Fair-trade coffee and tea under the procurement directive

Can public authorities procure fair trade products, or are they debarred from specifically referring to the fair trade qualities of those products under the public procurement directive (directive 2004/18/EC)? This is one of the issues underlying the judgment of the Court in Case C-368/10 Commission v. Netherlands.

In 2008, the Dutch province of North Holland announced in a tendering procedure that it wished to procure coffee machines and the products necessary to make them function (coffee, tea, sugar, milk, cups). It required that those products to be delivered to bear the Max Havelaar label, a private label that adheres to the rules of the Fairtrade Labelling Organisation. Considering that this tender was contrary to the public procurement directive (2004/18/EC) the Commission started an infringement procedure against the Netherlands.

Obviously, specifically requiring products to bear only that label is contrary to EU public procurement law, as it is way too over specific and does not allow for any form of competition for the contract. However, the Court made – for the first time – some interesting points on procuring fair trade products in general.

The two points I will discuss are:

  • Fair trade requirements to products cannot be part of technical specifications but are conditions relating to the performance of the contract;
  •  Fair trade criteria can be used as award criteria for public supply contracts.

Technical specifications or contract performance conditions?

 The first interesting point in this judgment is that the Court does not consider the requirement that products need to be of fair trade origin a technical specification but rather a contract performance condition under article 26 of the directive. In an earlier post I already criticized the position of the Advocate General in this matter. The Court’s reasoning follows that of the Advocate General, although I think the Court’s reasoning is a bit clearer:

 73      As stated in paragraph 37 above, the MAX HAVELAAR label describes products of fair trade origin purchased at a price and under conditions more favourable than those determined by market forces from organisations made up of small-scale producers in developing countries. According to the file, that label is based on four criteria, that is to say: the price must cover all the costs; it must contain a supplementary premium compared to the market price; production must be subject to pre-financing and the importer must have long-term trading relationships with the producers.

74      Such criteria do not correspond to the definition of the concept of technical specification in paragraph 1(b) of Annex VI to Directive 2004/18, given that that definition applies exclusively to the characteristics of the products themselves, their manufacture, packaging or use, and not to the conditions under which the supplier acquired them from the manufacturer.

75      By contrast, compliance with those criteria does fall under the concept of ‘conditions for performance of contracts’ within the meaning of Article 26 of that directive.

76      Pursuant to the article, the conditions governing the performance of a contract may, in particular, refer to social considerations. Thus, to require that the tea and coffee to be supplied must come from small-scale producers in developing countries, subject to trading conditions favourable to them, falls within those considerations. Accordingly, the lawfulness of such a requirement must be examined in the light of the aforesaid Article 26.

 The Court thus distinguishes fair trade products from, say, green electricity by arguing that the latter relate to the manufacture and the former to the conditions under which the supplier acquired them from the manufacturer. Practically speaking, there might not be too much difference as to whether fair trade requirements are conditions relating to the performance of the contract or technical specifications, as it is still possible for public authorities to make such requirements. However, more principally, the Court is defining the characteristics of products (or in procurement language their ‘technical specifications’) pretty narrowly (at least in procurement procedures). Not only does this interpretation run into arbitrary  distinctions –  what to do with halal and kosher meat, green electricity, or products with  high animal welfare standards – it also seems counterintuitive. Millions of consumers buy fair trade products exactly because of their fair trade characteristics. Qualities relating to the production stage of products (including fair trade conditions!) are the subject of variety of economic literature where those characteristics are referred to as ‘process attributes’, ‘credence attributes’ or ‘Potemkin attributes’ based on Nobel prize winning research by George Akerloff, Stiglitz and Spence on information asymmetries.

 Award criteria

 Secondly, and this is perhaps the most important point of the judgment, the Court does allow the fair trade character of a product to be part of the award criteria for the contract. The fair trade origin of the product thus relates to the subject matter of the contract. Interestingly, the Court here refers to EVN Wienstrom and uses green electricity as an analogy for its reasoning, whereas earlier on it had distinguished fair trade products from environmentally friendly products:

 91      (…) as is apparent from point 110 of the Advocate General’s Opinion, there is no requirement that an award criterion relates to an intrinsic characteristic of a product, that is to say something which forms part of the material substance thereof. The Court held thus, in paragraph 34 of EVN and Wienstrom, that European Union legislation on public procurement does not preclude, in the context of a contract for the supply of electricity, a contracting authority from applying an award criterion requiring that the electricity supplied be produced from renewable energy sources. There is therefore nothing, in principle, to preclude such a criterion from referring to the fact that the product concerned was of fair trade origin.

 This is an important clarification on the scope of article 53 of the directive. It is now clear that public authorities can use fair trade criteria as criteria to award public supply contracts of products. However, it seems to me that the Court is somewhat contradicting itself by first distinguishing products produced in an environmentally friendly way from fair trade products under technical specifications only to assimilate them once again under award criteria.