Every year, institutions, agencies and other bodies of the European Union spend around 3 billion euros to buy goods, services and works of any kind.

The legal basis of the related procurement procedures is set out by the ‘Financial Regulation 2024/2509’ on the financial rules applicable to the general budget of the Union (repealing ‘Financial Regulation 2018/1046’), which is inspired by Directive 2014/23 on concession contracts and Directive 2014/24 on public procurement (see recital 154).

In the same way as the Directives, the Financial Regulation also sets out similar or identical grounds for exclusion of a tenderer (see Article 138 of the 2024 Financial Regulation and Article 136 of the previous Financial Regulation 2018) which, in comparison to the Directives, are all mandatory.

The claim for annulment discussed here (TP v Commission, T-776/22) is particularly interesting because the General Court interpreted the ground for exclusion provided for in Article 136(1)(e) of the 2018 Financial Regulation in relation to Article 57(4)(g) of Directive 2014/24.

In particular, the General Court had to establish whether that provision must be interpreted to mean that the finding by the judge having jurisdiction over the contract of a failure to comply with the contractual obligations attributable to a group of persons, entailing the joint and several contractual liability of each them, enables the authorising officer responsible to adopt an exclusion measure against one of those persons or whether it imposes an obligation to carry out an individual assessment of the conduct of the person concerned.

Background and Legal Context

In 2009, the European Commission launched a procurement procedure for the award of a public works contract concerning the modernisation of a facility. From the summary of the action it appears that the subject matter of the contract in question was the construction of sewerage and water distribution networks in the city of Famagusta (Cyprus).

The contract was awarded to a consortium formed by the applicant, TP, and its partner, jointly and severally liable to perform the contract.

After the completion of the works many defects were detected in the facility. Since it was not satisfied with the repairs carried out by the partner, the Commission issued the consortium with a notice of early termination of the contract, to which the consortium subsequently replied in the same fashion.

Since the attempts to settle the dispute with a dispute adjudication board failed, the Commission initiated arbitration proceedings before an arbitral tribunal established under the auspices of the International Chamber of Commerce (ICC).

The arbitral tribunal ascertained that there were 6,757 defects resulting from the work, the majority of which attributable to the consortium, and qualified the conduct of the consortium as grossly negligent. Consequently the arbitral tribunal ordered the applicant, TP, and its partner to jointly and severally pay damages to the European Union for an amount equal to the costs necessary to repair the facility.

The arbitral tribunal did not distinguish the individual liability of each partner. In any case, the summary of the action shows that TP had a subordinate role in the execution of the project, with a limited contribution to it.

In October 2022, the Commission, upon a recommendation by the interinstitutional panel established pursuant to Article 143 of the 2018 Financial Regulation – whose task, according to recital 38, is to assess requests on the need to take decisions on exclusion and imposition of financial penalties referred by the Union institutions and bodies – decided to exclude TP for a period of two years from participating in the EU institutions’ contracts award procedures and grant award procedures funded by the EU general budget, for failure to comply with the main obligations of the contract at issue (according to Article 136(1)(e) of the 2018 Financial Regulation).

In adopting the exclusion measure against TP, the Commission merely relied on the finding by the arbitral tribunal that the group members were jointly and severally liable, without actually conducting a specific and individual assessment of its conduct.

Therefore, TP brought an action under Article 263 TFEU for the annulment of the decision before the General Court of the European Union.

The General Court’s Reasoning

In the first part of its reasoning the General Court considers that in the circumstances provided for in Article 136(1)(e) there is no automatic link between the finding made by the arbitration tribunal ruling on the contract and the adoption of an exclusion measure by the authorising officer responsible, since the latter must make an independent legal classification of the conduct of the person concerned on the basis of the specific criteria laid down in that provision.

According to the General Court, Article 136(1)(e) of the 2018 Financial Regulation: ‘does not provide that any failure to comply with a contractual obligation automatically leads to the adoption of an exclusion measure. That provision refers to showing “significant deficiencies” in complying with “main obligations”. These are additional conditions imposed specifically by the Financial Regulation for the adoption of an exclusion measure. The existence of such conditions, which do not follow from the contract or from the law applicable to it implies that what is at issue, in such a situation, is a legal classification of the facts made by the authorising officer responsible, which is distinct from that made, where appropriate, by the court having jurisdiction over the contract’ (see paras. 40 and 41).

In addition, the terms of this provision are sufficiently imprecise to leave a margin of discretion to the authorising officer responsible (see para. 42).

From a systematic standpoint the General Court’s finding is corroborated by the circumstance that Article 136(1)(e), unlike the grounds for exclusion provided for by Articles 136(1)(b) to (d) and (f) to (h), refers directly to the conduct of the economic operator and not to the final administrative decision or to the final judgment of a distinct authority (see paras. 44 to 47).

Article 136(2) confirms that the findings made in the final administrative decision or the final judgment are binding on the authorising officer responsible only in the cases referred to in Articles 136(1)(c), (d) and (f) to (h).

The conclusion is further substantiated by the fact that exclusion measures and financial penalties (established by ‘the 2002 Financial Regulation’ and detailed by the 2018 Financial Regulation) are part of an autonomous legal regime which pursues specific objectives of public interest distinct from the protection and compensation of the parties to the contract which a system of contractual liability seeks to ensure (see para. 59).

The General Court’s scrutiny continues in order to determine if the independent assessment of the authorising officer must be individual, focusing on the conduct of the person concerned.

The Court states that the authorising officer responsible must carry on a specific and individual assessment in the light of all the relevant factors.

In fact, the wording of Article 136(1)(e) indicates that it is the ‘person’ or ‘entity’ that has failed to comply with its contractual obligations that is excluded (see para. 62).

The Court’s line of argumentation follows with the analogous application of the Court of Justice’s case-law relating to the parallel provision of Article 57(4)(g) of Directive 2014/24 which sets out an optional ground for exclusion for the same circumstances (see para. 63).

In interpreting Article 57(4)(g) of Directive 2014/24 the Court of Justice stated that in order to observe the essential characteristics of the optional ground for exclusion laid down by that provision and the principle of proportionality (referred to in Article 18(1) of the Directive), before the inclusion of an economic operator which was a member of a group in the list of unreliable suppliers, all the relevant factors adduced by that operator must be the subject of a specific assessment (see HSC Baltic and Others, C‑682/21, paras. 46 and 47).

In the same judgement the Court of Justice held that the Member States may provide for a presumption that any economic operator, ex lege responsible for the proper performance of a public contract, shall be deemed to have contributed to the significant or persistent deficiencies in the performance of a prior public contract which resulted in its early termination (see para. 48).

The Court of Justice nevertheless stated that, where that contract had been awarded to a group of economic operators, whose individual contributions to those deficiencies were not necessarily identical, such a presumption had to be rebuttable (Latin: praesumptio iuris tantum). The application of the ground for exclusion laid down in the said provision must be based on the wrongful or negligent nature of that individual conduct (see paras. 48 and 49).

In the light of these elements, the General Court observes that the obligation to conduct a specific and individual assessment applies a fortiori in the context of the 2018 Financial Regulation, where, as illustrated above, there is no automatic link between the finding made by the court having jurisdiction over the contract and the adoption of an exclusion measure and where the exclusion penalty has a punitive nature (see Vialto Consulting v Commission, C‑130/23, para. 31).

Furthermore, it is necessary to comply with the fundamental general principle that penalties should be applied only to the offender (see Eni v Commission, C‑508/11 P, para. 50).

The General Court points out that the institution or body concerned is in the position to assess the individual conduct of each group member since it can demand the identifiability of the performance to be carried out by each participant and ask the persons concerned to forward the documents of the contract implementation (see paras. 76 and 77).

When it is impossible to distinguish between the liability of each of the participants in a complex group, the institution or body concerned will always have the possibility to explain this situation before the EU judiciary. However, it must show that it at the very least attempted to carry out an individual assessment of the person concerned.

In the light of the above, the decision of exclusion was annulled and the Commission was ordered to pay the legal costs.

Concluding Remarks

In conclusion, it is recalled that the fundamental principle of personal liability for financial penalties has already been used by the Court of Justice in EU public procurement law – together with the principle of proportionality – in the case of exclusion of all of the members of a group of economic operators where a group member has submitted false information (Klaipėdos, C-927/19, see paras. 156 and 157).

By paying particular attention to this landmark judgment the Commission could have avoided infringing Article 136(1)(e) of the 2018 Financial Regulation, which has led to the annulment of its decision.

Luckily, the sanctioning power of the Commission has not been exhausted, providing an opportunity for more precise action (see Article 139(2) of the 2018 Financial Regulation).

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