Top 3 risks to consider in the national contract: contractor’s obligations, performance guarantee & delay penalties

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#Article 3 Series 5 Must-Reads on the National Contract in Public Tenders in Romania

After the entry into force of the national contract (or conditions of contract applicable in public tenders in Romania), enacted by Government Decision no. 1/2018, all concerns went to identifying the risks companies undertook by participating at a tender in Romania.

A main challenge in understanding such risks was generated by the structure of the contract, different from the standard FIDIC reference, as we have seen in our first article available here .

Assessing risks under a contract is important when participating at the tender and, even more so after the contract signing.

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CONTENT:

We present here three main risks to consider in the national contract.

Firstly, we examine obligations set for the Contractor, including cases of associations, third supporting party and subcontractors.

Secondly, we refer to the performance guarantee and the extensive cases in which the Beneficiary is entitled to make claims against such guarantee.

Lastly, before conclusions, we analyze the penalties applicable for delay in the execution of works and the maximum value of delay penalties, but also other unlimited penalties set within the contract.

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Contractor’s general obligations

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Contractor’s general obligations include the following:

Compliance with any Administrative Order of the Supervisor/Engineer.
Providing information: obligation to send any information or document related to the conditions under which the Contract is implemented within 5 days of the Beneficiary’s request.
Confidentiality: obligation to treat the details of the contract under strict confidentiality (including for 10 years after receipt of the final payment).
Code of conduct: obligations are established for code of conduct, applicable to Contractor’s Personnel and Subcontractors in what regards commissions, fighting bribery practices, generating uncommon commercial expenses, etc.
Conflict of interests: Obligations set in order to avoid the conflict of interests.
In case of ASSOCIATIONS: Individual and joint responsibility of each member of an association is indicated for performance of the Contract. The partners (including the leader) and the bylaws of the association cannot be modified without prior consent of the Beneficiary. Exceptions are set in cases of insolvency of the Contractor.
In case of THIRD SUPPORTING PARTY: In case the Contractor fails to comply with the obligations related to the activities, situations or parts of Works for which they have received support from third parties, the Beneficiary has the right to request the remediation of the situation through the involvement of the third party. The third party will indemnify the Beneficiary for any damage, in case of non compliance with the obligations undertaken through their commitment or in case of inadequate compliance.
In case of SUBCONTRACTOS: The Contractor is responsible and shall compensate the Beneficiary for any damage caused during the execution of the Contract not only by Contractor’s Personnel, but also by Subcontractors. In addition, termination by the Beneficiary may be triggered in cases of breach by the Contractor of the obligations related to the code of conduct, conflict of interests, including breach of obligations by the Subcontractors.

2. Unlimited cases for claims against the performance guarantee?

General provisions. The general conditions of contract indicate that the Performance Guarantee should:

the issuance of the guarantee should be under the prescribed form and at the term prescribed/signing date of the Contract.
be irrevocable and at the first demand of the Beneficiary based on their statement as to the Contractor’s fault.
in case of association, it should be issued on behalf of the association.

Validity of the Performance Guarantee. The Contractor shall ensure that the Guarantee is valid and in effect until the approval of the Final Reception.

If the Contractor does not have the right to obtain approval of the Final Reception 30 days prior to the expiration date of the Performance Guarantee, the Contractor will extend the validity of the Guarantee until the Works will be completed and all defects will be remedied.

Claims against the Performance Guarantee. Important aspects are to be noticed in comparison to standard FIDIC rules in what regards claims that can be introduced by the Beneficiary against the Performance Guarantee.

Similarities with FIDIC standards can be encountered for cases:

when the Contractor does not extend the validity of the Guarantee – in this situation the entire value of the Guarantee may be requested and
when the Beneficiary terminates the Contract as per the Clause on Termination by the Beneficiary.

However, two specific cases are established in the national contract, entitling the Beneficiary to make a claim against the Performance Guarantee, as follows:

when the Contractor does not pay the Beneficiary, within 30 days, a due amount, well accepted or established by a Supervisor’s Decision (given in accordance with the contract procedure) and
when the Contractor fails to remedy, within 30 days of receiving a request from the Beneficiary, a non-compliance of one of its obligations (the reference includes obligations and not only defects are included here, as per the FIDIC standard).

In these last two cases, the Contractor has the obligation to reimburse the value of the guarantee within 15 days of the execution of the amounts claimed by the Beneficiary. If the Contractor does not comply with the reimbursement, the provisions regarding the termination by the Beneficiary will apply.

In our practice, tender conditions generally set the value of the Performance Guarantee at 10% of the Contract Price and the value of the Performance Guarantee returned after the approval of the Reception at the Completion of the Works at 70%.

3. Are limitations in place for all penalties under the contract?

In cases of delays in the execution of works:

In case of an unsatisfactory rate of progress in the execution of the Works, the Contractor must update the execution program and include a plan of measures to make up for the delays. The Contractor will comply with this plan of measures, including any mobilization of additional resources.

If the Contractor does not complete the Works within the Period of Execution (including the extensions that may have been granted as per the provisions for Extension of the Period of Execution), the Beneficiary is entitled to require penalties of delay for each day calculated between the end of the Execution Period and the effective date of completion.

It is also clarified that the application of the penalties will not release the Contractor from the obligation to complete the Works.

Value of delay penalties.

A general value of penalties for each day of delay, which can be modified, is set as the Price of the Contract divided by the Execution Period in days (all at the signing of the Contract).

While the value of the penalties should be indicated in the Contract Agreement, a general maximum value of delay penalties is set at 15% of the Contract Price (indicated at the signing of the Contract.)

The penalties of delay will be the only penalties that the Contractor will owe for the delay in the completion of the Works, except for the penalties and damages in case of Contract Termination by the Beneficiary.

Other risks in case of maximum penalties.

However, an important aspect to consider is that, if the Beneficiary has the right to request the maximum penalties, the Beneficiary will also be entitled to terminate the Contract.

In practice, variations exist depending on the indications included in the Special Conditions or the Contract Agreement. Multiple tenders establish that progress of the Works will be verified through a system of reference points. In case of non-compliance with the reference points, retention and penalties apply.

Furthermore, besides penalties for delays in the execution of Works, penalties are also established for each day of delay until compliance is reached with certain obligations.

In practice, cases include penalties per day for delay in submitting the Execution Program or in submitting subcontracts, in cases of lack of compliance with the quality of Equipment or Cleaning during execution.

A special consideration should be given to the fact that, in general terms, unlike the penalties for delay in the execution of Works, for this other penalties set under the contract, a maximum value is not set.

4. Conclusions

It is without doubt that the new national contract has brought a certain number of improvements, as seen in our previous article available here .

However, the identification of risks has been a priority for tender participants.

Among these risks, in this article we have underlined three main aspects to consider:

obligations established for Contractors, including in cases of associations, third supporting party and subcontractors.
performance guarantee claims from the Beneficiary for a very wide range of cases and
the maximum set for Penalties applicable for delays in the execution of works and also other penalties established within the contract.

For all tenders in Romania, understanding risks such as the ones described in this article, is an important part of the assessment performed by the participant companies and, even more so, those who will perform the contracts.

Besides the general knowledge of the risks under the contract, a special attention should also be given to all modifications and applicable conditions for each tender.

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AUTHOR

Georgiana Sîrbu

Partner SIRBU LAW

E: georgiana.sirbu @gsirbu.com | www.gsirbu.com

T: +40 724 875 503 | T: +34 672 238 070

Offices: Bucharest | Barcelona

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* 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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