[00:00:00] Marta: Welcome to Bestek, the public procurement podcast. Today we’re tackling topic of defence contracts and its exemption list nature.

[00:00:09] Bestek Intro/Outro: Welcome to Bestek, the public procurement podcast. In this podcast, Dr Willem Janssen and Dr Marta Andhov discuss public procurement law issues, their love of food, and academic life. In each episode, Willem, Marta and their guests search for answers to intriguing public procurement questions. This is Bestek. Let’s dish up public procurement law.

[00:00:40] Marta: Hello everyone, and welcome back to Bestek podcast for another aperitif episode. My name is Marta Andhov, and I’m your host. Every EU member state has a way to skip, uh, the normal procurement rules when it comes to defence. We refer to this as an exemptions of Article 346. And today’s question is the one sitting right underneath that, and mainly questioning, should defence contract be allowed to skip the regular rules in the first place?

[00:01:16] This one on defence and security procurement, uh, discussion has been chaired by the PurpLE project colleague, Professor Michał Kania at the University of Silesia in Poland. The panel was called Contracts in the Defence and Security Sector, and Michał, uh, moderated the conversation between Professor Martin Trybus from the University of Birmingham, Associate Professor Colette Langos from Adelaide University, Professor Dan Schoeni from the University of Daytona in the United States, and Sofie Dreyer Mikkelsen, a lawyer and senior manager at Poul Schmith/Kammeradvokaten in Denmark.

[00:01:58] There was so much in this conversation that I’ve split it into two episodes, and this is the first one. I want to start with Professor Martin Trybus on what the exemption in Article 346 is supposed to do in the first place.

[00:02:16] Martin: So before we have, since 1999, uh, a Court of Justice case law with what I call Spanish weapons, with Agusta, uh, with, uh, Schiebel Aircraft, with, uh, and a couple of cases against almost any member state that, uh, on the planet. Um, which suggests that actually, uh, Article 346 has to be interpreted narrowly.

[00:02:41] Member states have to specifically invoke the provision, and, uh, the use of the provision will be subject to judicial review. And then the Commission has an interpretive communication in which it sets out, uh, actually altogether six steps, uh, of analysis here, which I will not repeat, just the main important ones.

[00:03:01] First, you check whether the good in question is actually an armament on the list of 1958. A bit later, you actually decide whether there’s an essential security interest of the member state involved, and ultimately, and that’s the most in, uh, interesting point also for a law professor, uh, proportionality of the measure, meaning derogating is actually proportionate in view of the essential security interest pursued.

[00:03:25] Marta: So that’s the mechanism, right? Article 346 isn’t blank cheque. There’s a real legal test behind it. Is it an armament? Is there a genuine security interest? Is the measure proportionate? Martin’s been researching this since before most of us were really working on procurement, and I think what he says next is the part that should worry anyone who cares about that test holding up.

[00:03:58] Martin: Here comes 2022, and all of a sudden- … in the member states like Germany and Finland that would have very narrow interpretations in their highest courts, this changes dramatically. And some of the courts even say so very clearly. So in the German case of, uh, German army radios, which is from the highest court, uh, uh, deciding on federal cases, they even say, “This is our analysis, and this is especially so because of the geopolitical situation bec- uh, after, after Ukraine,” which for a law professor is a nightmare because what they’re basically doing is they take first the facts, then they come with the law, yeah?

[00:04:43] And you can’t do that. Yeah. First the law, then the application to the facts, yeah?

[00:04:50] Marta: For a law professor, this is a nightmare. In Martin’s words, courts deciding the politics first and reverse engineering the law to fit afterwards, and I think that’s exactly the kind of erosion that matters most when nobody’s watching closely because it doesn’t happen all at once.

[00:05:09] It happens one stretch interpretation at the time. So if the legal test is under pressure from the courts, what does the pressure look like from inside a contracting authority actually trying to buy something? Sofie Dreyer Mikkelsen has been on the other side of that exact problem.

[00:05:29] Sofie: I do see some issues where the reality of the public authorities within the defence sector, um, collides with the regulatory framework, and I can try and give some examples for that. Um, first of all, the current interpretation of when the framework agreement is deemed to have exhausted its, um, its use, it can no longer be used for further, further orders, kind of limits the possibility of addressing unforeseen operative needs, which is what’s happening right now.

[00:05:58] Everything is quite uncertain what we actually need. And I’ll try to give the example of surge capacity. So by surge capacity, I mean some sort of contractual arrangement whereby a supplier would undertake to be on standby and with very short notice deliver, uh, some specified capability to the public authorities.

[00:06:22] It could be relevant in the context of host nation support, for example, but really in any, any escalation of the current conflict. And in my opinion, at this point in time where speed and flexibility is so very critical for these types of public authorities, the authorities are faced with a dilemma over and over again as to whether conduct a standard procurement procedure for the time and administrative burden that contains or rely on exceptional procedures or derogations that will entail an increased, um, legal risk. Either way, it will result in hesitation and delay in the urgent capability delivery.

[00:07:06] Marta: A framework agreement gets declared exhausted, and suddenly you can use it for exactly the kind of urgent, unforeseen need it was supposed to cover in the first place, like standby capacity you didn’t know you need until you needed it right now. That’s not a hypothetical for Sofie. That’s a real gap she’s had to navigate, and it gets more humane than that, honestly, when you get into the next thing Sofie raises, which is about soldiers, not spreadsheets.

[00:07:37] Sofie: There is the current case law on sole suppliers and exclusive rights, which is very strict, and I completely understand the logic behind that in, like, a more general public procurement context.

[00:07:50] Um, but it sits uneasily with the public authorities within the defence sector, um, who often procure complex defence systems and also have to take into account, uh, what I call the train-as-you-fight doctrine, and I’ll try and elaborate a little bit. So the train-as-you-fight doctrine reflects the fundamental premise that soldiers ultimately risk their lives when going to war for everyone here.

[00:08:20] Um, and they do that on the understanding that we or the public authority, um, ensure their safety and protection so that their safety equipment is thoroughly known for them, trained in at the barracks at home and trusted when at the battlefield. That operative purpose is not currently reflected in how we interpret sole suppliers and exclusive rights.

[00:08:47] Marta: Train as you fight. That’s the doctrine Sofie is describing. Soldiers train on specific equipment, trusting that exact equipment in the field, and strict source supply procurement rules just don’t have a category for that kind of trust. I think that’s a clear example of policy goals, standardisation, competition, running headlong into an operational reality that doesn’t care about policy goals at all.

[00:09:17] So does any other country handles this differently? That’s when you brought the American comparison, and it is a different model.

[00:09:27] Dan: If there’s one thing I want to emphasise, it’s that, uh, OTAs are, are a valuable tool in our toolkit.

[00:09:35] Um, but I, I wanna push back on the idea that they’re a silver bullet, that they’re gonna solve every problem because, because they won’t. They’re, they’re not, they’re not perfect. And, um, there are some problems, and I’m not sure how well, um, this sort of tool would even… could be transplanted into a different system.

[00:09:51] It’s, it’s designed very specifically for problems specific to our system. One of the problems we have in the Department of Defense is, um, we have very sophisticated technology companies in America, obviously. Um, and fifty, sixty years ago, the Department of Defense was driving a lot of that innovation. We had a lot more influence over those companies.

[00:10:11] Now, the tables have turned, and a lot of the innovation is happening in the private sector. And frankly, they’re not interested in doing business with the federal government because we’re just not… It’s hard to do business with us. We have our own separate accounting system. There are cybersecurity requirements that are much more onerous.

[00:10:24] Um, there are socioeconomic requirements. You know, you have to… Small businesses have to be, have to be brought in. There are a lot of different things, and so OTAs are this way around all of that, or the way around that thousand pages that Steve Schooner was talking about yesterday to say, “Okay, we’ll do this a little differently so that we can attract businesses that might not be interested in doing business with the federal government, so we can tap into some of that great technology.”

[00:10:46] OTAs are useful in our system to address very specific problems to the Federal Acquisition Regulation. I don’t know how, how much they would be applicable in the European Union. And maybe one last point, if I can add this. I can’t help mentioning when, when Martin mentioned cutting the Gordian knot with Article 346, um… I’m testing this out in real time, so you tell me if it’s a terrible idea.

[00:11:11] But I, I, uh, I, uh, I can’t help thinking that OTAs are sort of like our Article 346. Different, right? We’re not talking about sovereignty and things like that, but it’s kind of our way around complicated rules and regulations. It’s, it’s a lot of flexibility, but there are problems with that, just like there are problems that Martin pointed out with Article 346.

[00:11:35] They’re different. I get it’s not a perfect analogy, but it’s kind of our way to circumvent the system.

[00:11:41] Marta: An other transactions authority, or OTA, sits completely outside normal Federal Acquisition Regulation, built specifically to attract tech companies who don’t want to deal with the usual federal red tape.

[00:11:59] On the surface, that sounds a lot like what Article 346 does for European defence contracts. Skip the normal process for something that matters more than the normal process. But Martin doesn’t let that comparison stand unchallenged, and the distinction he draws gets right to the heart of today’s question.

[00:12:22] Martin: I think 346 is, uh, mainly a sovereignty issue.

[00:12:26] Dan: Agreed.

[00:12:27] Martin: Yeah. So it’s, that’s main… Which, which you don’t have as a problem.

[00:12:28] Dan: No, not at all.

[00:12:29] Martin: Yeah. So this is basically the main thing is not, I don’t want it complicated, I just want to make sure that at the end it’s a domestic supplier I have. Right. I might even, if I’ve got several ones, not care about which one’s gonna win. Right. And I think that’s… But, but the kind of where I agree with you is it’s, there’s also now a tendency to just get rid of any rules, especially the EU.

[00:12:57] Yeah. Uh, and, and just do what you want.

[00:13:01] Marta: OTAs are about convenience. Article 346 is about sovereignty. That’s Martin’s distinction. Convenience is good enough reason to skip some paperwork. Sovereignty is a different kind of claim entirely. It’s a country deciding that its own security needs sit outside the normal rules of trade, and that’s a much higher bar to clear, or at least it should be.

[00:13:29] There’s a real legal test for when that’s justified, narrow, proportionate, tied to real security interest, but the test is under real pressure. And Sofie’s exa-example show you exactly where the theory runs into operational reality. Martin distinction is the one I hold onto. The exemption exists for sovereignty, not convenience, and every time it gets used for the second reason while dressed up as the first, that’s the exemption failing at the one job it has.

[00:14:05] That’s the value of pulling this question out of the panel discussion on its own. Sovereignty and procurement law don’t usually get talked about in the same sentence, or at least it h- these topics weren’t really coming together in recent years, is relatively new development. And now you’ve got a really good framework for when the conversation is justified.

[00:14:29] There was much more in this panel that I couldn’t fit into one episode, so there’s a second one coming on a different angle the same four got into. Buying European while still needing American technology. That’s one coming soon. Okay, so right before I go, I just wanna tell you a little bit more about where this panel was formed and what it was part of.

[00:14:54] It was part of our public procurement and contract conference this past June, hosted by PurpLE project in Copenhagen and funded by Carlsberg Foundation. More than 40 expert speakers joined us across those two days from across the globe and beyond. Sorry, from the across the globe, period. I wanted to originally say from across Europe, but I realised we had many, many actually speakers from outside of Europe, so that wouldn’t be a fair, uh, description.

[00:15:24] If you want more on our speakers, uh, if those are from this panel or if you want to learn more about the conference itself or the new book this whole conference fed into, the Public Procurement and Contract Law: Exploring Intersections, Defining Boundaries, an open-access, Hart-published anthology, this whole information will be linked in the show notes.

[00:15:49] I’m Marta Andhov. I’ve been your host. This has been Bestek, the public procurement podcast, and I’ll catch you at the next aperitif. Stay safe.

[00:15:59] Bestek Intro/Outro: This was Bestek, the public procurement podcast. Do you want to contribute to today’s discussion? Then share your thoughts on LinkedIn or Twitter. Do you have an idea for a future episode? Write to us at www.bestekpodcast.com.

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