Which rules apply to force majeure in public contracts? In this article we will provide you with an overview of when you, as a supplier to the public sector, can invoke force majeure due to the coronavirus outbreak and circumstances you should be particularly attentive of when submitting a tender to the public sector.
16.03.2020
Økland
The challenge
The ongoing coronavirus outbreak and measures implemented by the public authorities may have major consequences on ongoing contracts, for example through restrictions in product flow, currency fluctuations, raw material shortages and production shutdowns. Public procurement is governed by the procurement rules that can, to some extent, be considered inflexible in situations like the one we are currently facing. Nevertheless, there is still room for adaptations, but this will vary depending on the phase of the procurement process.
Ongoing contracts entered into prior to the coronavirus outbreak
Contracts that were entered into prior to the coronavirus outbreak are governed by general contract law. This means that the supplier’s rights and obligations depend on the interpretation of each contract.
Most contracts include force majeure clauses that stipulate that a party’s failure to fulfil its obligations under the contract cannot be considered breach of contract. Force majeure normally refers to extraordinary circumstances that could not have been predicted at the time of entering into the contract. Force majeure provisions can therefore be invoked in connection with delivery delays, for example. They can also be used as a justification for payment adjustments.
Suppliers may therefore also invoke force majeure in public contracts as a result of the coronavirus outbreak. Nevertheless, the changes made to the contract must be within the limitations set down in the procurement regulations concerning contract changes.
The procurement regulations include a general prohibition against so-called “material changes”, including where violation of these rules would mean that a new (illegal) direct procurement had been entered into. The “litmus test” for whether a change can be considered material is whether it means that other suppliers could potentially have participated in the competition, whether it means that another supplier should have been awarded the contract or whether it generally changes the financial balance of the contract in favour of the supplier. By its wording, the latter is a very broad condition that would, in principle, affect all price increases, etc.
At the same time, the regulations specify some cases that avoid the prohibition against “material changes”. In the situation we are facing now, the most relevant of these may be the access to make changes due to circumstances that a vigilant client could not have predicted. The condition here is that the overall nature of the procurement does not change and that the (total) price increase cannot exceed 50% of the original contract value.
Additionally, there will be greater room for changes implemented in accordance with change clauses incorporated prior to entering into the contract. It is therefore a good idea to review ongoing contracts to look for such clauses.
Finally, in the situation that has occurred, there will also be room to bring up the issue of renegotiation with clients, even if the contract does not directly include any provisions on force majeure or change clauses. However, in such a situation, questions may arise more quickly as to whether a change can be considered “material”.
Tenders submitted prior to the coronavirus outbreak but for which the contract has not been signed
For tenders submitted prior to the coronavirus outbreak, suppliers are generally bound by the tender validity period. The terms and conditions of the contract have been established even though the contract has not been signed and there should also be room here to invoke force majeure for events that could not have been predicted on the tender submission date, even though the contract was not signed before the situation had worsened. Nevertheless, in such a situation, there could be a greater risk of disputes than for contracts entered into prior to the outbreak.
The coronavirus pandemic is a situation that has been gradually developing. There could therefore be borderline cases where, on the tender submission date, it was possible to foresee that the situation would have consequences, but where the consequences became greater and more serious than assumed. It will also be possible to invoke force majeure in this situation, but the exception then will not extend any further than the unforeseen part of the consequences.
Tenders submitted after the coronavirus outbreak
For tenders submitted after the coronavirus outbreak (or after the situation worsened significantly), it will normally be difficult to invoke force majeure, as the tenderer will have been expected to have taken the situation into account when submitting its tender. At the same time, there is only limited room in the procurement regulations for making reservations and deviations from the tender specification and extensive circumstances linked to the coronavirus outbreak could result in a risk of rejection. It is therefore even more important than usual to utilise the opportunity for clarifications up to the expiration of the tender submission deadline in this case.
By asking questions of the clients and making the client aware of challenges, they may not have seen themselves that it could be possible to have the client change the competition conditions in a way that makes it easier to take the current situation into account. For example, it would be possible to incorporate renegotiation clauses that would make the room for change somewhat greater than normal, it would be possible to incorporate provisions to soften the effects of delays, etc. It would normally also be in the best interests of the client for the competition to be implemented in the best possible manner in the current situation. Otherwise, the client may risk that suppliers deem it necessary to price in the significant uncertainties they are facing, with the consequence that submitted tenders are more expensive than necessary.
Final comments
The above mentions only a few aspects of the situation we are currently facing in Norway and globally. It is more resource-intensive (and harder) to reverse decisions than to manage challenges along the way and, in the current situation, it is even more important than before to have a proactive mindset in procurement processes.
At Økland, we remain fully operational and we are ready to assist you and your company, both pre-emptively and when a situation has occurred.
We wish to contribute to ensuring that industry can manage the crises that arise while also facilitating sustainable operations when the situation normalises. We are here when you need us, please do not hesitate to get in touch!
