[COVID-19] What are the consequences on public contracts and state aid regulations ?

Information current as of the date of publication of this article.

Public contracts

Apart from the support measures already planned, how can the consequences of the pandemic on parties to a public contract be managed?

1. Can the parties invoke force majeure to suspend the execution of their contract or terminate it?

The Legal Affairs Directorate of the Ministry of Economy and Finance (the “LAD”) has just published a fact sheet on the awarding and execution of public contracts in a health crisis, which already provides valuable information.

According to the LAD, the confinement measures decided on March 16 present two of the three characteristics of force majeure (unpredictability and externality) concerning contracts in progress, at least for several weeks.

The parties to a public contract (not just public procurement) must therefore ask themselves the following questions:

• – Is the performance of the contract by either party momentarily impossible, in whole or in part?
• – Does the contract specifically address the consequences of force majeure?

Depending on the answer to these two questions, public entities and/or service providers may be exempted from all or part of their obligations during the crisis period. The situation of prolonged force majeure may justify the termination of the contract.

Warning: the parties must not automatically stop fulfilling the contract when the conditions of force majeure are not met: their responsibility may be engaged.

2. Can companies be compensated as a result of this unforeseen situation?

For that part of the contract whose performance is not prevented in the strict sense, and subject to contrary clauses in the contract, the parties must ask themselves the following questions:

• – Does the contract fall within the scope of Article L.6 of the Public Procurement Code? Is its performance linked to requirements of continuity of performance of a public service?
• – Is the economics of the contract upset to the detriment of the provider?

Depending on the answers to these questions, providers will be able to request compensation from the contracting public entity under certain conditions. The parties however will have to ensure that such compensation, depending on its extent, is compatible with the Community directives applicable to public contracts and with the rules on state aid.

The prolonged unforeseen situation may lead to a situation of “administrative force majeure” and lead to the termination of the contract.

3. Can companies be compensated because of constraints imposed unilaterally by the State?

In the case of contracts entered into with the State, the theory of compensation of the contracting party for the act of the prince is intended to apply.

4. Can companies be compensated as having to bear unusual and unfairly distributed burdens?

Depending on the duration of the measures and their impact, some providers could be compensated on the basis of the theory of breach of equality before public charges, which will have to be determined.

State aid

Numerous mechanisms are already being discussed/established to enable economic operators to deal with the difficulties, even before provisions are adopted in the framework of the future emergency law to deal with the COVID-19 epidemic.

In this respect, in the event of a particularly serious economic situation, EU state aid rules allow Member States to grant support to remedy a serious disturbance in their economy. This provision is laid down in Article 107(3)(b) of the Treaty on the Functioning of the European Union (“TFEU”). As stated by the European Commission: “the impact of the VIDOC-19 epidemic in Italy is of such nature and magnitude as to justify recourse to Article 107(3)(b) of the TFEU. The Commission can thus approve additional national support measures in order to prevent serious disturbances in the economy of a Member State. The Commission’s assessment of the use of Article 107(3)(b) for other Member States will follow a similar approach“.

The Commission, which has already validated a mechanism to assist Denmark in dealing with the consequences of VIDOC-19, is currently preparing a special legal framework under Article 107(3)(b) TFEU: source.

Your usual contacts at Bignon Lebray on your issues of public contracts and state aid, are mobilized to answer all your questions.