Covid-19 and the performance of public contracts

By Henrique Frizzo, partner of the Aerospace and Defense, Energy, Mining, Petrochemical and Infrastructure, Life Sciences, Public Law and Regulation groups at Trench Rossi Watanabe

Compliance with certain contractual obligations have become more costly or unfeasible due to the Covid-19 pandemic. Specifically with respect to contracts executed with the direct and indirect Public Administration, certain delays or non-compliances can result in the following: unilateral termination; imposition of fines; return of amounts due to losses caused to the Public Administration, declaration of unsuitability and temporary suspension to execute contracts with the Public Administration. In addition, the flexibility for negotiations and amendments of public contracts is lower than with private parties.

In view of the foregoing, companies with public contracts in place are advised to analyze and assess:

• risks of delay, excessive burden, or unfeasibility of complying with its obligations before the Public Administration (temporary or permanent).

• possibility of avoiding or preventing the effects of delay or non-compliance with contractual obligations, including with the potential suspension of the contract, when such events are a result of force majeure or a government act (fato do príncipe).

• potential cost increase for the performance of the contract and possibility of requiring the economic-financial rebalance of the contract, allowing the equalization of the financial costs/losses undertaken.

• possibility of requiring the termination of the public contract, without the imposition of any penalty, due to an event of force majeure. This measure is only advised in extreme situations. Since the pandemic is a global crisis, the Public Administration may have difficulties in executing new contracts, which may, therefore, damage the company’s reputation – in particular if the public contracts are related to the provision of essential services to the population.

• in case of a public service concession, the risk matrix. The most recent concession contracts usually recognize as a risk of the Public Administration only the materialization of force majeure events whose effects exceed a specific period of time and that are not covered by insurances contracted by the concessionaire.

Currently there are strong legal arguments to support the recognition of a force majeure event in public contracts, to the extent its effects on the compliance with the obligations undertaken by the contracted party are evidenced. Companies with public contracts in place are advised to immediately assess the potential consequences of the pandemic in the performance of such contracts, as well as to monitor the situation and take the appropriate measure as soon as practicable.