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Advocatus Martinková s.r.o.

Záhradnícka 6, 811 08 Bratislava                                                   

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Selection of legal counsel for state in arbitration dispute underlies the following rules


09.12.2011, updated 23.3.2012

The Ministry of Finance has now traditionally for years been wrongly interpreting the Public procurement Act when engaging law firms with representation of the State in arbitration disputes1.) many times worth tens to hundreds millions, with the attorneys’ fees amounting up millions (occasionally tens of millions). Whether this is caused by superficiality and inexpertness or such approach is purposeful,  shall be left for every reasonable person to assess. Although this interpretation is on the same grounds also supported by the Public procurement Bureau, I cannot agree with it.

The legal state

The Public procurement Act applies to activities (to contract) that are laid down in the annexes to the statute and for which a contract is entered into. Legal services are categorized among the non-priority services stipulated in Annex No.3 to the statute (Act No. 25/2006 Coll.). The approach by selection of legal services depends on the assumed value of the contract. However, in any case, should the value of the contract exceed or equal € 10.000, the provisions of the Public procurement Act shall apply, foremost its fundamental principles: the principles of equal treatment, non-discrimination of applicants, transparency, economic efficiency and effectiveness.

From the point of view of the European legislation, the assignment of contracts to which also the legal services belong, are governed by the EU Directive 2004/18/EC2.) which applies to provision of services in the area of legal advisory services, in the case the value of the contract exceeds €130.0003.). It lays down an obligation of the public procurer to approach all parties to the tender non-discriminatorily and transparently. The said Directive contains an exception in its Art. 16, lit. c)4.), according to which the said Directive shall not apply to public procurements for services which’s subject are arbitration and conciliation services. The said exception was implemented also into the Public procurement Act, into the provision S. 1, ss. 2, lit. i)5.) (...”The said statute shall not apply to arbitration and conciliation proceedings”...), however, it is being applied excessively outside the framework of the statute and the Directive. That on the ground that the exception from the Directive shall be construed in the

1.)For example ČSOB v. Slovak Republic over €1,327.7 million; Austrian Airlines AG v. SR over €15 million; HICEE, B.V. v. SR over more than €1 billion., Oostergetel and Laurentius over €298 million; ALPS FINANCE AND TRADE AG v. SR over €2,7 million; Eureko/Achmea B.V.v. SR over €64,7 million; EURAM BANK AG v. SR over €131,4 million and most recently also SLOVAK GAS HOLDING B.V., E.ON INTERNATIONAL RUHRGAS GMBH, GDF INTERNATIONAL SAS v. SR
2.) http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=DD:06:07:32004L0018:EN:PDF
3.) http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:319:0043:0044:EN:PDF
4.)Art 16 EU Directive 2004/18/EC „This Directive shall not apply to public service contracts for arbitration and conciliation services
5.)Update - since 9.3.2012 lit. f)

context of the introductory provision of Directive 26 that reads: “Arbitration and conciliation services are usually provided by institutions or individuals designated or selected in a way that cannot be governed by rules of procurement”. The following unequivocally follows from the above stated:

The exception, i.e. exclusion from the rules of public procurement,  shall apply exclusively to specific services provided by arbitrators in arbitration proceedings and mediators in conciliation proceedings,  shall not apply to arbitrations as a whole, because only arbitrators provide arbitration services,  these are not provided by attorneys who in the disputes represent the parties to the dispute. It is logical that the selection of arbitrators who have the capacity of judges during the proceedings, cannot underlie the rules in a public procurement, as their selection underlies the contractual provisions of bilateral treaties and no other authority can interfere with these contractual rights, on the contrary, these must be honored. On the other hand, attorneys, or respectively the law firms provide the same LEGAL services in arbitration proceedings as in any other judicial proceedings, these services are not specific in any way. Surely the attorneys representing the parties to the proceedings do not provide arbitration services to which the exception applies. Therefore also the standpoint of the Public procurement Bureau (PPB) from the past, according to which “specific services are being provided in arbitration proceedings that are safeguarded by institutions selected in a way to which the rules on assignment of contracts according to the Public procurement Act cannot be applied” is correct, however it certainly cannot be used to “advocate circumventing” of the statute on the side of the Ministry of Finance, as it is absolutely wrongly construed.

Also the ECJ judicature (for example Award C-231/03 Rn 21), as well as the Commission’s report 2006/C 179/02 have both stated that within intra-market tasks, a “company with its seat in other Member State must have access to adequate information regarding the present contract prior to its assignment, in a way that it eventually may express its interest in accepting of this contract”. Necessary is therefore the publication of a sufficiently accessible communication, whereas a rule applies that the more interesting for potential applicant the contract is, the further it shall be communicated. Formal publication is not necessary, brief description of points of the contract and the tender proceedings shall suffice, by adhering to the following rules:

- Non-discriminatory description of the subject of the contract

- Equal access of the participants to the competition from all Member States

- Transparent and objective formulation

Further arguments upholding the said interpretation:

Legal services are defined in the ANNEX II B to European Parliament and Council’s Directive 2004/18/EC as a specific item “21” Legal services (861 from 74110000-3 to 74114000-1"), but the exception defined in Art. 16, lit. C) applies to different item, that is item “11” Management consulting services (6) and related services 865, 866 from 73200000-4 to 73220000-0, from 74140000-2 to 74150000-5 (excl. 74142200-8), and 74420000-9,74421000-6, 74423000-0, 74423200-2, 74423210-5, 74871000-5, 93620000-0"6.)

Although according to the exception in Art. 21 (“Contracts which have as their object 

6.)11 Management consulting services (6) and related services 865, 866 from 73200000-4 to 73220000-0, from 74140000-2 to 74150000-5 (excl. 74142200-8), and 74420000-9, 74421000-6,74423000-0, 74423200-2, 74423210-5, 74871000-5,93620000-0
(6) Except arbitration and conciliation services

       services listed in Annex II B shall be subject solely to Article 23 and Article 35(4).”), the Directive does not apply in full extent to legal services, BUT according to the Commission Interpretative Communication on the Community law applicable to contract awards not or not fully subject to the provisions of the Public Procurement Directives (2006/C 179/02)7.), it does not apply only to such contracts for legal services that exceed the thresholds for application of these Directives.

I hold the interpretation of the Public procurement Act by which the services of law firms provided to parties of arbitration proceedings are excluded from its applicability  to be in contradiction to the fundamental principles of the Directive and public procurement, that foremost the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency. As the relevant EU Directive 2004/18/EC has successfully been implemented also into the domestic legal regulation (Act No. 25/2006 Coll.),  it is not possible for an interpretation of provision of the community law, upheld by the ECJ judicature,  to be diametrically different from the interpretation of the relevant provision of the domestic legal regulation into which the provision of the community law had been implemented. I have already made standpoint in this regard in 2009 (www.psiru.org/reports/2010-02-H-tradelaw.doc).

Negotiation proceedings without publication for the selection of a law firm may be used solely in cases laid down in the provision of S. 58 Act No. 25/2006 Coll. On Public procurement (most likely in lit.  c) and i)8.)), which corresponds also with the European Parliament and Council Directive 2004/18/EC of 31 March 2004, specifically Article 31. Such approach would be legitimate for example in case where the state would have engaged before a law firm that had been previously selected according to the Public procurement Act,  with taking over another dispute (disputes) with identical or analogical merits, but with different claimant,  provided that the value of the new contract would not exceed 50% of the value of the previous contract.

In the future it would be more than desirable for the selection of a legal counsel in

There remains a wide range of contracts that are not or only partially covered by them, such as Contracts below the thresholds for application of the Public Procurement Directives (2);
— Contracts for services listed in Annex II B to Directive 2004/18/EC and in Annex XVII B to Directive
2004/17/EC that exceed the thresholds for application of these Directives.

S. 58, lit. c) contract for supply of goods, execution of construction works or for provision of service, shall be assigned on the ground of an extraordinary incident not caused by the public procurer that the public procurer could not have foreseen and considering the hence occurred time emergency, a public tender, narrower tender or negotiation proceedings with publication cannot be executed; an extraordinary incident shall mean mainly natural catastrophe, accident or a situation immediately threatening life or health of the people or the environment; other related contracts shall then be assigned through public procurement practices with the use of expedited practices, if possible, S. 58, lit. i) supplementary construction works or services not included in the original contract, the necessity of which arose from unforeseeable circumstances and the contract shall be assigned to the original contractor carrying out the original contract and the total value of the construction works or services does no exceed 50% of the value of the original contract, if the supplementary construction works or services are inevitablefor the exercise of the original contract and

1. are not technically or economically severable from the original fulfillment of the contract without such causing the public procurer unreasonable difficulties,

2. are technically or economically severable from the original fulfillment of the contract, but are inevitable for the fulfillment of the original contract,

arbitration proceedings also in the practice to underlie tender proceedings,  whereas the valuation criterion should not be only the price, but also foremost professionalism, expertness, experience and present results in similar disputes. Selection procedure not respecting the basic principles of tender proceedings may lead to inadequately steep fee of the state’s legal counsel, in worse case scenario also to defeat in the arbitration dispute itself and also to increasing non-credibility of our country in the eyes of foreign authorities. Should an arbitration tribunal not award the Slovak republic full remuneration for the legal counsel’s fees on the ground of their inadequateness despite the victory in the dispute, it does not reflect good on the state which’s task is an effective use of resources.

Advocatus Martinková s.r.o
Jana Martinková,