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COVID-19 PRESSURE POINTS: The impact of Royal Decree-law 8/2020 and Royal Decree-law 11/2020 on concession contracts for works and services

16 April 2020 | Madrid
Legal Briefings – By Iria Calviño, Javier Guillén y Esther Lumbreras

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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.

Article 34 RDL 8/2020 contains a series of measures targeting public procurement specifically, with the aim of mitigating the detrimental impact of measures adopted by the Spanish state, regions, local authorities and all public institutions and entities to protect employment and the commercial viability of companies. In particular, article 34.4 contains specific measures applicable to concession contracts for works and services.
 
The Government’s suspension of metered parking or the temporary closure of gyms and other sports establishments operated under concession contracts are clear examples of the impact that these extraordinary measures are having on works and services concession contracts.
 
The measures established in article 34 (in general) and article 34.4 (in particular) of RDL 8/2020 have raised a number of doubts as to the scope and content of the provision in respect of works and service concessionaires, some of which are analysed below.
 

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

Article 34.4 RDL 8/2020 establishes that concessionaires are entitled to have the financial balance of their concession restored if it is impossible to perform their concession contracts as a result of the COVID-19 outbreak and the measures adopted by the different authorities to contain it.
 

Scope of application: which concessions can request rebalancing pursuant to article 34.4?

 
Article 34.4 indicates that the contracts falling within the scope of that provision are public contracts that were in place when RDL 8/2020 entered into force, which had been signed by public sector entities (as broadly defined in article 3 of the Spanish Public Procurement Law 9/2017, of 8 November, which transposes into Spanish legislation Directives 2014/23/EU and 2014/24/EU of the European Parliament and of the Council of 26 February 2014 (“LCSP”).
 
It is important to point out that the modification made to RDL 8/2020 by the First Additional Provision, paragraph 10 of RDL 11/2020 has closed the definition of “public contract”, indicating that only those contracts that, in accordance with their terms and conditions, are subject to the following provisions will be taken into account:
 
  • 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”).
In other words, after the modification made by RDL 11/2020, the literal wording of the provision excludes, among other things, public contracts governed by public procurement regulations prior to those listed, eg, those tendered and awarded under the Spanish Public Sector Contracts Law 30/2007, of 30 October (“Law 30/2007”) or Legislative Royal Decree 2/2000, of 16 June, which approves the recast Law of Contracts with the Public Administrations (“RDLeg 2/2000”).
 
It should also be pointed out that article 34 in general (not only article 34.4) does not apply to contracts awarded by public entities listed on the official markets and that do not obtain income from the General State Budget.
 

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.”

This is one of the issues that had generated most debate. The truth is that article 34.4. refers to “performance … is impossible”. The lack of any qualification to that concept would seem to refer to the completely impossibility to perform the contract (ie, contracts that have become impossible to perform as a result of the situation caused by COVID-19 or the public authorities’ actions).
 
Whereas in the case of other types of contracts (eg, public services contracts or continuous supply contracts as regulated by article 34.1.) article 34 provides for partial impossible performance (as a means of justifying partial suspension of the contract), paragraph 4 of the article, which contains provisions for the impact of COVID-19 on works and services concession contracts, only refers to impossible performance, without drawing a distinction between whether that be complete or partial. It therefore seems that it must be completely impossible to perform a contract in order to apply that provision. As such, if the contract can continue, even though the COVID-19 outbreak has had an impact on its performance, the contractor will not be entitled to rebalancing under RDL 8/2020.
 
Therefore, if the aim of the provision is to allow a request for rebalancing only when a contract cannot be performed at all, its scope of application will be reduced considerably as a vast majority of works and services concessions have not been suspended and no provisions have been put in place to make that possible. However, income under those contract will have reduced considerably (eg, in the case of motorway concessions).
 
However, the State Attorney’s Office of the State’s Legal Department issued a report on 1 April 2020 in response to a consultation raised by the State Attorney’s Office at the Ministry of Transport, Mobility and Urban Agenda in relation to motorway contracts, in which it pointed out that:
 
  • 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.
 
If that is the correct interpretation of the provision, if a concession can continue to be performed it would not meet the requirements to request rebalancing.
 
Nevertheless, the State Attorney’s Office’s interpretation is restrictive; it is also possible to construe ‘impossibility’ more broadly to encompass other situations other than absolute impossibility. As a result, we must await future decisions issued in this regard, most especially rulings delivered by the courts.
 

What events must have taken place for a contract to be ‘impossible to perform’?

 
As established by article 34.4, the complete inability to perform the contract must have been triggered by the situation caused by the COVID-19 outbreak orand the measures adopted by the Spanish state, autonomous regions or local authorities to fight the outbreak.
 
By contrast with articles 270 and 290 LCSP, according to which a right to request rebalancing would only exist if the administrative action that triggered the imbalance of the contract was performed by the procuring authority, under article 34.4 RDL 8/2020 this need not be the case. As such, the administrative action may have been performed by the procuring authority or any other authority, in particular the state.
 
Therefore, it seems that article 34.4 has created a new ground for restoring the financial balance of a concession – albeit without classifying it as force majeure event – which should apply automatically without having to look at whether or not the financial balance of the concession has been substantially broken.
 

Which items are subject to compensation?

 
By contrast with the contents of other paragraphs of article 34 RDL 8/2020 that provide a series of specific compensations in the event of suspension of services, works and supply contracts, paragraph 4 establishes an open-ended formula to rebalance works and services concessions.

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.
Article 34.4 seems more lax in this regard than general public procurement provisions, which require that at least 50% of the concessionaire’s income must be from user fares or fees for it to be possible to extend the term of the concession (article 270 LCSP).
 

What procedure must be followed to request rebalancing?

 
In order to have the financial balance of a concession restored, the concessionaire must apply to the procuring authority. Article 34.4 RDL 8/2020 points out that “the contents of this paragraph will only apply when the procuring authority has, at the contractor’s request, found that performance of the contract is impossible as a result of the situation described in the first paragraph”.
 
However, RDL 8/2020 does not establish a specific procedure that must be followed to restore the financial balance of a contract; it merely alludes to certain formal aspects that must be observed, as mentioned above. Therefore, the general procedure for rebalancing must be followed, subject the particularities indicated in RDL 8/2020. As such, the contractor must include the following it its application for 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 rebalancing to apply, the procuring authority must determine that it is indeed impossible to perform the contract, as claimed; however, no specific time period is established within which the authority must issue its decision on an application for rebalancing. Therefore, in principle, the general term to issuing decisions in administrative proceedings (ie, three months) would apply. If no decision is issued in that time period, it is to be understood that the application has been denied.
 
However, we must wait to see how applications of this kind ultimately unfold to see how the respective authorities (and, ultimately, the courts) overcome the legal gaps in article 34 as to the procedure to be followed.
 

For how long will the measures apply?

 
With regard to the how long the measures adopted by RDL 8/2020 will remain in force, the Tenth Final Provision establishes that “they will remain in force until one months has elapsed beyond the end of the state of emergency. The above notwithstanding, the measures established in this royal decree-law that have a specific term shall be subject to that term.
 
Without prejudice to the above, the Government may extend, by means of a royal decree-law and after having assessed the situation, the measures established in this royal decree-law”.
 

Would it be possible to rebalance a concession connected to COVID-19 outside the scope of article 34.4 RDL 8/2020?

 
From the wording of article 34 overall, it seems that the situation caused by the COVID-19 pandemic is not considered to constitute a force majeure event from the perspective of public procurement; it is given a different treatment. Furthermore, article 34 will apply preferentially to all public contracts affected by the COVID-19 crisis, whereby a rebalancing application in connection with COVID-19 would in principle only be possible under article 34.4 RDL 8/2020.
 
This was the interpretation offered in the aforementioned report issued by the State Attorney’s Office of the State Legal Department, which pointed out that:

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.”
 
That said, and although the State Attorney’s Office’s opinion on the matter is clear, it would again 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.
 
Furthermore, it cannot be ruled out that further modifications to provisions may make it possible for rebalancing of that kind to take place. Indeed, a Europe-wide initiative (eg, the European Association of Operators of Toll Road Infrastructures) is already underway to have the COVID-19 pandemic classified as a force majeure event from a public procurement perspective so as to make it possible to take measures to rebalance public contracts affected by the current circumstances.
 

Would it be possible to pause the concession contract?

 
RDL 8/2020 does not offer the possibility of pausing concession contracts for works and services. It only enables a contractor to apply to have the financial balance of the contract restored when that balance is affected by the measures adopted to combat COVID-19, provided that it has become impossible to perform the contract.
 
The Spanish Government has thus opted to ensure the continuity of concession contracts for works and services given their doubtless impact on the ability to meet general public interests. As a result, by contrast with the other forms of contract provided for in paragraphs 1, 2 and 3 of article 34 RDL 8/2020 – which can be paused subject to the effects established in the RDL – that is not the case of concession contracts.
 
The above notwithstanding, there is uncertainty as to whether or not the procuring authority is able to pause a concession contract on the basis of article 208 LCSP.

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”.


Main conclusions

 
  • 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.
 
 

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