On September 22, 2020, the National Agency for the State’s Legal Defense – ANDJE (a state entity that designs strategies, plans and actions that allow the fulfillment of State’s legal defense policies) issued a guide to public entities of the national order with recommendations for the analysis of the contractual imbalance due to the appearance of COVID‑19. The abovementioned guide has three main chapters: (i) General characteristics of contractual imbalance; (ii) Causes of contractual imbalance; and (iii) Specific challenges of COVID‑19 in the execution of state contracts and guidelines to manage them.
Economic imbalance in state contracts and COVID‑19
State contracts are governed by the principle of commutativity, which means that the initial economic equation of the contract must keep an objective equilibrium during its performance. When this balance is affected, in a serious and abnormal way due to events that are not attributable to the party claiming the restoration, a “contractual imbalance” occurs.
COVID-19 is a supervening, extraordinary and external event that has significantly affected the economic and social life of the Country and has forced the adoption of decisions that might have affected the performance of State contracts. Among these decisions is the implementation of biosecurity protocols as required by the Ministry of Health and Social Protection and the suspension of state contracts due to compulsory social isolation measures ordered by the National Government. The ANDJE guide establishes a roadmap that guides State entities through the analysis of the existence of a contractual imbalance through three-step analysis:
- Analysis of economic imbalance: The first analysis is focused on the existence of an economic imbalance. This analysis considers, among others, contractual obligations that are still pending, the possibility and/or impossibility of fulfilling such obligations considering the implementation of biosecurity protocols and the predictability of the risks caused by the implementation of such protocols or the suspension of the agreement due to isolation measures.
- Serious and specific alteration of economic imbalance: Once the State entity determines the existence of an economic imbalance, the second step includes the studying the impact of the implementation of biosafety protocols or the suspension of the contract. In the latter, the analysis is focused on the expenses incurred by the contractor and the valuation of the consequential damage and lost profits. The alteration caused by the implementation of biosecurity protocols will consider the impact of the obligations derived from said protocols, including the obligation to take temperature, use of masks, alcohol and liquid soap, and physical distancing measures.
- Guidelines for the restoration of the contractual balance: If after carrying out the previous analysis the State entity concludes that the contractual balance was affected, it must determine the guidelines for its restoration. The guidelines proposed by ANDJE are: (i) the application of readjustment or revision clauses agreed in the contract (if any), (ii) the waiver of restoration rights by the contractor, or (iii) executing and additional agreement by means of which the State entity supports the contractor’s expenses for one time. If none of these guidelines is feasible for the State entity, ANDJE recommends preparing for possible litigation.
Click here in order to access the ANDJE guide.
Baker McKenzie’s Infrastructure and Public Law team has experience in state contracting, handling client relationships with public entities and possible claims for economic imbalance, among others. Our attorneys are ready to help you with upcoming challenges and share their knowledge to strengthen your business.
Click here to access the Spanish version.