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Experts in public procurement ask the Administrations to expedite payments of pending debts to provide liquidity to companies

| News | Public and Regulatory Law

José Vicente Morote analyses public procurement in view of the state of alert generated by the coronavirus crisis

What is the main effect of the state of alert and containment measures affecting public contracts?

The declaration of the state of alert has a clear impact on public sector contracts, which has materialised in the recent RDL 8/2020, in which article 34 enables a whole range of measures to guarantee one of the ratios of the rule, that is, "to support the continuity of the productive activity". This has had an impact, for example and among other measures, on the possibility for the contractor to insist on the suspension or extension of the deadline for contracts whose performance becomes impossible as a result of COVID-19. I believe that we will have to be extremely vigilant with regard to the successive measures adopted in this field since it is foreseeable that, as in Italy - where all public works have been suspended ex lege - the impact of the state of alert and the containment measures on public contracts may be even greater in the following weeks.

In what way can RD law 8/2020 help to ensure that there is less damage in such contracts at this time, and what measures will be put in place?

RDL 8/2020 focuses on "protecting and supporting the Spanish production system" and, in our sphere, aims to reduce the economic impact that the COVID-19 may have on government contractors. For them, and although not without contradiction - the norm has already been the subject of various interpretative notes by the State Attorneys - RDL 8/2020 has fundamentally established (i) a specific regime for the suspension of contracts whose execution becomes impossible as a result of the COVID-19; (ii) a mechanism for compensation for damages that the contractor has suffered as a result of the period in which its contract has been suspended; and (iii) the possibility of extending the period of execution of certain contracts - or their extensions - when, as the contractor, it falls behind in meeting the deadlines initially set as a result of the COVID-19. It advocates, as we said, to guarantee business viability, preventing the widespread termination of public contracts by public sector entities.

What types of contracts are currently suspended? No contract is automatically suspended. Although the suspension regime contained in RDL 8/2020 is applicable both to service and supply contracts for successive services -not to single-tract contracts- and to works contracts, the suspension does not operate automatically. This is precisely how State Legal Service Report, dated 19 March, has interpreted it, which has stated that

"[...] notwithstanding the wording of the first paragraph, the suspension shall be granted by the contracting authority when it finds it impossible to carry out the contract, always at the request of the contractor, who must justify the circumstances set out in Article 34.1, paragraph 7. Once the suspension has been agreed, its effects will be automatic and will go back to the moment when the factual situation that gave rise to it occurred".

Therefore, the suspension is by no means automatic. To access it, the contractor must expressly request it from the contracting body, which will have five calendar days from the presentation of this request - it remains to be seen how this temporary requirement will be combined in practice with the generalised suspension of deadlines that includes RD 463/2020, for the declaration of the state of alert - to assess the impossibility of executing the contract. Once this period has elapsed without notification of an express resolution, the contractor's request will be understood to have been rejected and, therefore, the contract should continue to be executed.

What other service and supply contracts are being extended?

The extension of the periods of execution of administrative contracts is a measure that, in itself, is already provided for in Law 9/2017 of 8 November on Public Sector Contracts, article 195.2, and which, in principle, could be applied to any administrative contract, regardless of the provisions of RDL 8/2020. However, in the latter regulation, RDL 8/2020, the extension of deadlines is limited to single-tract service and supply contracts only,

i.e. those whose services are performed in a single act, such as a one-off acquisition of property by the government. It should also be noted that this extension - for a period of time that will be at least equal to the time that would have been lost as a result of the health crisis caused by the COVID-19 - does not operate automatically either; in accordance with RDL 8/2020, it requires prior request by the contractor.

What could the status of construction contracts be?

In accordance with the provisions of RDL 8/2020, the situation of construction contracts is substantially like that of service and supply contracts for the provision of services or successive contracts referred to above. For these, works contracts, a system of suspension is provided for, which is identical to that of service and supply contracts for successive services; a system which, I repeat, does not operate automatically and which can only be used for contracts which, as stated in RDL 8/2020, have not lost their legitimate purpose as a result of COVID-19 and whose execution is impossible, which will require an individual analysis of each contract and, in particular, of whether it is possible to execute it in the current state of affairs. This situation will undoubtedly worsen in the future in relation to building contractors, when public works are generally stopped and will affect building contracts severely. We will have to be at the new crisis regulation to see what additional measures are taken in relation to building companies and their workers.

What kind of compensation can the contractor claim in this context?

Before answering this question, it should be made clear that the mechanism for compensation for damages established by RDL 8/2020 introduces a considerable nuance into the principle of risk and chance inherent in any administrative contract, so that, in principle, only when the contracting authority finds that the contract cannot be executed and, therefore, the contractual obligations are suspended, may the contractor make a claim:

  • a) The salary costs paid by the contractor to the staff assigned to the execution of the contracted work, service or supply, during the period of suspension of the contract.
  • b) The costs of maintaining the final guarantee, corresponding to the period of suspension of the contract.
  • c) The costs of renting or maintaining the machinery, installations and equipment assigned to the contract, during the period of contract suspension, provided that it is demonstrated that such means could not be used for purposes other than the execution of the suspended contract and that the amount thereof is less than the cost of terminating such contracts for the rental or maintenance of machinery, installations, etc.
  • d) Costs relating to insurance policies which, according to the specifications, must be taken out.

I should point out that this is a list of numerus clausus of damages that can be claimed and that these must be reliably accredited in the application made by the contractor; the Administration is empowered, under RDL 8/2020, to carry out the necessary checks to verify the reliability of the damages claimed.

We understand that, regardless of this specific regulation, there are other mechanisms that must be applied, fundamentally the economic rebalancing of the contract and other measures that will be implemented by the Government of the Nation.

Do you think that this standard may be supplemented in the future with other regulations?

In our view, given that the situation is going to get worse, we expect additional measures to be taken in relation to public contracts, the wording of which will depend on how the situation develops, which appears to be significantly worsened by the government's initial delay in adopting the necessary measures that are known and applied in other countries in our geographical area, such as Italy. Furthermore, RDL 8/2020 has been enacted in a situation of extraordinary urgency, which has not allowed for a refinement of the provisions it contains, some of which entail certain significant contradictions, which will certainly have to be interpreted and complemented.

What issues currently remain outstanding?

Faced with a situation that evolves daily, we cannot know what all the necessary measures will be between now and the end of the crisis, in any area, and public procurement is no exception.  It will be very important that the measures taken protect contractors so that they can protect their employees. It would be absurd to end up giving aid to unemployment and, in turn, to force contractors to lay workers off with harsh measures in relation to them. It should be an absolute priority, at this time, for public authorities, for example, to settle all outstanding debts to contractors, in order to provide them with the necessary liquidity. This could be a very timely measure. Another measure could be to modify the regulation of the economic rebalancing of contracts to make it more flexible and to allow extensions of terms with the suppression of fees and leasing grants during the term of the extension, etc.

What advice do you offer to companies that have signed a public contract and have been paralysed? Will they be entitled to any compensation?

Above all, we must call for peace of mind and let all those companies know that, in principle, contracts are not suspended. They must continue to be implemented, for the time being, with all the necessary health and safety measures at work. This must, of course, be complied with. Our main recommendation would be that, in any case, with the utmost rigour, they should account for the expenses associated with each contract, compiling each and every one of the supporting documents for such expenses, in order, if necessary, to be able to document and speed up the claim for any damages they may have suffered.

You can see the article in Confilegal.

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