Opinion of Mr Advocate General Jacobs delivered on 10 May 2001. - SIAC Construction Ltd v County Council of the County of Mayo. - Reference for a preliminary ruling: Supreme Court - Ireland. - Public works contracts - Award to the most economically advantageous tender - Award criteria. - Case C-19/00.



European Court reports 2001 Page I-07725



Opinion of the Advocate-General

1. Under Community rules, public works contracts must be awarded on the basis either of the lowest price or of the most economically advantageous tender; in the latter case all the criteria to be applied must be stated in the contract notice or documents.

2. Where in that context it is stated that the tender most advantageous in respect of cost and technical merit will be accepted, and where the lowest bidders are all of accepted competence, may the contract be awarded not to the bidder whose tender is formally the lowest but to the bidder whose tender is, in the opinion of the consulting engineer, likely to be lowest in ultimate cost? That is, in essence, the question raised in the present case by the Supreme Court of Ireland.

Legislation

3. The relevant Community legislation in force at the material time in the main proceedings was Council Directive 71/305 (the Directive).

4. Of its provisions, essentially only those of Article 29(1) and (2) are in issue in the present case:

1. The criteria on which the authorities awarding contracts shall base the award of contracts shall be:

- either the lowest price only;

- or, when the award is made to the most economically advantageous tender, various criteria according to the contract: e.g. price, period for completion, running costs, profitability, technical merit.

2. In the latter instance, the authorities awarding contracts shall state in the contract documents or in the contract notice all the criteria they intend to apply to the award, where possible in descending order of importance.

The main proceedings and the request for a preliminary ruling

5. The facts as they appear from the Supreme Court's order for reference and the documents annexed to it are as follows.

6. In February 1992 Mayo County Council (the County Council) advertised in the Official Journal of the European Communities for tenders for construction of a sewerage and sewage disposal improvement scheme, comprising sewers, storm water drains, rising mains and water supply pipes, all complete with various fittings, together with two pumping stations and a waste water treatment works.

7. The contract was to be of the measure-and-value type, in which the estimated quantities of each item are set out in a bill of quantities. The tenderer fills in a rate for each item and a total price for the estimated quantity. The price payable is determined by remeasuring the actual quantities on completion of the work and valuing them at the rates quoted in the tender. This type of contract is used in particular where it is not possible to establish precise quantities before work begins.

8. Under the heading Award criteria (other than price), the contract notice published in the Official Journal stated: the contract shall be awarded to the competent contractor submitting a tender which is judged to be the most advantageous to the council in respect of cost and technical merit ...

9. Other contract documents included the instructions to tenderers, the specification, and the conditions of contract. The following relevant points emerge from those documents:

- among the terms defined were tender total (the total of the priced bill of quantities on the date of its acceptance) and contract price (the sum to be ascertained and paid on completion of the contract), although those terms do not appear to have been used systematically throughout the documents;

- the award would be made to the tenderer whose tender was adjudged the most economically advantageous to the County Council in respect of price and technical merit;

- the County Council none the less reserved the right not to accept the lowest or even any tender;

- the decision would be taken on the recommendation of a consulting engineer, who would check the three lowest tenders for errors in calculation and would compare prices with his own estimates of cost to ensure that items were adequately priced to meet the highest standard of workmanship without additional expenditure if the tender appeared underpriced;

- the revised tender price (that is to say, the price established after arithmetic correction) would form the basis for comparison of tenders;

- all items had to be priced, with rates stated in the appropriate places;

- however, where no price or rate was entered against an item, that item would be deemed to be covered by the other rates and prices. (This practice, known as zero-rating, is used by tenderers to submit fewer, inclusive prices for major items covering all related minor items, rather than pricing each individual item in detail.)

10. There were 24 tenderers. The three lowest were SIAC Construction Ltd (SIAC), Pat Mulcair (Mulcair) and Pierse Contracting Ltd (Pierse). Following arithmetic corrections, the tender totals were IEP 5 378 528 for SIAC, IEP 5 508 919 for Mulcair, and IEP 5 623 966 for Pierse.

11. In his extremely detailed report of 30 June 1992, the consulting engineer stated that those tenders were equal in technical merit.

12. However, he had serious reservations regarding SIAC's tender, as the pricing system used greatly reduces the freedom of the consulting engineer to properly and fully administer the contract in a way that, in his view, is the most economically advantageous to the Mayo County Council. In general, SIAC's approach greatly reduced control over all the items in the bill of quantities, which would in one way or another vary on final measurement. Specifically, it had zero-rated 27.5% of the items, whereas Mulcair had zero-rated only 18% and had priced all major items of measured work. SIAC had also deducted in its entirety a provisional sum of IEP 90 000 which had been included for certain materials. (It appears that SIAC considered this to mean that it had to supply such materials free of charge - the effect of which would seem to be similar to that of zero-rating, in that the price was deemed to be included in that of other items.) Mulcair had, in the engineer's opinion, submitted a better balanced tender than SIAC's, and one which might well give far better value for money and might even cost less.

13. In his recommendations, the consulting engineer stated that Pierse's tender had to be rejected simply on price. He then gave a number of reasons for - with the greatest reluctance - not recommending SIAC's tender, in particular the zero-rating practices described above, which caused distortion and rendered proper management and control extremely difficult if not impossible. He expressed his serious doubts that in fact [SIAC's] tender would prove at the end of the day to be the lowest. He therefore recommended that Mulcair's corrected tender be accepted. That was done and the contract has since been completed.

14. When making the award, however, the County Council informed SIAC of those reasons for not accepting its tender. SIAC challenged the County Council's decision before the High Court, which dismissed its action for judicial review and damages on 17 June 1997.

15. One issue was whether the term cost indicated a criterion other than price, in the sense of tender total, in the contract documents. The High Court found that the two terms were used interchangeably and were intended to have the same meaning. In choosing criteria which were stipulated in the contract notice and amplified in other contract documentation, the County Council had exercised a discretionary power of selection which was largely predicated on the exercise of professional judgement. The High Court confined itself to examining whether the County Council's decision was unreasonable, and concluded that it was not. SIAC appealed to the Supreme Court.

16. SIAC submitted in its appeal that the County Council was required to accept its tender as the lowest priced. Since all tenderers had the requisite technical merit, the only relevant criterion could be cost (which was synonymous with price). Cost/price could not mean ultimate cost; it could mean only tender price. By taking account of ultimate cost, the County Council had departed from the specified award criteria, contrary to the principles of transparency, foreseeability of the adjudication process and equality of tenderers.

17. The County Council contended that it was entitled to exercise a discretion and to award the contract on the basis of its consulting engineer's recommendation as to which tender was the most advantageous in respect of cost and technical merit. In a measure-and-value contract, cost must be understood as the ultimate cost to the awarding authority. Furthermore, the consulting engineer was entitled to make comparisons between prices quoted and his own estimates of cost. SIAC had understood that the criterion of cost referred to the probable cost of the contract to the County Council.

18. The Supreme Court has decided to stay the proceedings and submit the following question to the Court of Justice for a preliminary ruling:

In a situation where an authority is awarding a contract pursuant to the provisions of the second indent of Article 29(1) of Council Directive 71/305/EEC, Chapter 2, of 26 July 1971 as applied in the national law of a Member State, and where the authority shall have specified the "Award criteria (other than price)" as being that the contract would be awarded to "the competent contractor submitting a tender which is adjudged to be the most advantageous to the" (awarding authority) "in respect of cost and technical merit", and where the three lowest tenderers shall have been contractors of accepted competence and shall have submitted valid tenders of accepted technical merit, and where the tender prices of the three lowest tenderers shall not have diverged greatly, is the awarding authority obliged to award the contract to the contractor who shall have tendered the lowest price or is the awarding authority entitled to award the contract to the contractor with the second lowest price on the basis of the professional report of its consulting engineer that the ultimate cost of the contract to the awarding authority is likely to be less if the contract is awarded to the contractor who tendered the second lowest price than it would be if the contract were awarded to the contractor who tendered the lowest price?

Observations to the Court

19. Written observations have been submitted by SIAC, the County Council, the Irish Government, the Austrian Government and the Commission. SIAC, the County Council, the French Government, the Irish Government and the Commission presented oral submissions at the hearing.

20. SIAC argues that the criterion of cost or price stated in the tender documents must mean the total price of the tender as submitted; by adjudicating between SIAC and Mulcair on the basis of projected ultimate cost, the County Council departed from the award criteria it had itself stipulated. In doing so, it breached the principle of non-discrimination, failed to ensure transparency and foreseeability, and acted subjectively and arbitrarily, conferring on itself what amounted to total discretion.

21. The County Council contends that the references to cost and price can be only to the probable cost of the performed contract and that the question is simply whether it is permissible for an awarding authority to adopt that cost (as assessed by its consulting engineer) as an award criterion under the second indent of Article 29(1) of the Directive. It considers that it is permissible, since the case-law shows that an awarding authority must have some discretion in determining the most economically advantageous offer on the basis of objective criteria, which may include future consequences of the choice made.

22. The French, Irish and Austrian Governments support essentially the County Council's position. The Irish Government agrees in particular that, in the context of a measure-and-value contract where final costs and quantities cannot be accurately predicted, proper compliance with the tendering instructions ensures a fair sharing of the risk which is compromised by excessive use of zero-rating; moreover, the professional judgment of a consulting engineer is in principle not subjective but is in any event open to challenge in the national courts if any lack of objectivity can be established. The Austrian Government agrees with the County Council that to require an awarding authority to adjudicate on the basis of the lowest tender price when it had stipulated a different criterion would be contrary to the provisions and principles of the Directive.

23. The Commission, finally, adopts a position more favourable to SIAC. It considers that where the only relevant criterion is cost, corresponding to the price tendered, a contracting authority is not entitled to have regard to previously unmentioned criteria such as zero-rating, balanced tenders or pricing methodology. Where price is a criterion, it must mean the lowest tender price, whether the context is the first or the second indent of Article 29(1) of the Directive; to take ultimate cost as a criterion would give rise to problems of certainty and objectivity, such as the apparently subjective assessment made by the consulting engineer in the present case.

Analysis

The meaning of price and cost

24. A crucial point in the case is what is meant by cost or price in the tender documents. The High Court found that the words were used interchangeably and were intended to have the same meaning, but does not seem to have decided what that meaning was. The point apparently remains in issue before the Supreme Court, with SIAC arguing that it meant the arithmetically corrected price given in the tender (the tender total defined in the contract documents) and the County Council arguing that it meant the foreseeable final cost (the contract price).

25. SIAC wishes this Court to rule that the terms price and cost in the tender documents cannot, as a matter of Community law, be construed as meaning ultimate cost, and the County Council argues that the Supreme Court's question presupposes that they must have that meaning.

26. Although that is, I consider, a question of interpretation of the terms of a contract governed by Irish law and as such a matter for the Irish courts, this Court may none the less provide guidance as to the meaning of price in the Directive which may be of assistance in arriving at an interpretation.

27. The word price is used in both indents of Article 29(1) of the Directive.

28. In the first indent, the term lowest price only can, I consider, apply only to the price stated in the tender. Any alternative interpretation would detract from the clarity of that provision, which is obviously intended to enshrine an absolutely objective standard; nor, indeed, has any suggestion been made to the contrary.

29. The Commission considers that the word price must be given the same construction in the second indent.

30. I agree, but do not regard that point as decisive. The second indent allows awarding authorities to assess the most economically advantageous tender on the basis of various criteria according to the contract and provides a non-exhaustive list of such criteria, including price. Other criteria may thus be used, provided that they are stated in the contract notice or contract documents in accordance with Article 29(2), and one such criterion might be probable ultimate cost. It can hardly be denied that the lowest ultimate cost to the awarding authority may qualify as the most economically advantageous.

31. For the reasons given above, I shall not express any opinion on whether cost (or price) in the tender documents means the total of the tender submitted or the foreseeable ultimate price of the contract but shall consider the competing hypotheses in turn.

32. First, however, it will be helpful to examine some general considerations concerning the interpretation and application of the Directive.

The application of award criteria

33. The main purpose of regulating the award of public contracts in general is to ensure that public funds are spent honestly and efficiently, on the basis of a serious assessment and without any kind of favouritism or quid pro quo whether financial or political. The main purpose of Community harmonisation is to ensure in addition abolition of barriers and a level playing-field by, inter alia, requirements of transparency and objectivity.

34. The way in which award criteria are to be applied under the Community rules has been clarified by the Court in a number of judgments, in particular Beentjes, Storebælt Bridge and Walloon Buses, all of which have been cited by the parties who have submitted observations.

35. Beentjes concerned the legality of certain criteria stipulated in the contract documents. Although those criteria were different from that in issue in the present case, some relevant points emerge from the judgment. A stipulation that the award is to be made to the tenderer whose tender appears the most acceptable is incompatible with Community law if, as interpreted in national law, it confers unrestricted freedom of choice on the awarding authority but not if its effect is to allow comparison between tenders on the basis of objective criteria such as those listed in the second indent of Article 29(1) and, where such criteria are used, they must be stated in the contract notice or documents.

36. The Storebælt Bridge case was an action brought by the Commission against Denmark on the ground of irregularities in a major tendering procedure. One tenderer had submitted a tender not in compliance with the tender conditions and the awarding authority entered into negotiations with that tenderer resulting in amendments to the conditions and the acceptance of its tender. The Court held in particular that the principle of equal treatment of tenderers lies at the heart of the Directive and requires that all tenders must comply with the tender conditions in order to ensure an objective comparison.

37. In Walloon Buses, an action brought by the Commission against Belgium (on the basis of another procurement directive ), an awarding authority was held to be in breach of Community law because it took into account an amendment to the tender of only one tenderer, awarded the contract on the basis of figures which did not correspond to the requirements of the contract documents and took into account additional features suggested by one tenderer but not among the stipulated award criteria. The Court again stressed the need to respect the principles of equal treatment of tenderers and of transparency.

38. It thus appears clear from the wording of Article 29(1) and (2) and from the case-law that unless an awarding authority specifies the criteria of economic advantageousness which it intends to apply under the second indent of Article 29(1) it is bound to award the contract on the basis of the lowest price only; where it does specify such criteria it is bound by them and may not deviate from them in the course of the procedure. The requirements of transparency, objectivity and equality of opportunity are respected only if all tenderers know in advance on what criteria their tenders will be judged and those criteria are assessed objectively.

39. With those considerations in mind, I turn to the two alternative hypotheses on which the parties to the main proceedings base their submissions. It must also be remembered that the award procedure was governed by the second indent of Article 29(1) and by Article 29(2) of the Directive, not by the stricter requirements of the first indent of Article 29(1).

First hypothesis: The terms price and cost in the tender documents mean the arithmetically corrected total of the tender submitted

40. On this hypothesis, the outcome of the national proceedings seems straightforward. It is common ground that the award was made (at least at the final stage of adjudicating between the two lowest tenders) on the basis of likely ultimate cost and not on the basis of the tender total as defined in the contract documents. Thus, if likely ultimate cost was not one of the award criteria specified in accordance with Article 29(2), its use was contrary to the provisions of the Directive and the principles governing their application.

41. Such a situation would be akin to those in the Storebælt Bridge and Walloon Buses cases, even though in this case there do not appear to have been any formal amendments to the tender conditions or to the tender of the successful tenderer. The mere fact of awarding the contract on the basis of criteria of which tenderers were not informed prevents them from planning the structure of their tenders so as to achieve optimum competitivity and clearly fails to meet the requirements of transparency embodied in Article 29(2) - a fact which vitiates the procedure regardless of whether the criteria used were in fact objective and regardless of whether all tenderers were kept equally uninformed of the true basis on which the award would be made.

42. If those are the circumstances, therefore, the reply to the national court's question must be that the awarding authority was not entitled to award the contract on the basis of likely ultimate cost.

Second hypothesis: The terms price and cost in the tender documents mean the likely ultimate cost to the County Council

43. On this hypothesis, the above objections are in principle not relevant. It is assumed that the criterion of likely ultimate cost was chosen and was then applied. However, it is still necessary to examine whether the choice of criterion was permissible, whether it was stated clearly in accordance with Article 29(2), whether it was applied objectively and whether tenderers were treated equally.

44. I have taken the view that likely ultimate cost is in principle a permissible award criterion in the context of the second indent of Article 29(1), but I have not yet considered whether it was permissible in the form it took in the present case.

45. It is understandable that where, in a measure-and-value contract, the final quantities are likely to vary from the estimated quantities on the basis of which tenders are submitted, the way in which tenders are structured and in particular the approach to zero-rating may affect the ranking of tenders as between the estimate and the ultimate cost.

46. For example, x linear units of drain may be estimated, tenderers being asked to quote a figure per unit, together with separate figures for an estimated number of ancillary items such as manholes, overflows, connections, gullies, valves and ventilating columns, and for excavation in rock, clay, silt etc.

47. If tenderer A submits an inclusive figure per linear unit of drain (zero-rating all the others) and tenderer B submits full itemised figures, their tenders may be compared satisfactorily on the basis of the estimated quantities. However, where the final length of drain laid is different, that comparison will not hold true unless the quantities of ancillary items and types of excavation remain proportionately the same. Among other things, it may be easier for the awarding authority (or its consulting engineer) to control expenditure in respect of variations by exercising technical choices in the case of tenderer B than in the case of tenderer A. Where tenders are very close in value, as was the case here, it does not seem unreasonable to suppose that tender B may prove the lower in ultimate cost.

48. Furthermore, since final quantities will deviate from those estimated but the deviations cannot be predicted with any formal accuracy, it seems reasonable that assessment of the probable effect of different pricing structures on final cost should be based on the professional judgment of an experienced consultant. On the one hand, such a person is in principle qualified to assess that effect with the greatest achievable accuracy and, on the other, he should be aware of the margin of uncertainty which his predictions must involve and will be able to take that factor into account when making his recommendation.

49. The criterion applied in the present case thus seems to me to be a permissible one.

50. The next question is whether the criterion was stated sufficiently clearly in the contract documents, but in a case such as the present that must be a matter for the national court. Obviously, on the present hypothesis, tenderers were informed that their tenders would be assessed on the basis of likely ultimate cost, but I consider it still necessary to examine whether the information given in the contract notice and contract documents was sufficient to allow them to plan their tenders to take account of the way in which that assessment would be made, in particular with regard to the effects of zero-rating. If it was not, there would be a failure to comply with Article 29(2) and the principle of transparency.

51. When examining that question, the national court should take into consideration not merely the literal terms of the contract documents but also the way in which they may be presumed to be understood by a normally experienced tenderer in the context of a measure-and-value contract. Bearing in mind that certainty as to the criteria to be applied is of paramount importance in drafting a tender, the national court should consider to what extent the distinction between tender total and contract price, and the respective role of each, was made clear, and whether the relevant indications were sufficiently prominent in the tender documents. I consider it relevant that, as I have stated above, the word price is normally to be understood as the price stated in the tender, even in the context of the second indent of Article 29(1).

52. In that regard, the County Council has pointed to the statement that the consulting engineer would compare prices with his own estimates of cost. However, that statement may not have any relevance here; it seems to have been confined to the situation in which particular items appeared to have been underpriced.

53. It is again for the national court to determine whether the criterion was applied objectively. That issue is related, but not identical, to the question of unreasonableness, which was addressed in some detail by the High Court by considering whether the award decision plainly and unambiguously flew in the face of fundamental reason and common sense. The test for objectivity should be, I consider, rather less extreme.

54. The essential question here is whether the factors taken into account are capable of supporting the conclusions drawn from them.

55. The consulting engineer's recommendation was based on his professional opinion as to likely ultimate cost. In my view such professional judgment should in principle be considered objective, even though it must of necessity involve some extrapolation from strictly verifiable facts, provided that it is based in all essential points on objective factors regarded in good professional practice as relevant and appropriate to the assessment to be made.

56. Finally, there is the question of equal treatment of tenderers. There is no suggestion in the present case that the successful tenderer benefited from special treatment of the kind seen in the Storebælt Bridge and Walloon Buses cases, where a single tenderer was allowed to make adjustments or negotiate on a different basis after all the tenders had been submitted. However, SIAC has laid great stress on the fact that, of the 24 tenderers, 22 were eliminated on the basis of the tender total alone and only two tenders were examined on the basis of likely ultimate cost.

57. I have stated above that I consider an examination of pricing structure a permissible method of assessing likely ultimate cost because variations in final quantities may affect the final contract price differently depending on the approach to pricing used in the tender.

58. However, since the effect of different pricing approaches on ultimate cost cannot extend beyond a certain range, it would serve no purpose to analyse all tenders in that way. The difference between tenders may be too great for such analysis to have any effect on their ranking. In that event, a higher bid may in my view be refused on the basis of the tender total alone. There is no contradiction between that approach and the scrutiny of pricing structures in order to adjudicate between closely competing tenders. That view is not affected by the fact that tenderers were informed that the arithmetically corrected tender total would form the basis for comparison, provided that the consulting engineer did indeed use the corrected figures when making that closer scrutiny.

59. The question might be raised on the present facts whether all the tenders apart from those of Mulcair and SIAC did in fact fall outside the range within which an examination of pricing structure might affect the ranking of tenders on the basis of likely ultimate cost. In particular, of the three lowest tenders to be examined in detail, Pierse's was not examined in that way, even though the difference between its corrected total and that of Mulcair's bid was no greater than that between the tender totals of Mulcair and SIAC. However, that fact cannot affect the validity of the adjudication as between Mulcair and SIAC, and no other tenderer appears to have challenged the outcome of the award procedure.

60. Subject to the qualifications I have mentioned, it seems to me that the notion of ultimate cost could properly be used as an award criterion on the present hypothesis. The approach which I am advocating should be sufficient, I consider, to allay the fears expressed by the Commission at the hearing, to the effect that the use of that criterion would lead to an unacceptable degree of uncertainty and lack of objectivity in procurement procedures. In my view it - like any other criterion - may be used only where the principles of transparency, objectivity and equality as between tenderers are clearly respected.

Conclusion

61. In the light of all the above considerations, I am of the opinion that the question referred by the Irish Supreme Court should be answered in the following way:

In a procedure governed by the second indent of Article 29(1) and Article 29(2) of Council Directive 71/305/EEC, an awarding authority is entitled to award the contract to the tenderer whose tender, although not the lowest, is likely in the professional opinion of the authority's consulting engineer to be lowest in ultimate cost, provided that transparency, objectivity and equal treatment of tenderers are ensured, and in particular that:

- the award criterion was clearly stated in the contract notice or contract documents; and

- the professional opinion is based in all essential points on objective factors regarded in good professional practice as relevant and appropriate to the assessment made.