Royal Decree-law 8/2020, of 17 March, on extraordinary measures to tackle the economic and social impact of COVID-19 (“RDL 8/2020”), amended, among others, by Royal Decree-law 11/2020, of 31 March, which adopts additional urgent social and economic measures to tackle COVID-19 (“RDL 11/2020”), established a series of measures with a considerable impact on public procurement with the aim of mitigating the serious disruption to companies and workers caused by the numerous measures adopted to contain the COVID-19 pandemic.
What does article 34.4 establish with regard to concession contracts for works and services in the context of COVID-19: possibility of restoring the financial balance of the concession if it is impossible to perform the works or services
Scope of application: which concessions can request rebalancing pursuant to article 34.4?
- The LCSP; or
- Legislative Royal Decree 3/2011, of 14 November, which approves the recast Public Procurement Law (“RDLeg 3/2011”); or
- Law 31/2007, of 30 October, on procurement procedures in the water, energy, transport and postal sectors (“Law 31/2007”); or
- Book I of Royal Decree-law 3/2020, of 4 February, on urgent measures to include in Spanish legislation several directives of the European Union in matters of public procurement in certain sectors; private insurance; pensions schemes and funds; tax and tax litigation (“RDL 3/2020”); or
- Law 24/2011, of 1 August, on public procurement in the defence and security sectors (“Law 24/2011”).
Which requirements must be met to request rebalancing? Impossibility of performing the contract
Article 34.4 establishes that rebalancing “will only apply when the procuring authority has, at the contractor’s request, determined that performance of the contract is impossible as a result of the situation described in the first paragraph.”
- “A contract is not impossible to perform if the motorway continues to be in a condition to remain open to traffic and this is legally permitted.” And that:
- “The fall in the number of vehicles on the motorway and the concessionaire’s resulting fall in income do not trigger an entitlement to rebalancing of the concession in accordance with RDL 8/2020.”
What events must have taken place for a contract to be ‘impossible to perform’?
Which items are subject to compensation?
However, it does expressly establish two items that must be compensated “in any event”:
- Loss of income;
- Any increase in costs borne, which may include potential additional salary costs paid, during the situation caused by the COVID-19 outbreak compared to those that would normally be incurred in the ordinary performance of the concession contract for works or services. RDL 11/2020 has clarified that salary costs include the those related to the relevant Social Security contributions.
It should not be forgotten that compensation would only be awarded if the contractor submits an application and provides proof of those expenses and the amount thereof.
What compensatory measures have been established for concessionaires? Extension of the term of the concession or amendment of economic clauses
Article 34.4 does not include any new provisions to those already in place in general regulations applicable to public procurement; it establishes that a concession will be rebalanced by adopting either of two measures:
- Extending the initial term of the contract by up to 15%;
- Modifying the economic and financial clauses of the contract.
What procedure must be followed to request rebalancing?
- It must indicate that it is impossible to perform the contract;
- It must also provide evidence of the expenses effectively incurred in the form of increased costs borne and the loss of income resulting from the COVID-19 outbreak.
For how long will the measures apply?
Would it be possible to rebalance a concession connected to COVID-19 outside the scope of article 34.4 RDL 8/2020?
“It is considered that the reduction of vehicles and income would not amount to ‘force majeure’, an ‘unpredictable situation’ or a ‘factum principis (‘actions by the procuring authority, given that they are mandatory for the concessionaire, will directly trigger a substantial breakage of the financial balance of the contract) for the purpose, respectively, of justifying a rebalancing of the works contract on the basis of the general provisions applicable to the concession contract (eg, current article 270.2 LCSP). This is justified for the following reasons:
- Because article 34 RDL 8/2020 rules out the possibility of the situation caused by COVID-19 being treated, from a public procurement perspective, as an event of force majeure; the COVID-19 situation is not classified as force majeure in that article and it expressly establishes that the articles in public procurement legislation in relation to force majeure do not apply.
- Because of the preferential application of article 34 RDL 8/2020 to all contractual impacts from COVID-19, it does not allow for the renegotiation of concession contracts by applying the general rules for rebalancing concessions, which would have outcomes that are different to suspension and compensation as provided by article 34 RDL 8/2020.”
Would it be possible to pause the concession contract?
The above is without prejudice to the provision in final paragraph of article 34.6 RDL 8/2020, which points out that “The regime contained in this article is understood without prejudice to the measures that may be adopted by the Minister of Transport, Mobility and Urban Agenda, in their capacity as the competent authority designated by article 4 of Royal Decree 463/2020, of 14 March, which declares the state of emergency to tackle the health emergency caused by COVID-19, to guarantee the services necessary to protect people, goods and places. Those measures may, among other things, entail a change to the cases in which it is possible to pause contracts”.
- Article 34 provides one specific event where rebalancing is possible: it states that the concessionaire shall be entitled to the restoration of the financial balance of the concession if it is impossible to perform public works and services concession contracts as a result of the situation created by the COVID-19 pandemic and the measures adopted by the different authorities to tackle it.
- Under article 34, not all contracts are eligible for rebalancing; only those that, according to their terms and conditions, are subject to: LCSP; or RDLeg 3/2011; or Law 31/2007; or Book I of RDL 3/2020; or Law 24/2011.
- In other words, according to the literal wording of the provision, the public contracts governed by contractual regulations other than those indicated – for example, those tendered and awarded under Ley 30/2007 or RDLeg 2/2000 – are excluded.
- What is to be understood by “impossible to perform” a contract? It would seem to refer to a complete inability to perform a contract (ie, a contract that has become completely impossible to perform). That is the interpretation of the State Attorney’s Office.
- Would it be possible to rebalance a concession in connection with the COVID-19 pandemic outside the scope of article 34.4 RDL 8/2020? Can it be classified as force majeure? From the wording of article 34 overall, it would seem that the situation caused by the COVID-19 outbreak does not constitute force majeure for the purpose of public procurement; it is given a different treatment. Furthermore, that has been the interpretation of the State Attorney’s Office, which has pointed out that, pursuant to general public procurement regulations, rebalancing would not apply on the grounds of the situation and provisions connected to COVID-19.
- That said, although the State Attorney’s Office is clear on this subject, it would be necessary to look at the long-term impacts of the COVID-19 crisis and ascertain case-by-case if the change of circumstances and impact on contractors could justify applying for rebalancing as provided by LCSP.
- Article 34 generates a number of question marks as to its interpretation. These will have to be analysed case by case and be resolved according to the decisions delivered by the public authorities and, ultimately, the courts.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021