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Starting as soon as the contract award stage, it is important to understand the risks undertaken when bidding at a public procurement tender in Romania.
Even more so, assessment of risks during the contract performance phase, is essential for a successful project and for reducing any potential financial loss.
Termination carried out by Beneficiary could have significant impacts in terms of financial loss for Contractors and all other parties involved in the execution of a project, including subcontractors and third supporting parties.
In Romania, more than once, projects life has been cut short by termination carried out by Contractors or Beneficiaries.
As a result, the approach of Romanian contracting authorities is now diligent and it can be clearly seen in the careful manner in which Termination by the Beneficiary clauses are now established in the National Contract.
CONTENT:
Firstly, we will examine the extensive cases of Termination carried out by the Beneficiary envisioned by the National Contract. It is here where we will also refer to the right of the Beneficiary to suspend payments, without any prior notice, in the cases when the Beneficiary would be entitled to carry out the Termination of the Contract.
Secondly, we will continue analyzing the effects brought by the Termination of the Beneficiary, including recovery of costs and loss and maximums to be paid by Contractors.
Before conclusions, in the third point we will refer to specific cases of termination of Contract, including unilateral Termination by the Beneficiary.
1. Cases of Termination by Beneficiary
Prior notice. In accordance with the National Contract, Termination is carried out by the Beneficiary through a motivated notice sent to the Contractor 15 days prior to the rescission.
Similarities with FIDIC standards. Similarities with FIDIC standards can be identified for some cases of Termination by the Beneficiary envisioned by the National Contract.
Similar cases are, nonetheless, limited and include:
- cases when the Contractor subcontracts or assigns the Contract without the required agreement of the Beneficiary and
- cases of bankruptcy, liquidation.
Specific cases. Under the National Contract, a larger number of cases of Termination by Beneficiary are established in comparison to FIDIC standards.
Among these, the following are included:
- Breach of contract. In case of serious non-compliance and when the Contractor fails to comply with the deadline established in the notification sent by the Beneficiary (and not sent by the Engineer as in FIDIC standards) in case of a breach of contract (specified in the notification).
- Performance Guarantee/ Insurance validity. In case the Contractor does not undertake or does not keep in force the Performance Guarantee or the required Insurances.
- Cases of criminal record If at the moment of awarding the Contract, the Contractor is in a specified case of final conviction in the last 5 years for participating in criminal actions, or cases of corruption, fraud, terrorist infractions, etc.
- Breach of code of conduct, conflict of interests. In case of breach by the Contractor of the obligations related to the code of conduct, conflict of interests, including breach of these obligations by the Subcontractors.
- Third supporting party breach. If the third party supporter does not comply with the undertaken obligations
- Maximum penalties. In case the Beneficiary has the right to request the maximum penalties.
- Breach of obligation to remedy a defects. If the Contractor does not comply with the obligation to remedy a defect within the established period.
Provision regarding suspension of payments. A debatable provision included in the National Contract establishes the right of the Beneficiary to suspend payments when the conditions of a case of Termination by Beneficiary are met.
This suspension of payment can be applied by the Beneficiary as a precaution measure and without any prior notice.
However, the right of the Beneficiary to apply the suspension of payment is limited and, if Termination by the Beneficiary does not intervene, the suspension cannot last more than 60 days.
As it is easily observable from the cases of Termination of Beneficiary, the National Contract established extensive cases in favor of the Beneficiary. Even more so, for certain cases such as
– breach of contract as notified by the Beneficiary (no limits are included here),
– breach of obligation to remedy a defect (as established by the Beneficiary and within the deadline imposed by the Beneficiary) and
– performance guarantee validity (you can read more on this subject here), are wide in understanding and the Beneficiary could attribute a meaning to this concepts according to larger criteria.
This presents even more importance when considering the effects brought for the Contractor in case of Termination carried out by the Beneficiary, as analyzed below.
- Effects of Termination by Beneficiary
When Termination by Beneficiary intervenes, the following effects are foreseen:
- Measures for protection of works. From the date of Termination, the Contractor will undertake measures to close the works in an orderly manner and to minimize expenses.
- Other rights and remedies. The Termination will not affect other rights or remedies.
- Certification of works. The Supervisor, within a maximum period of 90 days after the termination date, will certify the value of the Works and the amounts owed to the Contractor.
- Payments after Termination. The Beneficiary will have no obligation to make any payment until the completion of the Works and the Beneficiary will recover the paid additional costs.
- Entitlement to recovery of loss. Besides the additional costs, the Beneficiary will be entitled to any loss up to a total of 10% of the Contract Price.
The amounts obtained by the Beneficiary through the execution of the Performance Guarantee will be used to cover these additional costs and losses.
Considering the important effects mentioned above, it is clear that, the cases of Termination by Beneficiary are to be treated with care.
Furthermore, limitations on the interpretations of the clauses referring to the effects of Termination by the Beneficiary are expected to be debated in the future practice.
- Specific cases
When analyzing the Termination carried put by the Beneficiary, a special mention is to be made to the right of Unilateral Termination.
The National Contract establishes that the Beneficiary may send at any time a notification of Unilateral Termination to the Contractor with immediate effect.
Nonetheless, in order to rebalance a contractual equilibrium, it was foreseen that, in case of unilateral termination, the Beneficiary cannot continue the Works directly or by means of a new contract for a period of 3 years. Otherwise, the Contractor shall have the right to receive payments from the Beneficiary as in the cases of Termination by the Contractor.
An additional mention should be made with regards to a number of specific cases of Release from Performance under the Law, with wider meaning in the National Contract than the FIDIC standards.
The National Contract establishes that if one of the following cases occurs:
– a Substantial Modification of the Contract,
– the Contract should not have been awarded to the Contractor due to serious breach of European Union treaties,
– there are circumstances that cannot be controlled by the Parties (including force majeure) that make the execution of the Contract impossible or illegal,
then, the Parties will not have the obligation of compliance through a notification and the amount to be paid by the Beneficiary will be the same as in the case of force majeure.
4. Conclusions
The National Contract established an extensive number of cases of termination carried out by the Beneficiary. Furthermore, when the Beneficiary is entitled to carry out the termination, the National Contract established the right of the Beneficiary to suspend payments, without any prior notice.
Considering all the important effects of the termination by the Beneficiary, including the rules established on certification of works and payments after termination, a great care and attention is recommended when analyzing the conditions of contract applicable to each tender and, even more so, in the implementation phase.
***
* National Contract refers to the public procurement conditions of contract, as enacted by Government Decision no. 1/2018.
** Words in majuscule have the meaning attributed to them by the conditions of contract, as enacted by Government Decision no. 1/2018.
*** This article is for information purposes only. It is not intended to be used as or substitute legal advice.
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Razvan Delibasa is a young, enthusiastic lawyer whose primary focus is public procurement, construction law, and real estate. He holds a Bachelor's Degree from Faculty of Law, University of Bucharest.
Octavian specializes in civil, commercial, and administrative disputes, which are addressed both within the Romanian court system and before arbitral tribunals.
Cristina possesses expertise in the domains of public procurement, construction law, and real estate. Since becoming a part of our team, her contributions have been pivotal to major public procurement and energy ventures.
Alexandra is an alumna of the University of Bucharest, Faculty of Law, and currently contributes her expertise to the dispute resolution and arbitration department at Sirbu & Vornicu Law. Her primary specializations encompass public procurement, construction law, and administrative law.
Stefan Dudas has over ten years of experience in international dispute settlement and has practiced law in several European jurisdictions, including France, Germany, Austria and Romania while working for world-renowned international law firms, such as Shearman & Sterling LLP and Derains & Gharavi International, and other market leading law firms in Romania, such as NNDKP and Musat & Associates.
Roxana Vornicu is recognized nationally and internationally for her public procurement, construction law and EU law expertise and she combines academic excellence with legal practice for almost a decade. As a practitioner, Roxana specializes in procurement, construction and administrative law. She has worked for one of the biggest law firm in the country (NNDKP) for over 7 years, managing and working in some of the highest profile administrative disputes of Romania. She handles complex strategies for procurement and administrative disputes and holds comprehensive knowledge and thorough understanding of EU procurement law.