Interpretative communication on the application of Article 296 of the Treaty in the field of defence procurement {SEC(2006) 1554} {SEC(2006) 1555}
Date: 2006-12-07
Institutions: European Commission
Subjects: European arms policy, application of EU law, arms industry, arms trade, award of contract, public contract

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 7.12.2006 
COM(2006) 779 final 

INTERPRETATIVE COMMUNICATION 

on the application of Article 296 of the Treaty in the field of defence procurement  

(presented by the Commission) 

{SEC(2006) 1554} 
{SEC(2006) 1555} 

EN 

   EN 

 
 
 
  
 
 
INTERPRETATIVE COMMUNICATION 

on the application of Article 296 of the Treaty in the field of defence procurement 

(Text with EEA relevance) 

Introduction 

Defence  procurement  accounts  for  a  large  share  of  public  procurement  in  the  European 
Union.  Member  States'  combined  defence  budgets  are  worth  about  €170  billion,  which 
includes more than €80 billion for procurement.  

Most  of  this  expenditure  is  split  into  relatively  small  and  closed  national  markets:  Europe's 
defence  sector  remains  fragmented  at  national  level,  with  25  different  customers  and  25 
different  regulatory  frameworks.  This  fragmentation  is  a  major  obstacle  to  both  intra-
European cooperation and competition. It creates extra costs and inefficiencies and thus has a 
negative  impact  on  the  competitiveness  of  Europe's  Defence  Industrial  and  Technological 
Base as well as on Member States' efforts to equip their armed forces adequately. 

Defence  procurement  law  is  an  important  element  of  this  fragmentation.  The  majority  of 
defence  contracts  are  exempted  from  Internal  Market  rules  and  awarded  on  the  basis  of 
national  procurement  rules,  which  have  widely  differing  selection  criteria,  advertising 
procedures,  etc.  At  the  same  time,  Defence  Ministries'  publication  rates  vary  considerably 
between  Member  States.  All  of  this  can  limit  market  access  for  non-national  suppliers  and 
therefore hampers intra-European competition.  

In its Communication of March 2003,1 the Commission therefore identified procurement law 
as  one  area  for  action  towards  the  establishment  of  a  European  Defence  Equipment  Market 
(EDEM).  This  led  to  the  publication,  in  September  2004,  of  a  Green  Paper  on  defence 
procurement2  in  which  stakeholders  were  invited  to  comment  on  various  options  for 
improving  transparency  and  openness  of  defence  markets  between  EU  Member  States.  The 
consultation confirmed that the existing legislative framework for defence procurement is not 
functioning properly: 

•  Uncertainties persist regarding the scope of Article 296 TEC, which allows Member States 
to derogate from Internal Market rules when their essential security interests are at stake. 
Since  the  dividing  line  between  defence  acquisitions  which  concern  essential  security 
interests and those which do not is vague, it is not always clear which rules should apply to 
which contracts. In consequence, the application of Article 296 TEC remains problematic 
and varies considerably between Member States. 

•  The current Public Procurement (PP) Directive, even in its revised version (2004/18/EC), 
is considered ill-suited to many defence contracts, since it does not take into account some 
special features of those contracts. As a result, many Member States are reluctant to use the 

1 
2 

COM(2003) 113, 11 March 2003. 
COM(2004) 608, 23 September 2004. 

EN 

2 

   EN 

 
 
 
                                                 
PP  Directive  for  defence  equipment,  even  if  the  conditions  for  the  application  of  Article 
296 are not met. 

Based  on  these  findings,  in  December  2005  the  Commission  announced  two  initiatives  to 
improve the situation:3  

(1) 

(2) 

Adoption  of  an  "Interpretative  Communication  on  the  application  of  Article 
296 TEC in the field of defence procurement". This Communication will not 
modify, but clarify the existing legal framework; 

Preparation  of  a  possible  new  directive  on  the  procurement  of  defence 
equipment to which the derogation in Article 296 TEC does not apply. This 
directive  could  offer  new,  more  flexible  rules  adapted  to  the  specificities  of 
the defence sector. 

The  objective  of  the  present  Communication  is  to  prevent  possible  misinterpretation  and 
misuse of Article 296 TEC in the field of defence procurement. To achieve this objective, the 
Commission will set out its views on the principles governing the application of Article 296 
TEC and explain its understanding of the conditions for the application of the derogation in 
the light of the Court's case law. The final word on the determination of the ambit of Article 
296 TEC lies with the Court of Justice. 

This  Communication  can  neither  give  an  interpretation  of  Member  States'  essential  security 
interests nor determine ex ante to which procurement contracts the exemption under Article 
296  TEC  applies  or  not.  It  will rather  give  contract  awarding  authorities  some  guidance  for 
their assessment whether the use of the exemption is justified. 

Clarification of the existing legal framework is a necessary first step towards greater openness 
of European defence markets. At the same time, the Commission is also assessing the impact 
of  a  possible  new  defence  specific  directive.  Combining  the  present  Communication  with 
such  a  directive  may  in  fact  be  the  most  appropriate  approach  at  Community  level  to  cope 
with the difficulties of applying Article 296 TEC. These initiatives are complementary with 
Member States' efforts to enhance intra-European competition for defence equipment covered 
by Article 296 TEC via the Code of Conduct administered by the European Defence Agency. 

This  Communication  only  concerns  defence  procurement  by  national  authorities  inside  the 
European  Internal  Market.  It  does  not  deal  with  arms  trade  with  third  countries,  which 
continues  to  be  governed  by  WTO  rules,  and  in  particular  the  Government  Procurement 
Agreement (GPA).4 

3 
4 

COM(2005) 626, 6 December 2005. 
Article XXIII paragraph 1 of the GPA states that "nothing shall be construed to prevent any Party from 
taking any action or not disclosing any information which it considers necessary for the protection of 
its  essential  security  interests  related  to  the  procurement  of  arms,  ammunition  or  war  material  or  to 
procurement indispensable for national security or for national defence purposes". In accordance with 
these provisions, Annex 1 Part 3 in Appendix 1 to the GPA contains a list of supplies and equipment 
purchased  by  Ministries  of  Defence  that  are  covered  by  the  Agreement.  This  list  covers  only  non-
warlike material. 

EN 

3 

   EN 

 
                                                 
1. 

LEGAL BASIS 

According  to  existing  EU  law,  defence  contracts  fall  under  Internal  Market  rules.  Directive 
2004/18/EC5  on  the  procurement  of  goods,  works  and  services  thus  applies  to  "contracts 
awarded  by  contracting  authorities  in  the  field  of  defence,  subject  to  Article  296  of  the 
Treaty" (Article 10 of the Directive).  

Article 296 TEC reads as follows: 

(1) 

The  provisions  of  this  Treaty  shall  not  preclude  the  application  of  the  following 
rules: 

(a)  no Member State shall be obliged to supply information the disclosure of which 

it considers contrary to the essential interests of its security; 

(b)  any  Member  State  may  take  such  measures  as  it  considers  necessary  for  the 
protection of the essential interests of its security which are connected with the 
production  of  or  trade  in  arms,  munitions  and  war  material;  such  measures 
shall not adversely affect the conditions of competition in the common market 
regarding products which are not intended for specifically military purposes.  

(2) 

The  Council  may,  acting  unanimously  on  a  proposal  from  the  Commission,  make 
changes  to  the  list,  which  it  drew  up  on  April  1958,  of  the  products  to  which  the 
provisions of paragraph 1(b) apply. 

The  exemption  of  defence  contracts  from  the  rules  of  the  Internal  Market  is  a  measure 
connected with the trade in arms, ammunition and war material. Accordingly, its legal basis is 
Article  296(1)(b)  TEC.  Member  States  can  use  this  exemption  for  the  award  of  defence 
contracts, provided that the conditions laid down in the Treaty as interpreted by the Court of 
Justice are fulfilled. At the same time, the scope of Article 296(1)(b) TEC is limited by the 
concept  of  "essential  security  interests"  and  the  list  of  military  equipment  mentioned  in 
paragraph 2 of that Article. 

Article  296(1)(a)  TEC  goes  beyond  defence,  aiming  in  general  at  protecting  information 
which Member States cannot disclose to anyone without undermining their essential security 
interests.  This  can  also  concern  the  public  procurement  of  sensitive  equipment,  in  both  the 
defence and the security sector. In general, however, possible confidentiality needs related to 
the procurement process for military equipment are covered by Article 296(1)(b) TEC. 

2. 

SECURITY INTERESTS AND TREATY OBLIGATIONS 

It  is  Member  States'  responsibility  to  define  and  protect  their  security  interests.  Article  296 
TEC recognises this prerogative and provides a derogation for cases where compliance with 
European law would undermine Member States' essential security interests. 

However,  using  Article  296  TEC  for  defence  procurement  results  in  the  non-application  of 
Directive 2004/18/EC, which is the legal instrument intended to secure respect for the basic 

5 

Directive  2004/18/EC  of  the  European  Parliament  and  of  the  Council  of  31  March  2004  on  the 
coordination of procedures for the award of public works contracts, public supply contracts and public 
service contracts. 

EN 

4 

   EN 

 
                                                 
provisions of the Treaty relating to free movement of goods and services as well as freedom 
of establishment in the area of public procurement (Articles 28, 43, 49 TEC). The rules of this 
Directive  are  the  expression  of  the  fundamental  principles  and  objectives  of  the  Internal 
Market.  Thus,  any  derogation  under  Article  296  TEC  touches  the  core  of  the  European 
Community and is, by its very nature, a legally and politically serious matter.  

The  Treaty  therefore  contains  strict  conditions  for  the  use  of  this  derogation,  balancing 
Member  States'  interests  in  the  field  of  defence  and  security  against  the  fundamental 
principles  and  objectives  of  the  Community.  The  aim  of  these  conditions  is  to  prevent 
possible misuse and to ensure that the derogation remains an exception limited to cases where 
Member States have no other choice than to protect their security interests nationally.  

The Court of Justice has consistently made it clear that any derogation from the rules intended 
to ensure the effectiveness of the rights conferred by the Treaty must be interpreted strictly.6 
Moreover, it has confirmed that this is also the case for derogations applicable "in situations 
which  may  involve  public  safety".  In  Commission  v  Spain,  the  Court  ruled  that  articles  in 
which  the  Treaty  provides  for  such  derogations  (including  Article  296  TEC)  "deal  with 
exceptional and clearly defined cases. Because of their limited character, those articles do not 
lend themselves to a wide interpretation".7  

Therefore,  both  the  field  and  the  conditions  of  application  of  Article  296  TEC  must  be 
interpreted in a restrictive way. 

3. 

FIELD OF APPLICATION 

Article  296(1)(b)  TEC  allows  for  measures  "connected  with  the  production  of  or  trade  in 
arms, munitions and war material", specified in the list mentioned in paragraph 2. The latter 
was adopted on 15 April 1958 as Council Decision 255/58. According to the Court, it is clear 
that  Article  296(1)(b)  TEC  "is  not  intended  to  apply  to  activities  relating  to  products  other 
than the military products identified on [that] list".8 

At the same time, the interpretation of Article 296 (1)(b) TEC and the definition of its field of 
application must also take into account the evolving character of technology and procurement 
policies.  With  regard  to  technology,  the  1958  list  seems  sufficiently generic  to  cover  recent 
and future developments. Similarly, Article 296(1)(b) TEC can also cover the procurement of 
services  and  works  directly  related  to  the  goods  included  in  the  list,  as  well  as  modern, 
capability-focused  acquisition  methods,  provided  always  that  the  other  conditions  for  the 
applicability of Article 296 TEC are met. 

On the other hand, the 1958 list includes only equipment which is of purely military nature 
and purpose. It is true that security has become an increasingly complex concept, with new 
threats  blurring  the  traditional  dividing  line between  military  and  non-military,  external  and 
internal  security  dimensions.  However,  since  the  roles  of  military  and  non-military  security 

6 

7 

8 

Judgment of 4 October 1991, Case C-367/89 Richardt and Les Accessoires Scientifiques, par. 20; for 
public  procurement  in  particular:  judgment  of 3  May  1994,  Case  C-328/92 Commission  v  Spain, par. 
15; judgment of 28 March 1995, Case C-324/93 Evans Medical and Macfarlan Smith, par. 48. 
Judgment  of  16  September  1999,  Case  C-414/97  Commission  v  Spain,  par.  21;  judgment  of  15  May 
1986, Case C-222/84 Johnston, par. 26. 
Judgment  of  30  September  2003,  Case  T-26/01  Fiocchi  Munizioni  v  Commission,  par.  61;  see  also 
Opinion  of  Advocate  General  Jacobs  of  8  May  1991,  Case  C-367/89  Richardt  and  Les  Accessoires 
Scientifiques, par. 30. 

EN 

5 

   EN 

 
                                                 
forces  still  differ,  it  is  normally  possible  to  distinguish  between  military  and  non-military 
procurement.  

The nature of the products on the 1958 list and the explicit reference in Article 296 TEC to 
"specifically  military  purposes"  confirms  that  only  the  procurement  of  equipment  which  is 
designed,  developed  and  produced  for  specifically  military  purposes  can  be  exempted  from 
Community rules on the basis of Article 296(1)(b) TEC.9  

Procurement  for  non-military  security  purposes,  by  contrast,  is  excluded  from  the  field  of 
application of Article 296(1)(b) TEC. For these procurements, security interests  may justify 
the exemption from Community rules on the basis of Article 14 of the PP Directive, provided 
that the conditions for its application are met.10 

In  contrast  to  Article  296(1)(b),  Article  296(1)(a)  TEC  can  also  cover  the  procurement  of 
dual-use equipment for both military and non-military security purposes, if the application of 
Community  rules  would  oblige  a  Member  State  to  disclose  information  prejudicial  to  the 
essential interests of its security. 

4. 

CONDITIONS OF APPLICATION 

Military items included in the 1958 list are not automatically exempted from the rules of the 
Internal  Market.  Council  Decision  255/58  itself  states  that  the  list  includes  equipment  for 
which Member States have a legitimate interest in being able to take the measures provided 
for in Article 296(1)(b) TEC. In other words, the Council decision itself does not provide for 
automatic  application  of  the  exemption.  In  addition,  the  Court  has  confirmed,  on  several 
occasions,  that  Article  296  TEC  does  not  introduce  an  automatic  exemption  in  the  field  of 
defence.11 On the contrary, an exemption is legally based on Article 296 TEC, which means 
that items on this list can be exempted, if, and only if, the conditions for the use of Article 296 
TEC are fulfilled.12 

According to Article 296 TEC, Member States can take measures they consider necessary for 
the  protection  of  their  essential  security  interests.  This  provision  has  been  acknowledged  to 
grant to Member States a broad degree of discretion in deciding how to protect their essential 
security  interests13:  However,  the  text  ("necessary  for  the  protection  …")  also  demonstrates 
that this discretion is not unfettered. The very existence of Article 298 TEC, which lays down 
a special procedure to be followed in the event of possible improper use of Article 296 TEC, 
confirms  that  Member  States  do  not  have  absolute  freedom  in  their  decision  to  exempt  a 
specific procurement contract from the rules of the Internal Market. On the contrary, "it is for 
the  Member  State  which  seeks  to  rely  on  [Article  296  TEC]  to  furnish  evidence  that  the 
exemptions  in  question  do  not  go  beyond  the  limits  of  such  [clearly  defined]  cases"  and  to 

9 
10 

11 

12 

13 

Case T-26/01 Fiocchi Munizioni v Commission, par. 59 and 61. 
Article 14 of Directive 2004/18/EC stipulates: "This Directive shall not apply to public contracts when 
they  are declared  to be  secret,  when  their performance must be accompanied by  special  measures  in 
accordance  with  the  laws,  regulations  or  administrative  provisions  in  force  in  the  Member  State 
concerned, or when the protection of the essential interests of the Member State so requires." 
Judgment of 26 October 1999, Case C-273/97 Sirdar, par. 15-16; judgment of 11 January 2000, Case 
285/98 Kreil, par. 16; judgment of 11 March 2003, Case C-186/01 Dory, par. 30-31. 
See also response of 3 October 1985 from the Council to MEP Mrs Van Hemeldonck (1985)0574/F; by 
analogy: judgment of 13 July 2000, Case C-423/98 Albore, par. 22-23. 
Case T-26/01 Fiocchi Munizioni v Commission, par. 58 

EN 

6 

   EN 

 
                                                 
demonstrate "that the exemptions … are necessary for the protection of the essential interests 
of its security".14 

The  objective  justifying  the  exemption  is  only  the  protection  of  a  Member  State's  essential 
security  interests.  Other  interests,  in  particular  industrial  and  economic  interests,  although 
connected  with  the  production  of  and  trade  in  arms,  munitions  and  war  material,  cannot 
justify  by  themselves  an  exemption  on  the  basis  of  Article  296(1)(b)  TEC.  Indirect  non-
military  offsets,  for  example,  which  do  not  serve  specific  security  interests  but  general 
economic interests, are not covered by Article 296 TEC, even if they are related to a defence 
procurement contract exempted on the basis of that Article.15 

At  the  same  time,  Member  States'  security  interests  should  also  be  considered  from  a 
European perspective. They may vary, e.g. for geographical or historical reasons. On the other 
hand,  European  integration  has  led  to  an  ever-growing  convergence  of  national  interests 
among  Member  States.  The  development  of  the  CFSP  and  the  ESDP  illustrate  that  this  is 
increasingly  the  case  in  the  field  of  security  and  defence  as  well.  Member  States  share  in 
particular  the  objective  of  developing  a  common  Defence  Equipment  Market  and  a 
competitive  Defence  Industrial  and  Technological  Base.  They  should  take  this  into  account 
when  assessing  whether  the  application  of  EU  procurement  rules,  which  are  aimed  at 
fostering  intra-European  competition,  would  undermine  the  essential  interests  of  their 
security.  

Moreover, Article 296 TEC refers not to the protection of security interests in general, but to 
the  protection  of  essential  security  interests.  This  specification  underlines  the  exceptional 
character  of  the  derogation  and  makes  it  clear  that  the  specific  military  nature  of  the 
equipment included in the 1958 list is, by itself, not sufficient to justify exemption from EU 
procurement  rules.  On  the  contrary,  the  particularly  strong  wording  ("essential")  limits 
possible exemptions to procurements which are of the highest importance for Member States' 
military capabilities. 

The  wording  of  Article  298  TEC  and  the  relevant  case  law,  which  refer  to  Article  296  in 
general,  confirm  that  this  reasoning  should  apply  to  the  use  of  both  paragraph  1(a)  and 
paragraph 1(b) of Article 296 TEC. 

5. 

HOW TO APPLY ARTICLE 296 TEC 

It is the Member States' prerogative to define their essential security interests and their duty to 
protect them. The concept of essential security interests gives them flexibility in the choice of 
measures  to  protect  those  interests,  but  also  a  special  responsibility  to  respect  their  Treaty 
obligations and not to abuse this flexibility. Member  States must in  particular keep  in  mind 
that  the  derogation  under  Article  296  TEC  is  only  applicable  in  clearly  defined  cases  and 
make sure that it does "not go beyond the limits of such cases".16 

14 
15 

16 

Case C-414/97 Commission v Spain, par. 22. 
Offsets are compensations that  many governments require from non-national defence contractors as a 
condition for purchasing military equipment. These compensations can cover a wide range of activities: 
direct offsets are directly related to the object of the procurement contract; indirect offsets are not and 
can be military or civil in nature. 
Case C-414/97 Commission v Spain, par. 22. 

EN 

7 

   EN 

 
                                                 
In  the  area  of  defence  procurement,  the  only  way  for  Member  States  to  reconcile  their 
prerogatives in the field of security with their Treaty obligations is to assess with great care 
for  each  procurement  contract  whether  an  exemption  from  Community  rules  is  justified  or 
not.  Such  case-by-case  assessment  must  be  particularly  rigorous  at  the  borderline  of  Article 
296 TEC where the use of the exemption may be controversial. 

This means in particular that contracting authorities have to evaluate: 

•  Which essential security interest is concerned? 

•  What  is  the  connection  between  this  security  interest  and  the  specific  procurement 

decision? 

•  Why  is  the  non-application  of  the  Public  Procurement  Directive  in  this  specific  case 

necessary for the protection of this essential security interest? 

At  the  same  time,  Article  296(1)(b)  TEC  stipulates  that  measures  taken  under  this  Article 
"shall  not  adversely  affect  the  conditions  of  competition  in  the  common  market  regarding 
products  which  are  not  intended  for  specifically  military  purposes".  In  the  area  of  defence 
procurement,  this  can  be  the  case  for  offsets,  in  particular  for  indirect,  non-military  offsets. 
Member States must therefore make sure that offset arrangements related to defence contracts 
covered by Article 296(1)(b) TEC do respect this provision. 

6. 

THE ROLE OF THE COMMISSION 

It is not for the Commission to assess Member States' essential security interests, nor which 
military  equipment  they  procure  to  protect  those  interests.  However,  as  guardian  of  the 
Treaty,  the  Commission  may  verify  whether  the  conditions  for  exempting  procurement 
contracts on the basis of Article 296 TEC are fulfilled.  

In such cases, it is for Member States to provide, at the Commission's request,the necessary 
information and prove that exemption is necessary for the protection of their essential security 
interests. The Court of Justice has repeatedly stated that "Article 10 EC makes it clear that the 
Member States are required to cooperate in good faith with the enquiries of the Commission 
pursuant to Article 226 EC, and to provide the Commission with all the information requested 
for  that  purpose".17  This  concerns  all  investigations  carried  out  by  the  Commission  as 
guardian of the Treaty, including possible verifications of the applicability of Article 296 TEC 
to defence contracts.  

Therefore,  when  the  Commission  investigates  a  defence  procurement  case,  it  is  for  the 
Member  State  concerned  to  furnish  evidence  that,  under  the  specific  conditions  of  the 
procurement at issue, application of the Community Directive would undermine the essential 
interests of its security. General references to the geographical and political situation, history 
and Alliance commitments are not sufficient in this context. 

By means of Article 287 TEC it is guaranteed that the Commission will grant Member States 
absolute confidentiality of the information received. 

17 

Judgment of 13 July 2004, Case 82/03 Commission v Italy, par.15. 

EN 

8 

   EN 

 
                                                 
According to Article 298 TEC, if  measures  taken  under  Article 296 TEC have the effect of 
distorting the conditions of competition in the common market, the Commission can, together 
with the Member State concerned, examine how these measures can be adjusted to the rules 
laid down in the Treaty.  

The  Commission  may  also  bring  the  matter  directly  before  the  Court  if  it  considers  that  a 
Member State is making improper use of the powers provided for in Article 296 TEC. In this 
case, the burden of proof that an exemption is justified lies with Member States. 

In  evaluating  possible  infringements,  the  Commission  will  take  into  account  the  specific 
sensitivity  of  the  defence  sector.  In  parallel,  the  Commission  will  continue  its  preparatory 
work on a possible procurement  directive for military equipment to which Article  296 TEC 
does not apply. 

EN 

9 

   EN