Government to Government Contracts in EU Defence Procurement Andreas Estrup Ippolito

*

Defence and security contracts; EU law; Exemptions; Government contracts; Public procurement procedures; Third countries

1. Introduction, Purpose and Scope 1.1 Introduction This article1 seeks to clarify the scope of the exclusion for so-called “government to government-contracts” (“G2G-contracts”) in art.13(f) of the EU directive on public procurement in the fields of defence and security (the “Directive” or the “Defence and Security Directive”).2 The provision is very simple in itself. It states that the Directive shall not apply to: “Contracts awarded by a government to another government relating to: (i) the supply of military equipment or sensitive equipment, (ii) works and services directly linked to such equipment, or (iii) works and services specifically for military purposes, or sensitive works and sensitive services.” Similarly, Recital 30 of the Directive’s preamble merely states that: “Given the specificity of the defence and security sector, purchases of equipment as well as works and services by one government from another should be excluded from the scope of this Directive”. Nevertheless, as shown in the following, the exclusion is extremely important for defence acquisitions in practice and its scope is highly contentious. It often happens that one State acquires military equipment from another State’s existing stocks. This could be used equipment and equipment that has become surplus to requirements, which may often be of use elsewhere and available at a favourable price. Judging from the wording of art.13(f), such transactions ought to be covered by the exclusion without limitations. However, in the defence market, it has been a common practice for many years that even new military equipment is purchased—not from the manufacturer/supplier directly—but through the government of the supplier’s home country. This might be due to security concerns (e.g. controlling the sale of weapons/limiting access to sensitive technology), in order to strengthen coalitions or improve

* Andreas Estrup Ippolito is an attorney at the Danish law firm Poul Schmith/Kammeradvokaten (The Legal Adviser to the Danish Government). The views expressed in the article do not necessarily reflect the opinion of Poul Schmith/Kammeradvokaten. 1 The article is a revised edition of the author’s dissertation submitted to King’s College London for the degree LL.M. in European Law. The author wishes to thank visiting lecturer at King’s College London Sheila Tormey and attorney Tomas Ilsøe Andersen for their valuable input. 2 Directive 2009/81/EC of the European Parliament and of the Council of July 13, 2009 on the co-ordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security, and amending Directives 2004/17/EC and 2004/18/EC, [2009] OJ L216/76, as amended; reg.7(1)(h) of the UK Defence and Security Public Contract Regulations.

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interoperability in the battlefield.3 In such cases, the contracting authority’s counterpart is a State body and that body will usually handle negotiations, logistics and delivery. In the US, this practice is referred to as Foreign Military Sales (or in short “FMS”).4 Procurement through the FMS program occurs very frequently,5 not least because the US defence market is much larger and more advanced than any other defence market in the world.6 Weapons are sold from the stock of arms the US Department of Defence already has or via new deliveries from a US contractor. The transaction is based on a government-to-government sales agreement, in FMS jargon referred to a Letter of Offer and Acceptance (“LOA”).7 The legal basis for FMS is the US Arms Export Control Act which gives the President authority to control the export of defence equipment and services.8 It has been the prevailing position in legal theory that art.13(f) has clarified that FMS purchases fall outside the scope of the EU public procurement directives.9 Nevertheless, the conflict of interests between the US FMS programme and the continued development European defence market remains: when EU Member States opt for FMS acquisitions on a larger scale it undeniably improves the balance of payments of the US, retains jobs in the US defence industry, and lowers the prices of US goods and services through the economies of scale—in theory at least—all at the expense of the European industry’s competitiveness. Another important field for G2G-contracts is the NATO “Smart Defence” programme. Thus, while many States have now introduced their biggest defence budget cuts in years, they have been exploring ways to limit the impact on their armed forces, particularly through increased “pooling and sharing” of military capabilities.10 Smart Defence is a concept that encourages NATO allies to co-operate in developing, acquiring and maintaining military capabilities to meet common security problems in an economically efficient way.11 Although it poses certain political challenges, such as when and how the shared military capabilities are deployed,12 it is a necessary response to the sovereign debt crisis and the need for reconciling NATO’s level of ambition with budgetary realities. The Smart Defence policy is being implemented by several of EU’s Member States in their procurement activities. Thus, joint procurement procedures between different Member States are becoming more frequent, and one of the means to conduct joint procedures is the exclusion in art.13(f). The concept is that one government purchases equipment on behalf of all the participating governments (in accordance with EU’s public procurement rules) and subsequently resells part of the equipment to the other

3 For instance, the US Arms Export Control Act gives the President discretion to designate which military end-items must be sold through the US government’s Foreign Military Sales (FMS) program exclusively. Pursuant to the US Security Assistance Management Manual (SAMM), Ch. 4.3.5, the US Department of Defense may recommend “FMS-only” terms, among other reasons, if security of sensitive technologies requires greater scrutiny in the transfer process, or for enhanced interoperability and cooperation between U.S. and purchaser’s military forces. In addition, the SAMM provides that defence systems and munitions that are not particularly complex or sensitive but still require enhanced control to prevent proliferation to rogue states or terrorist organizations represent another area where FMS may be more appropriate than a direct commercial sale (DCS). 4 For a more elaborate description of the FMS program see http://www.dsca.mil/programs/fms [Accessed August 22, 2014]. 5 US Department of Defence, Defence Security Cooperation Agency, Security Assistance Management Manual, DoD 5105.38-M, October 3, 2003. 6 See, for instance, A. J. Perfilio, Foreign Military Sales Handbook 2013-2014, Thomson Reuters, § 1:1. Another testament to this fact is the top ten largest defence contractors in the world, which comprises 7 US companies, see the SIPRI Top 100 arms-producing and military services companies in the world excluding China, 2012, available at http://www.sipri.org/research/armaments/production/Top100 [Accessed August 22, 2014]. 7 The SAMM, ch. 5.4.1, defines an LOA as the legal instrument used by the US government to sell defense articles, defense services including training, and design and construction services to a foreign country or international organization under authorities provided in the US Arms Export Control Act. The LOA itemizes the defense articles and services offered and when implemented becomes an official tender by the US government. When the foreign purchaser signs the LOA, the purchaser accepts the offer and an agreement is formed. The agreement is also referred to as an “FMS case”. 8 The Arms Export Control Act of 1976 (enacted on June 30, 1976, codified at 22 U.S.C., chapter 39). 9 B. Heuninckx, “Lurking at the boundaries: applicability of EU law to defence and security procurement”, (2010) 19 P.P.L.R. 91–118. 10 C. O’Donnell, “Integrating the EU defence market: an easy way to soften the impact of military spending cuts?” Institute for Security Studies (http://www.iss.europa.eu/publications/detail/article/integrating-the-eu-defence-market-an-easy-way-to-soften-the-impact-of-military-spending-cuts/ [Accessed August 22, 2014]. See also S. Flanagan, The future of EU-US security and defence cooperation: what lies ahead?, Institute for Security Studies (http://www.iss.europa.eu/fr/publications/detail-page/article/q-the-future-of-eu-us-security-and-defence-cooperation-what-lies-ahead-10/ [Accessed August 22, 2014]. 11 For NATO’s Smart Defence policy see http://www.nato.int/docu/review/Topics/EN/Smart-Defence.htm [Accessed August 22, 2014]. 12 This issue came up during the deployment in Libya which NATO members disagreed considerably (e.g. http://atlanticreview.org/archives/1464 -Why-NATO-Members-Disagree-on-Libya.html [Accessed August 22, 2014].

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Government to Government Contracts in EU Defence Procurement 251 governments. This may be ad hoc or on a more regular basis comparable to a central purchasing arrangement. This solution is often preferred, because a “true” joint procurement procedure with all participating governments acting as contracting authorities can give rise to a number of problems. On the practical side of things, the participating Member States must agree on all procedural decisions or delegate certain decisions to the lead authority. Also, it has to be agreed which national enforcement regime should govern the procedure and any complaints made by bidders. In addition to the practical constraints there are also legal barriers: domestic legal systems might not even allow for delegation of competencies to authorities of other Member States, just as they might preclude the Member State from submitting itself to foreign enforcement regimes.13 For all of these reasons—which in essence are about aggregating demand to save money and/or strengthening coalitions—Member States have an obvious interest in a high degree of flexibility for G2G-contracts and an interpretation of art.13(f) that is consistent with is wording, i.e. broad and unconditional. However, fearing that the exclusion might be abused to the detriment of the internal market, the European Commission apparently wants to go in another direction. Following the adoption and entry into force of the Directive in 2009, the Internal Market and Services DG of the Commission (“DG MARKT”) published a series of guidance notes on its special features.14 The guidance note on the Directive’s exclusions deals with art.13(f) and it introduces an attempt to significantly reduce its scope.15 Thus, while the Commission reluctantly confirms that art.13(f) not only covers sales of surplus stock, but “in principle” also purchases of new material, it also warns Member States that they could be circumventing the Directive, if they purchase new material through direct contract awards to third countries, if the material could also have been delivered through an open competition within the EU.16 Furthermore, recently the Commission appears to have taken its strict interpretation even a step further. In letters to the governments of Romania,17 Bulgaria18 and the Czech Republic,19 Commissioner Michel Barnier has warned that they might be violating the Directive, if they proceed with planned purchases of fighter jets from the stocks of other countries.20 In the cases of Bulgaria and Romania, the plans have been to purchase used fighter jets from Portugal’s existing fleet.21 According to the Commission’s guidance note, such contracts are what the exclusion is primarily intended for. Nevertheless, in his letters, Commissioner Michel Barnier argues that the exclusion never applies when a competition for the contract is possible within the internal market. On July 24, 2013, the Commission published its Communication on the defence and security sector.22 In the communication, the Commission reiterates its position that the G2G-contract exclusion is seemingly 13 The Commission acknowledged these problems in its proposal for a new Public Procurement Directive published on December 20, 2011 (COM (2011) 896). Thus, in recital 26, the Commission stated that: “Joint awarding of public contracts by contracting authorities from different Member States currently encounters specific legal difficulties concerning conflicts of national laws. Despite the fact that Directive 2004/18/EC implicitly allowed for cross-border joint public procurement, contracting authorities are still facing considerable legal and practical difficulties in purchasing from central purchasing bodies in other Member States or jointly awarding public contracts.” These concerns have been endorsed by the Council and the European Parliament, and the new directive will therefore contain rules that facilitate cross-border joint procurement. 14 The guidance notes are available at http://ec.europa.eu/internal_market/publicprocurement/rules/defence_procurement/ [Accessed August 22, 2014]. 15 Guidance Note, Defence- and security-specific exclusions. 16 Guidance Note, Defence- and security-specific exclusions, s.3.6. 17 http://www.bne.eu/content/romania-collision-course-eu-approves-plan-buy-f-16-jets [Accessed August 22, 2014]. 18 http://sofiaglobe.com/2012/11/09/bulgaria-to-hit-political-turbulence-over-fighter-jet-purchase-plans/ [Accessed August 22, 2014]. 19 (last visited 1 July 2014). 20 Separate letters of May 15, 2012 to the Defence Ministers of the three countries. 21 The details of the proposed transactions are not publicly available in their entirety. 22 COM(2013) 542 final.

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being interpreted in a way undermining the correct use of the Directive and that it will take steps to “clarify the limits”.23

1.2 Scope of this article As shown above, there is a genuine disparity between the position of many Member States and the Commission’s interpretation of the exclusion, and the Commission might soon find itself compelled to take formal action against one or more Member States.24 Thus, there appears to be a need for clarification of the scope of the art.13(f). The main question of the article is therefore what purchasing practices the provision actually allows. As of now there have not been any CJEU rulings dealing specifically with art.13(f) (or any other exclusion in the Directive).25 Also, it is worth noting that the exclusion of G2G-contracts in the Defence Directive is novel in comparison to both Directive 2004/18/EC (the “Classic Directive”) and Directive 2004/17/EC (the “Utilities Directive”).26 These regimes generally apply to contracts awarded by one contracting authority to another, unless the latter is controlled by the former and the contract is therefore in-house.27 Consequently, there is not much guidance to be found in the case-law on these regimes. Therefore, the analysis will be centred on the Directive’s provisions and its preamble taking into account the principles of interpretation established by the CJEU. In addition, the Directive’s preparatory works and legislative history will be examined. While the CJEU traditionally has been somewhat hostile to historical interpretation of secondary EU legislation, preparatory works may nevertheless have legal significance for the analysis of the Directive.28 There are other ways for Member States to collaborate when procuring defence equipment and achieving economies of scale than through the methods described in the previous section. However, the sole topic of the article is G2G-contracts. Particularly, the article will not explore the legal basis for collaborative procurement made through international organisations such as OCCAR29 and NATO,30 for which the Directive also contains special exclusions.31 This is not to say that such organisations do not have a vital role to play in European defence

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P. 6 of the communication. In the Impact Assessment (SEC(2007) 1598) that accompanied the original proposal for the Directive, the Commission warned that spelling out the conditions for procurement in the field of defence could very well lead to “a more active infringement policy”. Clearer rules mean less leniency for infringers. This is reiterated in the Commission’s Communication on the defence and security sector of July 24, 2013. Here, the Commission explains that it will seek to deepen the internal market for defence and “take specific measures to ensure that the Directive is correctly applied and fulfils its objective”. 25 However, there have been quite a few judgments on the field of application for art.346 TFEU, e.g. Insinööritoimisto InsTiimi Oy (C-615/10) [2012]; Commission v Italy (C-337/05) [2008] E.C.R. I-02173; Commission v Belgium (C-252/01) [2003] E.C.R. I-11859; and Fiocchi Munizioni SpA v Commission (T-26/01) [2003] E.C.R. II-03951; The principles established in these cases will be taken into account. 26 Directive 2004/18/EC of the European Parliament and of the Council of March 31, 2004 on the co-ordination of procedures for the award of public works contracts, public supply contracts and public service contracts [2004] OJ L134/114, as amended; Directive 2004/17/EC of the European Parliament and of the Council of March 31, 2004 co-ordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors [2004] OJ L134/1, as amended. 27 M. Trybus, “The tailor-made EU Defence and Security Procurement Directive: limitation, flexibility, descriptiveness, and substitution”, (2013) 38 E.L.R. at [3]–[29]. On the so-called “in-house rule”, see the CJEU’s judgments in cases Teckal (C-107/98) [1999] E.C.R. I.08121; Stadt Halle (C-26/03) [2005] E.C.R. I-00001; Coname (C-231/03) [2005] E.C.R. I-07287; Coditel Brabant SA (C-324/07) [2008] E.C.R. I-08457; and Sea Srl (C-573/07) [2009] E.C.R. I-08127. 28 N. Reich, Understanding EU Law, 2nd edn (Cambridge: Intersentia, 2005), pp 26–27. An illustrative example of the CJEU applying historical interpretation can be found in Telaustria (C-324/98) [2000] E.C.R. I-10745 at [45]–[58]. 29 The Organisation for Joint Armament Cooperation, a not well-known European organisation dedicated to collaborative defence procurement with a yearly operational procurement budget of €4 billion. See http://www.occar.int/185 [Accessed August 26, 2014]. 30 The NATO Support Agency (NSPA) is NATO’s Integrated Logistics and Services Provider Agency, combining the former NATO Maintenance and Supply Agency (NAMSA), the Central Europe Pipeline Management Agency (CEPMA) and the NATO Airlift Management Agency (NAMA). It conducts procurement activities on behalf of its Member States. Goods and services are, in principle, procured through an international competitive bidding process, in compliance with NSPO’s Procurement Regulations. See http://www.nspa.nato.int/en/organization/procurement/procurement.htm# [Accessed August 26, 2014]. 31 See the exclusions in arts 12 and 13(c) of the Directive. 24

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Government to Government Contracts in EU Defence Procurement 253 procurement. However, an examination of these rules—which are not easy to comprehend either—is better left to existing32 and future pieces dedicated to this particular issue. Article 13(c) of the Directive contains a specific provision on contracts awarded within the confines of “cooperative programmes based on research and development”, i.e. when Member States cooperate to develop new defence equipment together. As explained in recital 28, contracts awarded in the framework of such programmes by one Member State on behalf of one or more other Member States are not covered by the Directive.33 The article will not explore these provisions either. Lastly, it is not within the scope of this article to provide recommendations on whether or not it might be advisable to procure defence equipment through a particular “channel”. This depends on a variety of financial, legal and operational factors. For instance, it is a particular feature of the FMS programme that the purchasing government only has a contractual relationship with the US government—not the contractor. Consequently, direct negotiations with the US contractor are only possible to a very limited extent and it also means that foreign purchasers may not sue US contractors directly in FMS transactions for breach of contract (UK MoD v Trimble Navigation).34 This is just one among many issues that must be taken into account. The analysis will be structured as follows. First, the article will summarise the current state of the European defence market in order to set the economic and political scene for the analysis (s.2). It will then briefly explain the field of application of the Defence Directive and its role in the EU public procurement law regime (s.3). It will then examine the Directive’s rules on G2G-contracts, the preparatory works and the relevant guidance and legal theory on the topic, which leads to the analysis of the article’s main question—the scope of art.13(f) (s.4).

2. The European Defence Market The production and trade in arms, ammunition and other war material has historically been at the heart of State sovereignty.35 Governments have traditionally felt the need to create their own independent defence industries to ensure that they can defend the nation against external aggression without being dependent on the purchase of arms from abroad.36 To this day, the industry remains highly politicised—not only as a matter of defence and security policy—but also because of its importance in many States for employment and economy. The failed merger between BAE Systems and EADS is a recent testament to this.37 Defence procurement also plays a vital role for national economies. As data from the European Defence Agency (“EDA”) show, in 2011, the defence expenditures of the EU Member States amounted to €192 billion, the equivalent of 1.55 per cent of the EU Gross Domestic Product.38 32 For example, B. Heuninckx in Ølykke, Risvig and Tvarnø (eds), EU Public Procurement—Modernisation, growth and innovation, 1st edn, (Copenhagen: DJOEF Publishing, 2012), Ch.7. International Organisations Covered by the EU Public Procurement Rules or Should they?, and B. Heuninckx, “Applicable Law to the Procurement of International Organisations in the European Union” (1992) 1 P.P.L.R. 9–28. 33 Provided that the conditions in art.13(c) are met. 34 US Court of Appeals for the 4th Circuit, Decision of May 10, 2007 in Secretary of State for Defence as represented by the United Kingdom Ministry of Defence, Defence Procurement Agency v Trimble Navigation Limited. Of course, if the foreign government raises what appears to be a legitimate claim, the US government will most likely choose to pursue it. However, foreign governments may be able to seek redress under the US Civil False Claims Act (31 U.S.C. §§ 3729–3733, also referred to as the “Lincoln Law”). This federal act imposes liability on persons and companies (typically federal contractors) who defraud governmental programs, including the FMS programme. The act applies even if there are no US taxpayer funds involved, and it contains provisions that allow private persons to file suit for violations of the act on behalf of the US government (a so-called “qui tam-action”). In principle, at least, foreign purchasers might be able to bring an action against a US contractor through this route. 35 M. Trybus, European Defence Procurement Law: International and National Procurement Systems as Models for a Liberalised Defence Procurement Market in Europe, (London: Kluwer Law International, 1999), p.25. B. Heuninckx in EU Public Procurement Law: An Introduction, the EU Asia Inter University Network for Teaching and Research in Public Procurement Regulation (2010), p.259. 36 A. Cox, “The Future of European Defence Policy: The Case for a Centralised Procurement Agency” (1994) P.P.L.R. 77. 37 The proposed merger between BAE Systems and EADS failed due to the deadlock in the talks between the UK, French and German governments. See, for instance: http://www.bbc.co.uk/news/business-19897699 [Accessed August 26, 2014]. 38 http://www.eda.europa.eu/info-hub/defence-data-portal/EDA/year/2011#2 [Accessed August 26, 2014].

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The European defence market is characterised by a high degree of industrial fragmentation.39 Although the Member States’ combined military expenditure is considerable, it remains split into national markets.40 This fragmentation poses a problem for all Member States with defence industries. Particularly following the latest budgetary reductions, the size of national markets is not sufficient to sustain production volumes that can offset the high research and development costs of defence equipment.41 Also, since defence contractors are dependent on public defence expenditure, when defence spending declines, industrial overcapacity results.42 These challenges call for restructuring, consolidation and integration of the industry, but this process is to some extent being held back by national concerns regarding sovereignty, protection of know how/technology and employment. 43 On an operational level, the shrinking defence budgets in the Eurozone mean that the EU now risks losing critical expertise and autonomy in key capability areas.44 As one commentator warns, European military capabilities, already suffering from two decades of under investment, will further decline over the next years.45 Thus, there is a genuine need for initiatives in defence procurement that can reduce costs, e.g. through aggregation of demand/economies of scale, and foster pooling and sharing of military capabilities and interoperability. There is no official data available on what percentage of the EU’s total defence expenditure G2G-contracts account for. In the fiscal year 2011, total FMS sales (equipment and training) were approximately $28.3 billion,46 whereas Direct Commercial Sales (sales from US contractors to foreign governments) amounted to approximately $44.4 billion.47

3. The Defence and Security Directive 3.1 Adoption of the Defence and Security Directive Shortcomings in EU procurement law have undeniably been an important element in the fragmentation of the European defence market.48 Prior to the entry into force of the Defence Directive, the majority of defence contracts were exempted from the internal market rules and awarded pursuant to varying national rules and policies. At the same time, Defence Ministries’ publication rates have varied considerably between Member States and there has been a practice to justify direct awards with reference to art.346 TFEU49 which—in the eyes of some—has been well beyond the confines of the exemption as it has been interpreted by the CJEU.50 In its 2003 communication “Towards an EU Defence Equipment Policy”, the Commission identified procurement law as an important area for action towards the establishment of a European defence equipment 39

B. Heuninckx in EU Public Procurement Law: An Introduction (2010), p.262. Commission Green Paper on Defence Procurement (COM(2004)608 final), p.4. Commission Green Paper on Defence Procurement (COM(2004)608 final), note 41. 42 ISS Policy Brief, After austerity: futures for Europe’s defence industry, No. 8, November 29, 2012. 43 ISS Policy Brief, After austerity: futures for Europe’s defence industry, note 43, November 29, 2012. 44 Commission Communication “Towards a more competitive and efficient defence and security sector” (COM(2013) 542). 45 S. Flanagan, The future of EU-US security and defence cooperation: what lies ahead?, Institute for Security Studies (http://www.iss.europa.eu/fr /publications/detail-page/article/q-the-future-of-eu-us-security-and-defence-cooperation-what-lies-ahead-10/ [Accessed August 26, 2014]. 46 US Depart of Defence and US Department of State joint report to Congress, Foreign Military Training, Fiscal years 2011 and 2012, Vol 1, p. II-1. 47 Report by the US Department of State pursuant to section 655 of the Foreign Assistance Act of 1961, Direct Commercial Sales authorizations for Fiscal Year 2011. 48 See the Commission’s “Interpretive Communication on the application of Article 296 of the Treaty in the field of defence procurement”, December 7, 2006, COM(2006) 779 final, p.2. 49 Article 346 TFEU is the most relevant Treaty-based derogation from the Treaty’s free movement rules and the provisions of the public procurement directives. In this context, art.346 TFEU allows for contracts to be awarded without a tender procedure in cases where this is necessary for the protection of essential security interests of a Member State. 50 Interpretive Communication on the application of Article 296 of the Treaty in the field of defence procurement, p.2. 40 41

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Government to Government Contracts in EU Defence Procurement 255 market.51 This led to the publication of the 2004 Green Paper on defence procurement.52 One of the Commission’s main suggestions was to supplement the EU legal framework with a specific instrument for defence procurement.53 The original proposal for the Defence Directive was put forward by the Commission on December 13, 2007.54 After the legislative process in the Council and Parliament, the directive was finally adopted on July 13, 2009 with August 21, 2011 as the transposition deadline.55

3.2 Field of application Pursuant to art.2, the Defence and Security Directive applies to contracts for: a) b) c) d)

the supply of military equipment, including any parts, components and/or subassemblies thereof; the supply of sensitive equipment, including any parts, components and/or subassemblies thereof; works, supplies and services directly related to the equipment referred to in points (a) and (b) for any and all elements of its life cycle; works and services for specifically military purposes or sensitive works and services.

Military and sensitive equipment, works and services are defined in arts 1(6) and 1(7) of the Defence and Security Directive respectively as: “Equipment specifically designed or adapted for military purposes and intended for use as an arm, munitions or war material; and equipment, works and services for security purposes, involving, requiring and/or containing classified information.” In its guidance note “Field of application”, DG MARKT gives it view on what contracts are covered by the Directive.56

3.3 Interface with the other public procurement directives Articles 70–71 set out the interface between the Defence Directive and the other public procurement directives.57 Pursuant to these provisions, neither the Classic Directive nor the Utilities Directive applies if the contract in question is covered by the Defence and Security Directive. This is so even if the contract falls within the scope of one of the Directive’s exclusions (arts 12–13) or below its thresholds (art.8). Thus, if a contract is covered by the Defence and Security Directive’s scope, but is either excluded or below the relevant threshold, none of the public procurement directives apply. In that case, only the general principles of the Treaty might apply, and the contracting authority may consider awarding the contract without prior publication of a contract notice in the Official Journal of the European Union (the “OJEU”).58

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Communication “Towards an EU Defence Equipment Policy”, March 11, 2003, COM(2003) 113 final. Green Paper on defence procurement, September 23, 2004, COM(2004)608 final. Green Paper on defence procurement, part II, s.2. 54 Proposal for a Directive of the European Parliament and of the Council on the co-ordination of procedures for the award of certain public works contracts, public supply contracts and public service contracts in the fields of defence and security (COM(2007) 766 final). 55 Article 72 of the Directive. 56 European Commission, “Directive 2009/81/EC on the award of contracts in the fields of defence and security — Guidance Note — Field of application”, October 1, 2010; see B. Heuninckx, “Lurking at the Boundaries: Applicability of EU Law to Defence and Security Procurement” (2010) 19 P.P.L.R. 91; this question is not examined further in this article. 57 These provisions amend the Utilities Directive (see the new art.22a) and the Classic Directive (see the amendment of art.10). 58 Whether the Treaty principles will apply, and what consequences this might have for the award of the contract is discussed in s.4 below; see also B. Heuninckx, “Lurking at the Boundaries: Applicability of EU Law to Defence and Security Procurement” (2010) 19 P.P.L.R. 91. 52 53

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However, a direct award of a contract that should have been advertised in the OJEU may result in an ineffectiveness decision.59 Before relying on one of the exclusions, it is therefore paramount that the contracting authority satisfies itself that the contract is actually within the scope of the Directive and, if so, that the exclusion in question applies.

4. The Government to Government Exclusion Having briefly explained the context and field of application of the Defence Directive in general and the debate on G2G-contracts in particular, we then turn to the specific rules on G2G-contracts in the Directive and the relevant parts of its preparatory works.

4.1 The Defence and Security Directive’s rules The G2G rule is found in the Defence and Security Directive’s s.3 “Excluded contracts” under the “Special exclusions” in art.13. As mentioned above, pursuant to art.13(f) the Defence and Security Directive does not apply to: “… contracts awarded by a government to another government relating to: (i) the supply of military equipment or sensitive equipment, (ii) works and services directly linked to such equipment, or (iii) works and services specifically for military purposes, or sensitive works and sensitive services … .” Article 1(9) of the Defence Directive defines “government” as “the State, regional or local government of a Member State or third country”. As already explained in the introduction, recital 30 of the Directive’s preamble simply states that contracts between governments are excluded from the scope due to “ … the specificity of the defence and security sector”. The exclusions in arts 12–13 must be read in conjunction with the art.11 on the “Use of exclusions”. Pursuant to art.11: “None of the rules, procedures, programmes, agreements, arrangements or contracts referred to in this section may be used for the purpose of circumventing the provisions of [the] Directive.”

4.2 Preparatory works The relevant parts of the Directive’s preparatory works (or travaux préparatoires) are described in the following sections.

4.2.1 The Commission’s original proposal and impact assessment The Commission’s original proposal of December 13, 2007 did not contain any specific provisions on G2G-contracts.60 However, recital 32 of the preamble confirmed that such contracts are also regarded as public contracts within the meaning of the procurement rules:

59 Article 2d(a) of Directive 89/665/EEC (the Remedies Directive) as amended by Directive 2007/66/EC. The Defence and Security Directive contains similar provisions in art.60. However, art.60(3) contains a special rule according to which a contract covered by the material scope of the Defence Directive may not be considered ineffective if the consequences of this ineffectiveness would seriously endanger the very existence of a wider defence or security programme which is essential for a Member State’s security interests. 60 Proposal for a Directive of the European Parliament and of the Council on the co-ordination of procedures for the award of certain public works contracts, public supply contracts and public service contracts in the fields of defence and security (COM(2007) 766 final).

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Government to Government Contracts in EU Defence Procurement 257 “Sales of arms, munitions and war material between governments are also public contracts of a particular type that may be useful in improving interoperability.” Thus, the Commission suggested that such contracts should be treated as any other public contract, and that the award of G2G-contracts should be subject to the rules of the Directive. In the accompanying Impact Assessment, the Commission pondered what legislative technique to use for the exemptions from the Directive’s field of application. It suggested making references to the derogations in the Treaty as opposed to spelling out specific exemptions in the Directive: “The challenge here is to keep the field of potential application of the new rules as wide as possible and, at the same time, leave flexibility with Member States for their decision to use the derogations provided by the Treaty. The best way to achieve this is to limit the number of explicit exclusions to a minimum and to refer to the derogations mentioned in the Treaty ….”61 This would, in principle, have meant that all defence contracts would have be to put out to competition pursuant to the Defence Directive’s procedural rules, unless the conditions of the Treaty exemptions, such as art.346 TFEU, were fulfilled. As seen in the following, both these approaches were abandoned during negotiations in the Council.

4.2.2 Revised proposals On May 19, 2008, the Slovenian Presidency put forward a revised compromise text. The compromise suggested that G2G-contracts for the supply of military equipment (and services related to such supplies) between Member States should fall outside the scope of the Directive. Thus, the proposal excluded: “… contracts for the supply of arms, munitions and war material and, where necessary, service contracts strictly related to these supplies, by the government of a Member State to the government of another Member State ….”62 The revised proposal presented by the French Presidency on July 24, 2008, expressly mentioned that the exclusion also covered contracts with third countries: “… supply of military equipment and, where necessary, works and service contracts directly related to this equipment, by the government of a Member State to the government of another Member State or by the government of a third country to the government of a Member State …”.63 In the compromise proposal of September 30, 2008, the scope of the G2G-exclusion was broadened to cover not only contracts for the supply of military equipment and related works and services, but also contracts for sensitive equipment, i.e. security purchases.64 The provisions of the draft directive still stated that contracts with third country governments were also covered, albeit with a different legislative technique. Thus, as in the Directive now in force, the exclusion of G2G-contracts extended to agreements with third countries through the definition of “Government” in art.1(9). On October 16, 2008, the European Parliament’s Committee on the Internal Market and Consumer Protection handed down its report on the Commission’s original proposal.65 In line with the discussions in the Council, the Committee proposed that G2G-contracts should be excluded from the scope of the Directive. The Committee argued that:

61

Impact Assessment (SEC(2007) 1598). Document 9449/08. Document 12150/1/08 REV 1. 64 Document 13616/08. 65 Report of October 16, 2008 of the Committee on the Internal Market and Consumer Protection (A6-0415/2008). 62 63

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The subsequent revisions to the compromise proposal (the versions of October 16, 2008,67 November 11, 2008,68 November 25, 2008,69 and November 27, 2008)70 brought about no material changes to the provision or the recitals in the preamble on G2G-contracts. The final compromise text was submitted by the Presidency on December 17, 2008, on the basis of which informal negotiations with the European Parliament were commenced. As it appears from the cover note, an agreement was reached with the Parliament to add: “… a simple reminder […] that exclusions, while they inevitably have the consequence of setting aside application of the Directive, may not be used for the purpose of circumventing its provisions ….”71 Consequently, under the headline “Use of exclusions”, the following provision was added (which is now art.11 of the Directive): “None of the rules, procedures, programmes, agreements, arrangements or contracts referred to in this section may be used for the purpose of circumventing the provisions of this Directive.”72 On January 14, 2009, the Parliament adopted the compromise proposal for the Directive,73 and on the July 7, 2009 the proposal was approved by the Council.74

4.3 Commission guidance on the government to government exclusion As already mentioned, DG MARKT published a series of guidance notes on the Defence Directive. One of the guidance notes specifically deals with the Directive’s exclusions as further described in s.4.3.1.75 The guidance note reflects the views of the services of DG MARKT and is not legally binding. Nevertheless, it may be of interpretive/persuasive value. Furthermore, the guidance note is arguably a statement of what Member States can legitimately expect in terms of the Commission’s enforcement of the Directive. In addition, on July 24, 2013, the Commission adopted a Communication entitled “Towards a more competitive and efficient defence and security sector”.76 With respect to defence procurement, the Communication announces the establishment of a market monitoring mechanism and additional guidance on certain exclusions in the Directive, including art.13(f). The communication is further described in s.4.3.2.

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Page 19 of the report. Document 14347/08. Document 15559/08. 69 Document 16158/08. 70 Document 16159/08 ADD 1. 71 Document 17291/08. 72 Article 7aa of the compromise proposal. 73 See document 5191/09 and [2010] OJ CE46/128. 74 Document 11840/09. 75 European Commission, “Directive 2009/81/EC on the award of contracts in the fields of defence and security — Guidance Note — Defence- and security-specific exclusions”, October 1, 2010. 76 “COM(2013) 542 final” available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2013:0542:FIN:EN:PDF [Accessed August 26, 2014]. 67 68

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4.3.1 Guidance Note—Defence- and security-specific exclusions in Directive 2009/81/EC The guidance note initially deals with the question of which contracting authorities may benefit from the exclusion of G2G-contracts. The term “government” is defined in art.1(9) as meaning “the State, regional or local government of a Member State or third country”. Therefore, according to DG MARKT, the contracts in question must be concluded by, or on behalf of, a Member State or a third country or, depending on the organisation of the state concerned, a regional or local government entity having its own legal personality, (e.g. a Land in Germany, regional or local authorities). By contrast, contracts concluded by or on behalf of bodies governed by public law or public undertakings are not eligible for exemption.77 On the more controversial issue of what contractual subject matter is covered by the exclusion, DG MARKT opens with the remark that G2G-contracts “can be awarded for a broad range of very different purchases”.78 With regards to services contracts, DG MARKT gives the example that Government A decides, for operational reasons, to conclude a contract with the Government B on the training of its pilots by the air force of Government B. According to the guidance note, such a service contract would be covered by the exclusion.79 With regard to supply contracts, DG MARKT distinguishes between used equipment and surplus stock on the one hand and new equipment on the other. It argues that the exclusion is: “… primarily intended for sales of equipment which is delivered from existing stocks, such as used equipment or stocks that are surplus to requirements.”80 However, DG MARKT also acknowledges that the exclusion is not restricted to such operations and that it “applies to all contracts for the supply of military or sensitive equipment, including, in principle, even purchases of new material”.81 It then goes on to say that the exclusion only covers the contract between the two governments, and not any related contracts concluded between the selling government and an economic operator.82 According to DG MARKT, this means that, if Member State A purchases new military equipment from the government of Member State B, the latter must procure the material in question in accordance with the contract award rules set out in the Directive.83 DG MARKT explains that Member State B may do so by using framework agreements, for example, or options included in existing supply contracts awarded under the rules of the Directive.84 The final remarks in the guidance note are on agreements with third countries. DG MARKT states that, if a Member State purchases new military equipment from the government of a third country, it must do so with due regard to its obligation under art.11 not to use such contracts for the purpose of circumventing the provisions of the Directive. According to DG MARKT, this is “particularly relevant in situations where market conditions are such that competition within the Internal Market would be possible.”85

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Paragraph 25 of the Guidance Note. Paragraph 25 of the Guidance Note. Paragraph 25 of the Guidance Note. 80 Paragraph 26 of the Guidance Note. 81 Paragraph 26 of the Guidance Note. 82 Paragraph 26 of the Guidance Note. 83 Paragraph 26 of the Guidance Note. 84 Paragraph 26 of the Guidance Note. 85 Paragraph 26 of the Guidance Note. 78 79

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4.3.2 Communication—Towards a more competitive and efficient defence and security sector It is hardly incidental that the first item on the Commission’s Action Plan described in the Communication is “Strengthening the internal market for defence”.86 Under the headline “Ensuring market efficiency”, the Commission states that—despite the Directive being fully transposed—defence remains a specific market with a longstanding tradition of national fragmentation. The Commission will therefore monitor the openness of Member States’ defence markets and regularly assess via the Tenders Electronic Daily (TED) database and other sources how the new procurement rules are applied.87 The Commission then goes on to explain that, in times of budget constraints, it is particularly important to spend financial resources efficiently, and the Commission argues that pooling demand is an effective way of achieving this objective.88 More specifically, the Commission would like to see Member States achieving economies of scale through the Directive’s provisions on central purchasing bodies, for example via the European Defence Agency.89 Alternatively, the Commission suggests that Member States take advantage of the exclusion of contracts awarded under the framework of cooperative programmes for research and development.90 By contrast, the Commission will pursue a significantly more stringent enforcement policy when it comes to the (alleged) misuse of the government to government exclusion. Thus, the Commission states: “However, other specific exclusions, namely those of government to government sales and of contract awards governed by international rules, might be interpreted in a way undermining the correct use of the Directive. This could jeopardize the level playing field in the internal market. The Commission will therefore ensure that these exclusions are interpreted strictly and that they are not abused to circumvent the Directive.”91 The Commission will achieve this by clarifying the limits of certain exclusions via consultations with Member States and (additional) specific guidance, “notably on government to government sales and international agreements”.92

4.4 Legal theory on the government to government exclusion Very little has been written so far about the Directive’s provision on G2G-contracts. The predominant position in legal theory seems to be that the provision should be interpreted based on its wording, i.e. more or less all-encompassing. In his 2010 article “Lurking at the boundaries: applicability of EU law to defence and security procurement”,93 Heuninckx sets out the position as follows: “[Article 13(f)] is an important exception for defence procurement, as a fairly significant part of defence procurement is performed between states, for instance through the United States’ Foreign Military Sales (FMS). The exemption clarifies a recurring question of procurement practitioners about whether or not they had to comply with the Public Procurement Directives when purchasing military equipment through FMS. In addition, it would allow open intergovernmental arrangements 86

Section 2 of the communication. Section 2.1 of the communication (1st action). Section 2.1 of the communication (2nd action). 89 Directive 2009/81/EC, art.1(18) and Recital 23. 90 Section 2.1 of the communication (2nd action). 91 Section 2.1 of the communication (2nd action). 92 Section 2.1 of the communication (2nd action). 93 B. Heuninckx, “Lurking at the Boundaries: Applicability of EU Law to Defence and Security Procurement” (2010) 19 P.P.L.R. 91. 87 88

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Government to Government Contracts in EU Defence Procurement 261 allowing states to procure from each other or exchange military equipment, such as the NATO Logistic Stock Exchange, to operate without having to comply with Public Procurement Directives, which is something they have been doing blissfully for many years anyway.” This view is shared by attorney Ilsøe Andersen, who frequently advises the Danish Ministry of Defence,94 who describes the exclusion in the Directive as: “[a]nother provision of particular interest is [Article 13(f)], which allows for the exemption of contracts awarded by one government to another for the supply of military or sensitive equipment etc. Previously such »FMS-cases« or collaborations based on Memoranda of Understanding [MoUs] would have to be conducted within the confines of Article 346 TFEU or Article 15 of the Classic Directive. It is now settled that such government to government contracts may be entered into without a tender procedure.”95 Similarly, Andresen, also a practitioner, writes in the Columbia Journal of European Law that the Directive’s government to government “exclusion provides a legal basis for member states to purchase U.S. military equipment and services through the “Foreign Military Sales” (FMS) procedure”.96 However, there are differing opinions. Concurring with the Commission, Trybus argues that purchases by a government from private suppliers with the intention of re-selling the equipment to another government will most likely constitute circumvention of the Directive: “At the beginning of the legislative process, the exemption was intended for surplus equipment but in its current wording includes new items. There is a danger of abuse when the selling government is purchasing from the private sector with the intention of selling to another government. It is assumed that this situation would not be covered. The exemption will apply to supplies purchased by one government for its own purposes which later prove to be excess to requirements or no longer suitable for the purposes of the armed forces so that they can be sold.”97 Trybus supports his argument by reference to a presentation given by Dr Burkard Schmitt and Mr Nico Spiegel, both from DG MARKT, at EIPA in 2010.98 Also drawing upon the Commission’s words of caution in its communications, Rosenkötter, a German practitioner, writes that—because of the anti-circumvention provision in art.11 of the Directive—contracts should be awarded through one of the Directive’s procedures if a competition between suppliers located within the internal market is possible.99

4.5 Analysis The main question of the article will now be analysed divided into two separate issues: 1.

Does Article 13(f) also cover supplies of new equipment or does it only apply to contracts for used equipment and surplus stock? (Section 4.5.1)

94 Tomas Ilsøe Andersen is a partner in Poul Schmith Law Firm, which acts as the (sole) Legal Adviser to the Danish Government (http://en .kammeradvokaten.dk/about-us.aspx [Accessed August 26, 2014]). 95 T. I. Andersen, Det nye Forsvars- og Sikkerhedsdirektiv (“The new Defence and Security Procurement Directive”), Ch.8 of the book Aktuel udbudsret (“Current Public Procurement Law”), (Copenhagen: DJOEF Publishing, 2011), p.202. The quote is a non-certified translation from Danish. 96 E. Andresen, “The EU New Defence and Security Procurement Directive”, The Columbia Journal of European Law, F. 22 (2011); Emil Andresen was at the time employed by the Legal Adviser to the Danish Government. 97 M. Trybus, “The tailor-made EU Defence and Security Procurement Directive: limitation, flexibility, descriptiveness, and substitution” (2013) 38 E.L.R. 3–29. 98 Schmitt and Spiegel, “The specificities of the European Defence and Security Procurement Directive” at the seminar “European Defence Procurement and Other Defence Market Initiatives”, EIPA, November 15, 2010—The power point presentation, which was made available by EIPA, does not contain references to other authorities that could further support this view. 99 A. Rosenkötter, Die Verteidigungsrichtlinie 2009/81/EG und ihre Umsetzung, (VergabeR 2012), Heft 2a—273.

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Does Article 13(f) only cover contracts between governments of Member States or does it extend to contracts with third countries, including contracts awarded through the US Foreign Military Sales programme? (Section 4.5.2)

4.5.1 New equipment or only used equipment and surplus stock? The starting point of this analysis is the wording of the provision, and the language chosen by EU’s legislature does not leave much room for interpretation: Article 13(f) is cast in a broad and encompassing way. It covers “contracts for the supply of military equipment or sensitive equipment … “ etc. as defined in art.2 of the Directive, and there are no reservations whatsoever as to the subject matter of the contract. The scope ratione materiae of art.13(f) is exactly the same as the scope of the Directive in general, cf. art.2, and ought to be interpreted in the same way. Thus, the wording clearly suggests that contracts for the supply of new equipment are also covered by the exclusion. This proposition arguably finds support in the preamble, where recital 30 states that “ … purchases of equipment as well as works and services by one government from another should be excluded … ” without any distinction between used equipment and new equipment. Neither the preparatory works suggest that EU’s legislature intended such a distinction. As shown in s.4.2.2, the wording on the material scope has remained without limitations in this regard throughout the negotiations in the Council and the Parliament. One could argue that the report of the European Parliament’s Committee on the Internal Market and Consumer Protection of October 16, 2008 supports the proposition that supplies of new equipment should not be covered. Thus, the report stated that: “Contracts between Member States within […] the Directive are complex and contracts may not always be linked to the supply of defence equipment, as in the case of services in the area of training, etc. It would therefore be appropriate for cooperation between Member States to be included in the specific exclusions.” However, such unilateral declarations cannot be used for the purpose of interpreting a provision of secondary EU legislation where, as in this case, no reference is made to the content of the declaration in the wording of the provision in question. In such circumstances, the declaration has no legal significance.100 Even DG MARKT acknowledges in their Guidance Note, albeit somewhat reluctantly, that art.13(f) “applies to all contracts for the supply of military or sensitive equipment, including, in principle, even purchases of new material”.101 DG MARKT adds the caveat that the selling government must procure the equipment in accordance with the Defence and Security Directive’s award procedures. This is correct, of course, but it does not lead to a different result. Thus, there seems to be no support in the Directive, its preamble or its preparatory works for the proposition made by commentators such as Trybus that the government to government exclusion was primarily intended for surplus stock, and that there is “a danger of abuse” when the selling government is purchasing from the private sector with the intention of selling to another government. Naturally, the prohibition on circumvention in art.11 must be taken into account when interpreting the exclusion. First, however, it can hardly constitute “circumventing the provisions of this Directive” when a Member State is in fact merely relying on the clear wording of one of those provisions. Second, in so far as the initial equipment purchase from the private market is made in accordance with EU law, it can hardly constitute circumvention to resell the equipment to another government afterwards. The objective 100 For example Antonissen (C-292/89) [1991] E.C.R. I-00745 at [17]–[18]. This case concerned a declaration recorded in the Council minutes at the time of the adoption of Regulation No.1612/68/EEC and Directive 68/360/EEC. 101 Paragraph 26 of the Guidance Note on Defence- and Security-specific Exclusions.

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Government to Government Contracts in EU Defence Procurement 263 of the Directive is to establish a European defence equipment market by putting out defence contracts to competition.102 This objective is not hampered by “government to government transactions” on the “secondary equipment market”. Another argument in favour of a narrower scope of art.13(f) is that any derogation from the fundamental principle of free movement must be interpreted strictly and exercised in accordance with the proportionality principle.103 This is generally speaking a strong argument in EU law. However, it does not seem persuasive when it would result in an interpretation of the provision in direct conflict with its wording. In the letters to Romania, the Czech Republic and Bulgaria mentioned in the introduction, Commissioner Barnier states that: “From the Commission’s point of view a government would circumvent the Directive if it directly awarded to another government a contract for the purchase of a new product for which competition with participation of EU suppliers would be possible. The award would then discriminate against companies from other Member States and therefore not comply with the Directive.”104 As a matter of law, this interpretation does not seem warranted. Arguably, the focus of the Commission should be on the initial equipment purchase from the private market (and whether this complies with the Directive)—not on the subsequent transaction between governments for that equipment. This is the system that the Directive has established, i.e. that the award procedures must be followed in “contractor to government transactions”, but not in “government to government transactions”. As a matter of policy, it may have been an objective for the Commission during the legislative process to limit art.13(f) to used equipment and surplus stock, but this was not in any way reflected in the final wording. On this basis, it is to be concluded, it is submitted, that art.13(f) excludes G2G-contracts for the supply of new equipment as well as contracts for used equipment/surplus stock from the Directive. This result seems fairly certain at least to the extent that the selling government/initial purchaser is a Member State and is therefore subject to EU public procurement law. In this case, the initial purchase must take place in compliance with the rules of the Directive, and the primary aim of the Directive—establishing a European defence market through competition for defence contracts—is thereby safeguarded.

4.5.2 Contracts with third countries, including Foreign Military Sales Next is the question of whether art.13(f) extends to contracts with third countries and, in particular, whether it is applicable to contracts awarded through the FMS programme. This area is likely to be of particular interest to the Commission and, at least in terms of internal market policy, for good reason. Notwithstanding the fact that US contractors are the only possible suppliers of certain types of military equipment, it is obviously not conducive for the establishment of a European defence market that direct awards are made by Member States to third country suppliers. However, policy is one thing, law is another, and the reality of the market, with its constraints on the purchaser, is still another. The Directive leaves no doubt as to whether contracts between Member States and third countries are covered by the government to government exclusion. See, to this effect, arts 1(9) and 13(f) which explicitly include both Member States and third countries. Consequently, the only argument that can bring FMS contracts and the like out of the ambit of the exclusion is the circumvention provision in art.11. 102 103 104

See recital 2 and 4 of the Defence Directive’s preamble. See section 2.3.3 above. Separate letters of May 15, 2012 to the Defence Ministers of the three countries (mentioned in s.1.1 above). (2014) 23 P.P.L.R., Issue 6 © 2014 Thomson Reuters (Professional) UK Limited and Contributors

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As shown in the previous sections, the Commission has continuously stated that purchases of new military equipment from the government of a third country are likely to constitute circumvention in situations where market conditions are such that competition within the internal market is possible. There is no support for this argument in the preparatory works, but a teleological interpretation taking into account the objectives and aims of the Directive might warrant it. The CJEU is well-known for continuously developing EU law provisions based on their objective and the aims of the Treaty.105 However, such interpretation can only fill the gaps that the legislation leaves open and, arguably, the Directive’s government to government provisions do not leave much room for interpretation. The wording of art.13(f) is broad and unequivocal and the Commission’s interpretation thus appears to be contra legem. In addition, it must be taken into account that art.13(f) must have a separate field of application in comparison to for instance art.28(1)(e) which exempts contracts that—for technical reasons or because of exclusive rights—can be awarded only to one particular contractor (thereby making a tender procedure futile). It would seem that the Commission is seeking to import requirements from art.28(1)(e) into art.13(f), when it argues that art.13(f) does not apply, if an EU-competition for the contract is possible. However, if such a “no competition possible” requirement was also intended for art.13(f), it seems likely that EU’s legislature would have included it in the wording. It could be argued that the role of the US government in the FMS programme is actually that of a middleman, and that the reality is that contracts are being awarded directly to US defence contractors. However, as the decision of the US Court of Appeals in UK MoD v Trimble Navigation shows, the reality is that the foreign government only has a contractual relationship with the US government—not the contractor.106 Therefore, an FMS contract (an “LOA”107) is clearly a G2G-contract within the meaning of the Directive, cf. arts 13(f) and 1(9). On this basis, it is submitted that the Commission’s position on contracts with third countries—although to some extent justified by the general objective of the Directive to submit government defence contracts to competition and improve the EU defence market—is challengeable. The better view, as supported by the predominant part of commentators, seems to be that even FMS contracts are within the scope of the exclusion. This is not to say that Member States have an unlimited margin of discretion when using exclusions like art.13(f)108 and that the circumvention provision in art.11 is without legal significance. As always, Member States must pursue legitimate aims and exercise the discretion in accordance with the principle of proportionality. This arguably means that a Member State cannot choose to procure new defence equipment through the FMS programme merely for the reason that the Member State can thereby avoid having to complete a procurement procedure pursuant to the procedural rules of the Directive.

5. Conclusions While it remains the Commission’s view that art.13(f) is primarily intended for used equipment and surplus stock, Member States—rightfully—maintain that the exclusion also covers supplies of new equipment. In fact, neither the wording of the Directive nor the preparatory works suggest that EU’s legislature intended the distinction that is suggested by the Commission. Consequently, the Commission’s focus should be on the initial equipment purchase from the private market (and whether this complies with the Directive)—not on the subsequent transaction between governments for that equipment. 105

For example, Europemballage Corp and Continental Can Co. Inc. v Commission (6/72), [1973] E.C.R. 00215. US Court of Appeals for the 4th Circuit, Decision of May 10, 2007 in Secretary of State for Defence as represented by the United Kingdom Ministry of Defence, Defence Procurement Agency v Trimble Navigation Limited. 107 The Arms Export Control Act of 1976 (enacted on June 30, 1976, codified at 22 U.S.C., chapter 39). 108 The fact that in this case the Member States have some discretion under EU law does not preclude judicial review of the question whether the national authorities exceeded their discretion. See, for instance, case Kraaijeveld (C-72/95) [1996] E.C.R. I-05403 at [59]. 106

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Government to Government Contracts in EU Defence Procurement 265 As for the particularly controversial question of whether art.13(f) only covers contracts between governments of Member States or if it extends to contracts with third countries, including contracts awarded through the US FMS programme, the Commission and other commentators have often stated that it is not conducive for the establishment of a European defence market that direct awards are made to third country suppliers. This statement is obviously correct. However, in analysing the scope of the Directive, one must separate EU law (as adopted by EU’s legislature) from internal market policy (as determined by the Commission). In fact, the provisions of the Directive leave little doubt; contracts between Member States and third countries are covered by its scope. The preceding conclusions do not mean, of course, that the Commission will be less likely to persist in its efforts to reduce the scope of art.13(f) to used equipment and surplus stock. Thus, in order to reach the result it failed to achieve during political negotiations, the Commission now seems to be pursuing its well-known litigation strategy to pressure Member States to over-comply with EU law by publishing restrictive interpretive communications while, at the same time, threatening to commence infraction proceedings before the CJEU.109 With Commissioner Michel Barnier’s letters to the Eastern European governments and the statement in the July 2013 communication that the G2G-contract exclusion might be “interpreted in a way undermining the correct use of the Directive” necessitating additional specific guidance, the Commission has already begun bolstering its case.

109 Another example of this was its approach to contracts not covered or not fully covered by the public procurement directives. The Commission commenced infraction proceedings against a number of Member States, including Ireland, Finland and Italy, and simultaneously published an interpretive communication on the issues that the CJEU would have to decide on. This approach was harshly criticised and led Germany to bring proceedings before the General Court for the annulment of the interpretive communication (Germany v Commission (T-258/06) [2010] E.C.R. II-02027).

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