50 years later ... the direct effect of non-implemented Directives is far from outdated

“Although the Court has recently commemorated the fiftieth anniversary of its emblematic judgment in van Gend & Loos, the discussions relating to the consequences of recognising the direct effect of EU law are far from closed. (...) in particular with regard to the scope of the direct effect of directives.”, so wrote Advocate-general Wahl in the introduction to its Opinion in Case C-425/12 – Portgás – Sociedade de Produção e Distribuição de Gás, SA contra Ministério da Agricultura, do Mar, do Ambiente e do Ordenamento do Território, which is the subject matter of this article.

It is well established that whenever the provisions of a directive can be regarded as unconditional and sufficiently precise, they may be relied on before the national courts by individuals against the State where the latter has failed to timely implement the directive in domestic law, or has failed to do so correctly (this is the so-called “vertical” and “upwards” direct effect). Conversely, the State cannot rely on the provisions of a Directive against an individual, thereby benefiting from its own failure in to implementing it (“downwards” or “inverted” vertical effect). Pursuant to the established case-law of the Court, a non-implemented directive cannot result, in and of itself, in obligations being imposed upon individuals.

What happens, though, when a state authority intends to rely on the provisions of a directive against a private company which is, at the same time the exclusive holder of a public service concession? Will this be still a case of “downwards” vertical effect prohibited under the existing case-law? And is it of relevance for the case that the company in question is a “contracting entity” within the personal scope of application of the Directive?

The Court was called upon to assess in Case C-425/12, which concerned a preliminary ruling requested in the context of a national dispute around the validity of a decision ordering the return of a financial support granted to Portgás on the grounds that the latter had failed to comply with the rules on public procurement contained in Directive 93/38/EEC of 14 June 1993 on the coordination of procurement procedures of entities operating in the water, energy, transport and telecommunications sectors, as amended by Directive 98/4/EC of the European Parliament and of the Council of 16 February 1998 (‘Directive 93/38’).

Those directives should have been implemented by the Portuguese State no later than 1.01.1998 (as for the initial version of Directive 93/38/CEE) and 16.02.2000 (as for subsequent changes). However, the Portuguese implementing legislation was only adopted in August 2001 and entered in force on December that same year.

In July 2001 and therefore, after the deadline for implementation has expired but before the entering in force of the implementing legislation, Portgás entered into a contract for the supply of gas meters, without however complying with the public procurement procedure imposed by the directive. Portgás argued it was only bound by existing national legislation and that the Portuguese State could not have relied, against Portgás, on compliance with the provisions of a directive, which had not yet been implemented and which was therefore unable to produce a direct effect in relation to Portgás, according to the established case-law.

The Portuguese State contended that Directive 93/38/EEC is addressed not only to the Member States but also to all contracting entities covered by its scope of application and that Portgás, in its capacity as the holder of the only public service concession in the area covered by the concession, was subject to the obligations arising from that directive, even without implementation.

Given the interpretation doubts raised the national judge decided to refer to the Court, for a preliminary ruling, the question of whether the provisions of Directive 93/38/EEC and the general principles of UE law can be interpreted as creating obligations for private persons who hold public service concessions (in particular entities covered by scope of application of Directive 93/38/EEC) where that directive has not been implemented into national law by the Portuguese State, so that failure to comply may be invoked against the concession-holder by the Portuguese State (through acts attributable to one of its Ministries)?

In its assessment, the Court first dealt with the question of whether Portgás could be considered as part of that set of entities against which the rules of a non-implemented Directive may, as a rule be relied on (or, in other words, whether Portgás could be included, to that effect, in the – broad – notion of State).

In opposition to the argument used by the Portuguese state, the Court clarified that a reply to this question is not dependent upon the fact that Portgás is within the scope of application of the Directive: “ (...) the mere fact that a private undertaking which is the exclusive holder of a public service concession is among the entities expressly referred to as constituting the group of persons covered by Directive 93/38 does not mean that the provisions of that directive may be relied on against that undertaking.”

On the contrary, a reply to this question will depend ultimately on whether or not such entity carries out a public service under the control of a public authority and benefits, to that effect, of special powers beyond those which result from the normal rules applicable in relations between individuals.

Although expressly stating that this assessment should be carried out by referring court, the Court left, in this judgment, some relevant indications for the solution of the specific case at hand, for example, in relation to the notion of “special powers”: the Court states that the fact that the undertaking enjoyed, pursuant to the concession contract, special and exclusive rights, that does not mean, that it had such special powers; also that a finding of “special powers” cannot be derived solely from the fact that Portgás is entitled to request that the expropriations necessary for the establishment and operation of the infrastructures be carried out, without, however, being able itself to do so.

Secondly, the Court assessed whether the provisions of Directive 93/38/EEC could also be relied on by the Portuguese authorities against an entity that which features amongst the entities against which, the provisions of Directive 93/38/EEC may be relied on.

The Court began by recalling the binding obligation of Member States to adopt all measures necessary to achieve the result prescribed by a directive and that such obligation is binding on all the authorities of the Member States (including bodies which, under the control of those authorities, have been given responsibility for a public-interest service and which have, for that purpose, special powers).

The Court further considered it would be contradictory to rule that State authorities and bodies satisfying the conditions set out above are required to apply Directive 93/38/EEC, while denying those authorities the possibility to ensure compliance with the provisions of such directive by a body satisfying those conditions. Also, failure by such bodies to ensure compliance with the provisions of the directive would – in the Court’s opinion – allow the Member State to take advantage of its own failure to comply with EU law.

In addition, such a solution would give rise to a non-uniform application of Directive 93/38/EEC in the domestic legal system of the Member State concerned because whether or not a contracting entity would be required to comply with the provisions of Directive 93/38/ EEC would depend on the nature of the persons or bodies relying on the directive.

As a result of the above, the Court concluded that a private undertaking, which has been given responsibility, pursuant to a measure adopted by the State, for providing, under the control of the State, a public-interest service and which has, for that purpose, special powers going beyond those which result from the normal rules applicable in relations between individuals, is obliged to comply with the provisions of Directive 93/38/EEC and the authorities of a Member State may therefore rely on those provisions against it.

Final comment

This ruling brings about important clarifications as to scope and reach of the obligations of the different entities involved and its relevance exceeds the particulars of the case at hand. Indeed, the Court reiterated the limits of the so-called “downwards” (vertical) direct effect by making it clear that no exemptions apply due to the fact that the individual/company at stake is within the (personal) scope of application of the Directive. In addition, the ruling of the Court makes it clear that an entity caught within the broad notion of “State” to this effect must comply with the provisions of a non-implemented directed regardless of who is relying on such provisions. At the same time, however, it is clear that whether or not the entity at stake is caught by said notion depends upon proof that requirements of state control and special powers are met in the case, a proof which – in light of the Court’s reasoning in that regard - seems to be open to a demanding scrutiny.