"Waterfall" subcontracting in public procurement: overlapping perspectives in Italy and France
In both Italy and France, the issue of waterfall subcontracting in public procurement is a matter of concern. In the building and public works sector, this practice is on the increase. Everyone recognises that subcontracting is essential to cope with an overload of activity or to carry out extremely specific services. The promotion of local content may also conflict with the EU law principle of non-discrimination. However, there is a risk that responsibilities will be diluted and illegal practices, such as concealed work, will emerge at the end of the chain. The question of whether or not to limit waterfall subcontracting therefore comes up again and again.
1. - A new deal in Italy with the new Public Contracts Code of 2023
In Italy, paragraph 19 of article 105 of the former 2016 code (Code 50/2016) provided that the services entrusted to a subcontractor could not be performed by lower-ranking subcontractors. However, this rule did not comply with the principle of free recourse to subcontracting enshrined in EU law. The "public procurement" directives of 26 February 2014 allow economic operators to make use, for a given public contract, of the capabilities of other entities, regardless of the legal nature of the links that unite them (art. 63 of Directive 2014/24/EU).
A new balance has been struck between free recourse to subcontracting and control by the public purchaser thanks to the new Public Contracts Code (Code 36/2023), which was instituted by Decree-Law no. 36 of 31 March 2023. This prohibition has been abolished in the new code.
However, this is not a total liberalisation of waterfall subcontracting. The contracting authority may introduce some limits, under the conditions set out in paragraph 17 of article 119 of the new Code. The contracting authority must indicate in the tender documents the services or works which, although subcontracted, may not be the subject of additional subcontracting. The limitation decided by the contracting authority must be justified by the characteristics of the contract and the need to reinforce the control of the activities of the site or more generally of the workplaces, to protect more intensively the working conditions, health or safety of the workers, or to prevent the risks of criminal infiltration; as per the applicable provisions of law, the above mention need to control, protect and prevent disappears if the subcontractor, which satisfies certain specific requirements as to prevent criminal infiltration, is listed in specific registers held by the relevant public authorities.
2. - As in Italy, French lawmakers have chosen to control the subcontracting chain rather than prohibit it
The 2018 French Public Procurement Code, which came into force on 1th April 2019, enshrines the right to use subcontracting and specifies that these provisions are of public order (article L. 2193-3). The French legislator has taken into account both the 2014 EU Directive and the constitutional requirements of entrepreneurial freedom and freedom of trade and industry.
The French Code however allows the purchaser to control the subcontracting chain.
First, the contracting authority has the option of requiring essential tasks to be carried out by the contractor, where subcontracting is likely to be detrimental to the proper performance of the contract. The purchaser must clearly indicate in the tender documents the essential tasks that may not be subcontracted (article L. 2193-3).
Secondly, all operators, whatever their rank in the subcontracting chain, who intend to use subcontracting must declare the subcontractor to the contracting authority, obtain its acceptance and approval of the terms of payment (article L. 2193-4).
This system enables the contracting authority to ensure that, throughout the subcontracting chain, no company is in a situation where it is prohibited from bidding because it has breached its social or tax obligations, or because it has been sanctioned for concealed work, or that the subcontractor's remuneration does not appear abnormally low in relation to the subcontracted services.
The purchaser also has the option of requesting that the subcontracting contract be disclosed (art. L. 2193-7).
3. - Parallel development of French and Italian law on subcontracting
The recent development of subcontracting law in Italy and France is a good example of the convergence encouraged by EU law. Although each legal system has its own specific issues, there are shared principles. French and Italian legislators have chosen to provide buyers with information and control tools, which appear to be more effective than outright bans. It will be interesting to see how the Italian courts apply this new legislation, and whether they tend to restrict the use of subcontracting as much as possible or, on the contrary, seek to open up the use of contracts to as many companies as possible.
This article was co-written by members of the Italian and French Real Estate teams – Bruno Richard, Tristan Annoot and Ivan El Knizi.
