEAN TREATY

In the field of procurement, regard must be had to Article 28 (free movement of goods), Article 39 (free movement of workers), Article 43 (freedom of establishment) and Article 49 (free movement of services) of the European Treaty, whether or not the contract is above the relevant procurement threshold.

Articles 43 and 49 together prohibit:-

(2) Rules which indirectly discriminate on grounds of nationality (for instance, a rule that contractors must use local labour will not be directly discriminatory but may be indirectly discriminatory if it is harder for foreign contractors to comply than it is for domestic contractors); and

(3) Rules which, although not discriminatory, are restrictive of free movement (rules relating to the qualification of contractors may in principle fall within this category).

It is also necessary to consider (again, irrespective of whether the contract is above or below the relevant procurement threshold) the principles of equality and transparency that flow from the relevant Treaty articles. The principle of equality requires, inter alia, that the winning tender needs to be chosen on the basis of objective criteria (see the Commission’s Interpretive Communication on Concessions under Community Law [2000] OJ C121/2). An authority will therefore need to ensure that any contract award criteria adopted permit an objective comparison of the rival tenders.

The principle of transparency requires contracting authorities to undertake sufficient advertising of a potential contract to enable the market to be opened up to competition: Telaustria v Telekom Austria C-324/98 [2000] ECR I-10745 at para 62. Some useful guidance on what amounts to sufficient advertising is found in the Commission’s Interpretive Communication on Concessions, where the Commission states that transparency can be ensured, inter alia, by publishing a tender notice in the daily press or specialist journals.

Under European law, the application of criteria which are not overtly discriminatory may still be unlawful if in practice they lead to discrimination based on nationality: Case C-3/88 Commission v Italy [1989] ECR 4035 at paragraph 8; but even if employment policy is prima facie discriminatory the policy may still not be unlawful if it can be justified on objective grounds. See, for instance Case 192/83 Robert Fearon and Company Limited v the Irish Land Commission [1984] ECR 3677.
TUPE
TUPE and the Acquired Rights Directive ("ARD") will often apply on contracting out. Reference should also be made to the new Directive, Council Directive 2001/23/EC. However, sometimes it will be desired for the employees to remain in the public sector (eg with a NHS Trust that is engaged in a PFI deal), and a Retention of Employment ("RoE") model may be adopted, with the employees objecting to transfer and being seconded to the transferee. The RoE model assumes that TUPE applies to services to be provided under the PFI project agreement between the NHS Trust and the external provider, so that the employment contracts of Trust employees would in the ordinary course of events automatically transfer under Regulation 5 of TUPE, but relies upon employees objecting to transfer under Regulation 5(4A), see Hay v George Hanson (Building Contractors) Ltd [1996] IRLR 427, so that their employment contracts do not transfer by virtue of Regulation 5(4B), notwithstanding Senior Heat Treatment v Bell [1997] IRLR 614. This leaves an argument that day-to-day control exercised by the project company over the duration of a long term contract will lead to a finding that staff become employees of that company: contrast Folani v Nigerline (UK) Ltd [1978] ICR 277 and Cross v Redpath Dorman Long Ltd [1978] ICR 730.

TUPE and the ARD continue to generate much case law both in the ECJ and in the UK. Prominent recent examples include Martin v South Bank University (see further below), Abler v Sodexho Catering Gmbh in the ECJ ("Abler"), and Fairhurst Ward Abbotts Ltd v Botes Building Ltd in the Court of Appeal ("FWA").

Abler [2004] IRLR 168 is the latest of numerous ECJ cases on the vexed question whether there is a TUPE transfer when services are contracted out or there is a change of service contractor, and the drawing of a distinction between labour intensive activities and asset intensive activities. Abler raised the question of whether the ARD applied when, after the termination of a contract with the first contractor, the incoming contractor uses substantial parts of the tangible assets previously used by the first contractor and subsequently made available to it by the contracting authority but refuses to take on the employees of the first contractor. The contract in question was one to provide catering services within a hospital to both patients and staff. It was the contractor's responsibility to draw up menus and to purchase, store, produce and portion meals and to transport these to the dining room and hospital departments. However, the premises themselves, as well as water, energy and the necessary small and large equipment, were provided to the contractor by the hospital authority. The latter decided in 1999 to appoint a new contractor, Sodexho, to replace the existing contractor, Sanrest. However, Sodexho refused to take over the outgoing contractor's materials, stock and employees. Nor did it acquire any accounting data, menu plans or general records.

Employees of Sanrest commenced legal action against Sodexho seeking a declaration that their employment relationship continued after the transfer on the basis of the provisions of the Austrian laws implementing the ARD. The ECJ held that the ARD did apply. The ECJ found that catering cannot be regarded as an activity based essentially on manpower since it requires a significant amount of equipment. A defining feature of the case was the fundamental obligation to prepare meals in the hospital kitchen, which required the taking over and use of tangible assets. Moreover, given their captive status, the new contractor necessarily took over most of its predecessor's customers. The ECJ concluded that the transfer of the premises and the equipment provided by the hospital constituted the transfer of an economic entity. The failure of the new contractor to take over an essential part of the outgoing contractor's workforce did not, in a sector such as catering where the activity is essentially based on equipment, prevent the entity from retaining its identity after the transfer. The ECJ also held that the fact that the tangible assets taken over by the new contractor did not belong to its predecessor but were provided by the contracting authority did not prevent the ARD from applying.

In FWA the Court of Appeal ruled on two points concerning the application of TUPE in a case where a part of an undertaking was transferred. The transferor supplied building maintenance services across the whole of the London Borough of Southwark pursuant to a single services supply contract with Southwark. In December 1998 Southwark decided to partition the Borough into two geographic areas, Area 1 and Area 2, and to invite separate tenders for each. The transferee successfully applied for the Area 2 contract and continued to operate the same activity as previously carried out by the transferor but refused to take the transferor’s employees on, contending that there was no relevant transfer of an undertaking and that TUPE did not apply.

Both the Employment Tribunal and EAT rejected that view, which led to the transferee appealing to the Court of Appeal. In dismissing the appeal, the Court rejected the transferee’s contention that TUPE cannot apply where the transfer is of something less than the entire undertaking as it existed in the hands of the transferor. The Court did accept that, if it is possible to identify part of an undertaking as a discrete economic entity before the transfer takes place, then the applicant will find it easier to show (i) that the part transferred retains its identity in the hands of the transferee and (ii) that he or she was employed in the part transferred immediately before the transfer. It unanimously held, however, that just because the part transferred was not identifiable as a discrete economic entity before the transfer does not mean that there can be no transfer of a part or that it will be impossible for the applicant to establish that there was a transfer of the part of the undertaking in which he was employed. It may be more difficult to make the required "before" and "after" comparison where the part becomes a discrete economic entity for the first time on the making of the transfer, but it is not an impossibility.

The second point dealt with by the Court of Appeal concerned whether an employee who was away on long-term sick leave at the time of the transfer had become detached from the workforce, with the consequence that he was not to be taken to have been employed in the undertaking transferred immediately before the transfer. If that were the outcome, his employment would not automatically be transferred to the transferee. However, the Court ruled that if the employee was in fact employed in the part of the undertaking transferred, the fact that he was away from work because he was sick would not of itself prevent the transfer from including him. A person on sick leave, like a person on holiday, on study leave or on maternity leave, remains a person employed in the undertaking, even though he is not actually at his place of work. The question is whether he was employed in the part transferred. That was a factual matter for the Tribunal to determine.

A TUPE transfer upon contracting out may have important equal pay implications. See Preston v Wolverhampton Healthcare NHS Trust (No 3) [2004] IRLR 96 ("Preston") and Allonby v Accrington & Rossendale College [2004] IRLR and commentary thereon by my Chambers colleague Adrian Lynch QC at www.11kbw.com. In Preston the EAT held that the ET had erred in law in finding that the equal pay limitation period was triggered by the date of a TUPE transfer, rather than the date of termination of the employment with the transferee. This point is on its way to the Court of Appeal.

PENSIONS
There is an important Cabinet Office Statement of Practice: Staff Transfers in the Public Sector. Two current DoE issues are employment benefits payable out of pension funds and discrimination in pension provision. As to the latter see "New Forms of Discrimination in Pension Provision" by my Chambers colleague, Jason Coppel, at www.11kbw.com.

The basic legal position is that benefits under an occupational pension scheme do not transfer (unless they do not relate to old age, invalidity or survivors). This exception is, however, to be strictly construed. It does not cover early retirement benefits. These do transfer: Beckmann v Dynamco [2002] IRLR 578; Martin v South Bank University [2004] IRLR 74. The effect of these decisions (see the Article by my Chambers colleague, Nigel Porter, "Transfers of Undertakings and the ECJ’s Decisions in Beckmann and Martin", at www.11kbw.com) is that:-

Beckmann

(2) Only benefits paid from the time when an employee reaches the end of his normal working life as laid down by the general structure of the pension scheme in question can be classified as old-age benefits (Beckmann paragraph 32);

(3) Early retirement benefits paid in the event of dismissal to employees who have reached a certain age are not old-age (or invalidity or survivors) benefits (Beckmann paragraph 32);

(4) Rights contingent upon dismissal or premature retirement by agreement fell within the definition of rights and obligation within the meaning of Article 3(1) of the ARD (Martin paragraph 29);

(5) Benefits payable on early retirement by agreement which does not correspond to the departure of an employee at the end of his normal working life as laid down by the general structure of the pension scheme are not old-age, invalidity or survivors’ benefits within the meaning of Article 3(3) (Martin paragraphs 34 and 35);

(6) Neither the fact that the rights in issue derive from statutory instruments or were implemented by such instruments, nor the practical arrangements adopted for such implementation, can have the effect of preventing transfer of those obligations to the transferee (Beckmann paragraphs 33-40; Martin paragraph 35);

(7) An employee offered less favourable terms by reason of the transfer cannot waive his rights conferred by ARD (Martin paragraphs 40 and 48); and

(8) Employees who have accepted less favourable terms by reason of the transfer have the right to require the transferee former employer to make good the consequences of its actions by ensuring that they are accorded early retirement on the terms to which they were entitled (Martin paragraphs 50-54).

The exception currently relates to continuing rights under a scheme. Accrued rights do transfer. The transferee must provide broadly comparable pension rights after transfer.

With regard to TUPE reform, the long-awaited draft Regulations have yet to be produced by the DTI; but clauses 203 and 204 of the current Pensions Bill once enacted will implement the Government’s proposals for protection of pension rights on a TUPE transfer.

James Goudie QC
11 King’s Bench Walk Chambers

20 April 2004

Back to the top

PREVIOUS SPEAKERS:

James Goudie QC Head, 11 Kings Bench Walk Chambers

ILS, 20 April 2004

INTRODUCTION

James Goudie QC
Head, 11 Kings Bench Walk Chambers