Home Experience Establishment of in-house regulations in Latvia’s economy
Strengthening in-house regulation in the Latvian economy

Establishment of in-house regulations in Latvia’s economy

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For several years, the Administrative Court reviewed administrative case No. A420612510, regarding the application of Section 3, Part 1, Paragraph 7 (6 April 2006 version) of the Public Procurement Law. This provision included an exception, in which applying the law, and thus using public procurement procedures, is not required. According to Section 3, Part 1, Paragraph 7, one such case is if the scope of the procurement is not to be offered for fulfilment by the market, but is to be fulfilled using the resources of the public entity itself.
The matter of the case in question was about the fact that on 23 October 1998, a number of municipal councils in North Vidzeme (including Limbaži and Cēsis Municipal Councils) founded SIA ‘Ziemeļvidzemes atkritumu apsaimniekošanas organizācija’ (on 20 October 2012, the limited company was renamed SIA ZAAO). On 16 December 2008 and 22 March 2012, Cēsis Municipal Council signed contracts for the management of household waste in Cēsis Municipality with SIA ZAAO. On 1 December 2009, Limbaži Municipal Council also signed a contract for the management of household waste in Limbaži Municipality with SIA ZAAO. No public procurement procedure was arranged prior to the signing of any of these contracts. The plaintiff, SIA L&T submitted two lawsuits, which were merged into one case, requesting the court to require municipal councils to arrange public procurement procedures for providing household waste collection and transport services in Cēsis and Limbaži municipalities, and to terminate the contracts signed with SIA ZAAO.

During its 29 December 2014 plenary hearing, the Administrative Case Department of the Supreme Court reviewed the case in cassation, and found that the public procurement procedure exception specified in Section 3, Part 1, Paragraph 7 of the Public Procurement Law does apply if the commissioning party controls the contracting party as its own unit. Such control is deemed to be present if the official body can affect the contracting party’s decisions, including those pertaining to its strategic goals and critical decisions. In other words, the official body must be able to control the contracting party structurally and functionally, and the control must be real. If the contracting party is owned by multiple official bodies, they can jointly exert such control, and it is not necessary for every individual official body to exert such control on its own. Sections 87 and 88 of the State Administration Structure Law govern the activities of public entities in the context of private law. According to these provisions, a municipal council may generally operate in two ways: as a provider of business activities, or as a party that performs such activities. Even though the nature of each of these activities is different, in both cases their purpose is to provide the public with an important service. The combination of these two types of activities may take place whenever a public entity decides to use its own means to provide the service. The public entity has ample freedom of action in making the decision as to whether the performance of the service can in principle be assigned to the market, or if the public entity should perform the service using its own means; the decision is based on politically defined goals and considerations that may depend on how socially-orientated the policy of the entity is. This is why the control of combining these activities and the decisions of the public entity are not subject to legal criteria, and thus, to the influence of the court.
In view of these conclusions, the Supreme Court changed the effective case-law, finding that the previous ruling of the Administrative District Court, which was not in the interests of the firm’s client, was not justified and was to be revoked, and thus, the case was submitted for another review by the Administrative District Court.
In its 19 June 2015 ruling (which took effect on 21 July 2015), the Administrative District Court essentially agreed with the arguments presented by the leading partner of the firm, admitting that the municipal councils in this case that were shareholders of the firm’s client had legal grounds to sign contracts with the firm’s client without the use of a public procurement procedure.