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Raw materials supply: more uncertainty for public tenders

| News | Public and Regulatory Law

José Vicente Morote analyses in Expansión the critical situation for public sector contractors due to the damages generated by the pandemic and the new legal storm derived from the increase in the prices of raw materials and energy.

The wounds inflicted on public sector contractors by the damage caused by the pandemic still haven’t healed, and a new legal storm is already brewing due to soaring commodity and energy prices. 

An efficient procurement system should let the concerned parties know, before committing themselves, who is liable for the ups and downs, more likely the longer the period of performance, that may occur during the contract period. But as has recently been highlighted by experts, neither the current law gives a clear answer to the question, nor the case law, which has been acting as a positive legislator correcting where the law seems inadequate, allows unambiguous rules to be extracted. 

Normally, price variation is part of the contractor's risk and the contractor must take it into account when making its bid, and therefore it will be disadvantaged by a higher-than-expected price increase but also benefit in the less likely event of a price decrease. However, the law allows for a different distribution of the risks generated by this cause, by including a price revision clause in the specifications that provides for periodic updating in accordance with indices that take the evolution of the prices of the main components that affect the cost of the service into account. 

Of course, the variation in prices of the essential components of the service when it is due to the market situation does not constitute a cause of force majeure that obliges the Administration to respond for damages, but it does not even meet the requirements that the Law demands for the concessionaire to be able to withdraw from the contract that has become excessively onerous. Consequently, if it were the law, not even resorting to analogy, the contractor would be entitled to be compensated for the unprecidented rise in prices generated by the reactivation of economic activity after the pandemic, and neither could it freely withdraw from the contract.

But this is not what has been proclaimed by some of our courts, which have resorted to the application of several general principles to affirm the contractor's right to be compensated for unforeseeable risk, i.e., for a supervening event outside the parties' conduct which radically modifies the contractual equilibrium and makes the contract excessively onerous or disproportionate for the contractor. 

The fact is that, despite some case law pronouncements which recognise this possibility in the abstract, case law is reluctant to recognise, in general, the unforeseeable nature of increases in the price of raw materials or energy caused by market fluctuations, based on the idea that in a liberalised market, price variations, however strong they may be, must be foreseen by the contractor. This idea still holds today. But, perhaps, the conclusion would be different if the variation in prices, instead of reaching 3.14% of the total contract, which is the percentage of variation that the Supreme Court has considered insufficient to break the equilibrium, were 10% for example. 

The solution of disputes with the application of general principles that have no legal basis generates the problem that it is the courts that create the solutions on a case-by-case basis. Thus, for example, the Supreme Court itself has recognised that the line for separating risk and chance from a breach of equilibrium, in the absence of a legal basis, is determined by "reasonableness", which is an indeterminate concept. It has also established that what is to be understood as unreasonable must be analysed based on the specific circumstances, since the assessment must be made on a case-by-case basis, relating the increase in prices to the total price and the duration of the contract. The consequences of recognising that the economic equilibrium of the contract has been broken are also not fixed, so that all kinds of solutions could be admitted, such as the modification of prices until the initial equilibrium is restored, partial compensation, or even simply the possibility for the contractor to withdraw from the contract without compensation and without penalty. 

In this context of galloping inflation, in the absence of a reaction from the legislator, the courts will once again take on the role of positive legislators and will have to determine, in accordance with the principle of equity, who should bear the cost overruns of inflation. This does not seem reasonable at all. It would be highly advisable for the legislator to clarify in a general and abstract manner the legal regime applicable to this situation to provide legal certainty to the development of the activity of one of the most relevant sectors of our economy.

You can see the article in Expansión

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