Castellán

These include, on one hand, limitations on the circulation and gathering of people, and on the other, measures aimed at mitigating the social and economic impact of such restrictions. This, logically, accentuated the complex economic situation that our country - largely an importer - was already facing, as a result of restrictive trade measures adopted in other countries already affected by the Coronavirus.

In this sense, the decrease, slowdown, and - in some cases - halt in the production, importation, and commercialization of goods and provision of services due to the pandemic has generated enormous difficulties in the execution of contracts of all kinds, which requires a study of the contractual and regulatory mechanisms - which we will call "defense mechanisms" for these purposes - that allow protecting the party that has been hindered or prevented from fulfilling its obligations due to the aforementioned causes.

Without prejudice to the fact that responsible advice on such a significant contractual aspect in such a unique situation requires a particular study of each specific case, this document aims to outline a series of general and preliminary considerations about the effects of the COVID-19 virus pandemic on those contracts in which one of the parties is a public state agency, taking into account the particularities of its legal regime and the ultimate goal that such contracts pursue: the satisfaction of the public interest.

Where are the mechanisms potentially applicable to public contracts in the face of the COVID-19 pandemic outbreak?

The search for the answer to this question faces an initial difficulty in that, except for rare exceptions (such as the regime of Public-Private Partnership contracts), our current regulations on administrative contracting are abundant in regulating procedural aspects related to the selection of the State's co-contractor, but not regarding the execution of the contract that arises from the award. The same happens with the specific conditions and contracts - which generally replicate the provisions of the conditions - that govern each specific contracting.

In this sense, with respect specifically to contractual execution, both the regulations and the specific conditions and contracts often contain provisions regarding: the possibility of assignment of the contract and/or the credits arising from it; the possibility of subcontracting; the possibility of increase and decrease of the contract's obligations and the sanction regime for contractor breaches. On the contrary, there are usually no provisions regarding the impact of external factors on the normal execution of administrative contracts.

Based on the above, in cases where neither the contract (if there is a written contract) nor the specific conditions applicable to the contracting in question contemplate situations like the one at hand, the applicable regulations specifically to said contracting, the general regulations and principles corresponding to administrative contracting, and in the absence of the aforementioned, the regulations and principles applicable to all contracting must be followed.

What are these defense mechanisms?

Before detailing the mechanisms potentially applicable to public contracts as a result of the Coronavirus pandemic outbreak, it is necessary to specify that the applicability of one or the other will depend on whether the contractor fulfilled its obligations, but in an excessively sacrificial manner, or if it is directly unable to fulfill them temporarily or definitively.

a) compensation to the contractor for damages suffered by fulfilling their contractual obligations

 

The fact that public contracts are a means to satisfy the public interest cannot imply that this is achieved through an irreparable economic sacrifice of the contractor.

In this sense, at a general level and mainly in deferred or continuous execution contracts, the maintenance of the economic-financial balance has been recognized as one of the essential rights that every contractor has against the contracting State entity, regardless of whether it is expressly recognized in the contract. This right consists of preserving the economic-financial situation initially considered by the contractor when formulating their offer - later accepted by the Administration with the award - in the face of certain circumstances external to the parties that occur during the contract's execution and alter the original economic-financial scheme.

Based on this foundation, our courts have adopted a series of theories, among which it is important to highlight for these purposes the so-called “theory of unforeseen circumstances” and “principle of the act of the sovereign”, each of which could be applicable depending on the impact that the COVID-19 virus pandemic has had or may have on the contract.

From the perspective of the first theory, the economic-financial equation of the contract is altered by abnormal material events that, although objectively existed at the time of formulating the offer and the subsequent contract formation, were not foreseen (in their occurrence or magnitude) by the parties. Think of contracts that were signed at the end of 2019, when the COVID-19 virus was just spreading in China, with no foresight at that time that shortly after there would be a pandemic with the consequences it is having.

 

From the perspective of the “principle of the act of the sovereign”, the contract's execution becomes excessively burdensome for the contractor due to a general or particularly directed measure adopted by the Administration (some argue it must be the contracting entity and others claim it can be any state entity) and not foreseen by the parties at the time of contracting. In this sense, some of the measures taken by the Executive Branch within the framework of the national health emergency declared on March 13 could be considered.

 

In the two aforementioned hypotheses, it could be appropriate to compensate the contractor for comprehensive damages suffered by fulfilling their obligations in unforeseen and external circumstances. This compensation could take various forms, depending on the type of contract, as in the case of public works concessions and Public-Private Partnership contracts that provide for that form of compensation, it could consist of an increase in toll rates. A similar solution would be appropriate for public service concessions (for example, public transportation services).

b) justification of non-compliance and exoneration of liability

In cases where the COVID-19 virus pandemic directly or indirectly - through measures taken by the authorities in this regard - temporarily or definitively prevents the contractor from fulfilling their obligations, depending on the specific circumstances, the possibility of considering the pandemic as a "Force Majeure" event could be analyzed.

 

This would mean that the definitive non-compliance or late compliance of the contractor is considered justified, and the contracting state entity should not be compensated for the damages caused, and in the event that the obligation definitively not fulfilled is essential, the contract could be terminated.

Events considered “Force Majeure” are those beyond the control of the contracting parties, not foreseen by them at the time of contracting, and irresistible - inevitable - for the party alleging it.

It has been understood that this mechanism applies even in cases where it has not been expressly provided for in the respective contract.

c) renegotiation of the contract

 

The purpose of satisfying the public interest of the contracts at hand and the principles of preservation of public contracts and maintenance of their economic-financial balance could open the possibility for the same parties that entered into the contract to modify it, seeking to overcome external, supervening, and unforeseen circumstances that jeopardize its continuity. If this mechanism is not accepted, the consequences of the COVID-19 virus pandemic would lead to the termination of many contracts - mainly those with extended terms - with the consequent risk of impairing the state service they serve and the need for a new contracting procedure, with all that entails.
However, it must be borne in mind that this is an exceptional mechanism that must be used with extreme caution, as it involves a modification of contractual conditions that were part of the bases of the contracting procedure, which could lead other participants to consider the equality of bidders violated and make the corresponding claims. In order to avoid this contingency, it is essential to determine as objectively as possible that any of the other bidders, if they had been awarded, would have been equally affected by the new circumstances that require the contractual modification.
The aforementioned principles of preservation of public contracts and maintenance of their economic-financial balance require contract renegotiation without the need for specific regulatory or contractual provisions, although this mechanism is explicitly recognized in the regulation of certain types of contracts, such as Public-Private Partnerships.

Relevant aspects to consider:

 

• Clearly define which obligations are directly and inevitably affected by the pandemic and its consequences and for which the analyzed mechanisms will be mobilized, bearing in mind that this situation cannot be used as an excuse to justify pre-existing breaches or breaches related to other causes.
• Analyze the contract (if any) to search for mechanisms that address situations like the one at hand and how to proceed in such cases.
• In the absence of a contract or the absence of contractual provisions regarding these types of situations, analyze and seek advice on the regulations applicable to the specific object of the contract in question.
• Take all possible measures to avoid or, at least, mitigate the consequences of the pandemic on the contract.
• Notify the contracting state entity, as far in advance as possible, about the possibility of temporary or definitive non-compliance with contractual obligations and maintain open communication about the progress of the situation.
• Document the specific situation on which any of the mechanisms discussed are intended to be mobilized, as well as the measures taken to avoid or mitigate the harmful consequences of the pandemic.

 

Dr. Juan Pablo Díaz

 

Montevideo, March 27, 2020.