Contractual relations between governments and the private sector are usually dictated by a strict set of rules and regulations, that are set in place as an assurance that the public interest is protected and that the public procedures are transparent and subject to the necessary advertising and competitive tendering requirements. In this context, the exceptional public health situation we are living in represents a true game changer, posing challenges to the existing legal frameworks and imposing upon governments the task to quickly adapt the regulatory system to provide answers to the ever evolving pandemic situation.
Therefore, and generally speaking, governments were quick to issue regulation on exceptional public procurement frameworks, mostly intended to simplify and therefore accelerate public procurement procedures required to respond to the SARS-CoV-2 or coronavirus epidemic, as a necessary measure to protect health and human life. This effort includes even supranational entities, like the European Commission, that on April 1 2020 publish welcome guidance clarifying the application of the public procurement framework during the pandemic.
Under the broad scope of the prevention, containment, mitigation and treatment of the epidemic, public procurement exceptional procedures were adopted in conjunction with several other measures that included quarantine measures, limitation to travel, circulation, and social gatherings or the mandatory closure of existing establishments.
The issue at hand relates to the execution of ongoing public contracts, that was not addressed by the exceptional legal framework, but was affected or prevented by the current exceptional circumstances, namely but not limited to, by measures issued by the governments to respond to the pandemic.
Therefore, the current analysis is especially relevant in jurisdictions like Macau or Portugal, in which the legislative authority did not set a specific legal framework to regulate the performance of non-coronavirus-related public contracts during this crisis period, as well as its more long-lasting impacts.
The question we are facing is, to what legal constructions can the parties of public agreements resort, when confronted with an event that disturbs the performance of such agreement, and that is rooted, in any way, in the vicissitudes deriving from the extraordinary the measures undertaken by the government? We believe the main issues in this field relate to the potential modification, suspension of performance or termination of the agreements, as a result of such events.
In order to address the situation, we need to begin by analysing the nature of the event the parties face, namely to determine if the current pandemic – with all the measures and limitation imposed by the governments to counter it, can be deemed as a force majeure event.
It is broadly accepted that an event of force majeure is composed by a number of cumulative elements – it is an unforeseeable (on the day the contract is concluded), irresistible (both in its occurrence – unavoidable and in its effects – insurmountable) and external (to the parties) event.
It is not our intention to advocate that the mere existence of the virus could constitute an event force majeure. However, we believe that the current pandemic, combined with the administrative decisions implemented by the different jurisdictions to avoid its propagation, have indeed affected the daily lives of companies and citizens, and have likewise significantly hindered the world´s economy and the financial systems. Therefore, due to the exceptional – and thus unforeseeable, and imperative – nature of the different elements that compose the existing situation, we can indeed establish the occurrence of a force majeure event.
Following this conclusion, in the event we are faced with a breach of the contract by private contractor due to the impossibility of performance of the contract, the next step is to determine whether or not the event is causing the performance of the contract to be temporarily or definitively impossible, including situations of full or partial. As a general rule, in order to demonstrate that the full or partial non-performance is caused by the force majeure event, a causal link should exist between the failure to perform and the overall measures adopted in response to the epidemic and that hinder the performance of the contract.
In case the private contractor is able to prove the existence of the above mention link between the force majeure event and the default, it is exonerated from any potential liability deriving out of the non-perform of the relevant obligation.
Furthermore and, faced with a temporary impossibility to perform the contract, the suspension of performance of the contractual provisions may be agreed. In this event, the performance of the contract should be resumed as soon as the grounds for suspension terminate and typically the new deadline for the performance of the defaulted obligation should not be superior to the period initially agreed for the performance of such obligation added by any preparatory works necessary for the performance.
In line with what has been said about the measures undertaken by different jurisdictions to respond to the pandemic, we can however, identify situations whereby either by a unilateral decision of the governmental authority, such as the mandatory closure of existing establishments or, by an external an unpredictable event related to the current crisis, the performance of the agreement under the exceptional situation may cause an unexpected and significant increase in costs that the private contractor is required to bear, therefore increasing the burden of the execution of the agreement to this party. In these situations the equitable modification of the contract may be in order, as a means to restore the financial balance of the agreement.
The decision to modify a public agreement generally has three potential causes: an agreement between the parties, a judicial or arbitration decision, or by decision of the public contractor, in this case by reasons related to the public interest.
Moreover, and unlike private contracts, the fundamental principle that guides all procedures regarding public agreements is the pursuance of public interest: the whole regime imposing different procedures in procurement of different goods or services aims to assure the compliance and preservation of the public interest. Furthermore, the principle of competition constitutes an important guideline in the entire legal regime: as a general rule, the public administration has to adopt open tender as to better guarantee fairness as well as the better pursue of public interest. Therefore, any amendment to a public agreement must comply with severe guidelines; otherwise it may jeopardise the aforementioned principle.
Nevertheless, it is undeniable that part of the recognition of the mandatory force of a contract does not result exclusively from the will of the parties nor does it concern only the linked individuals. In fact, the legal value of contracts arises from the law and is conferred deriving out of their social utility, thus the agreement cannot dissociate itself from the general conditions in which it is celebrated and executed. Therefore, in the event there is an alteration on the circumstances of the agreement in such a manner the base of justice the parties agreed upon to execute the agreement is affected, the applicable legal regimen must intervene.
Subsequently, the validity of any modification of a public agreement must comply with both general principles, relating to the specific legal structure of the public agreement and specific requisites that concern the situation in casu.
Regarding the general principle, we must conciliate a double dimension: on the one hand, the principles of commutative justice and good faith, which must govern any contractual relationship; on the other it is also justified in the light of specific principles of administrative law, such as the principle of continuity of public services.
The key element for determining the possibility to modify a public agreement is not the subjective element linked to the common intention of the parties, but rather an objective element of commutative justice and contractual good faith, which constitutes the raison d'être of the legal mandatory force of any contract.
Furthermore, and to what concerns another dimension of the public interest, the possibility of modification serves an additional purpose: the purpose of the public contracts, i.e., the need for the agreements to be performed in a continuous and regular manner and in the most adequate way to satisfy the general interest. The amendment of the agreement must, therefore, serve the principle of pursuance of public interest – translated into the requirement for regular and continuous functioning of public services and the fulfilling of the collective needs.
In the event the modification of the agreement is duly substantiated by reasons of public interest, we must then verify the specific framework of the situation to ensure that it complies with the requisites for the modification of the agreement. Firstly, it must be determined if the event derives from the occurrence of an unforeseeable circumstance on the date of the conclusion of the contract, which determines an additional burden to be undertaken by private contractor to perform the agreement. Secondly, the event must be extraordinary in a matter that, as the French put it, causes a bouleversement du contrat, this is to say, profound disruption of the contractual economy.
Another element that must be weighed to determine whether the performance of the benefits has become or not excessively burdensome for the private contractor is that of the event does not fall under normal business risk, taking into account the type of contract (v.g., longer agreement are, in thesis, more subject to new circumstances), and any special conditions the parties have agreed to include in the agreement. Finally, the contract must still be susceptible of performance, i.e., the contract cannot have been rendered impossible to be performed.
Taking into account all of the above, regarding the conditions for the valid modification of public agreements in force previously to the pandemic, that have seen the balance of their respective obligations affected, we believe the current situation, previously qualified as an event of forcemajeure, may also be considered as the grounds for their modification. In this event, the private contractor must proceed with the performance of the contract and, concomitantly, the public contractor has an obligation to assist the co-contractor with the difficulties that such compliance presumes.
Regarding the public contractor´s duty to assist the contractor, it can take two forms: a readjustment of the contract, taking into account the economic difficulties affecting its performance, namely by means of an extension of a deadline for the compliance of the relevant obligations, an extension of the agreement itself, or a review of contract prices, or consist of the payment of a compensatory compensation for the excessive cost of compliance with the performance of the agreement.
Regarding the determination of the quantum of the applicable measure, first we must determine the exact moment from which the contractor is entitled to demand this compensation and then observe the specific characteristics of the event. As an example, and considering that the extension of public contract could be served as one of the possible ways to reestablish the economical-financial equilibrium of a specific agreement, there could be different approaches contingent to the specific situation. However, we believe two principles shall orientate this decision. On a positive stipulation, the measure shall allow for the necessary time for the private contractor to restore the financial proportion on which the contract was initially based; on a negative limit the restoring the financial balance of the agreement cannot place any of the parties in a more favorable situation than that resulting from the financial balance initially established.
To conclude, we are indeed undergoing extraordinary times. However the legal framework we have been analysing is designed to deal with situations that exceed the limit of what should be considered proportional and balanced in a contractual relationship. They are effectively composed by strict requirements, as they should be, and naturally contingent to the specifics of the situations, we believe there are legal grounds to effective subsume these legal concepts to public contracts affected by events related to the coronavirus pandemic.
Inês Costa Moura, Valéria Wong and João Nuno Riquito
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