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Compensation by the public contract party for the non-execution of a public contract

After an award has been made in a public tender process, the contract in question may not always be executed. This may be for various reasons, including the revocation of the award authorisation or the cancellation of the public tender. As a result of the non-execution of the contract, the Administration incurs the obligation to compensate provided for under the institution of extra-contractual civil liability for public management acts.

As to the issue of compensation, this is a situation of pre-contractual civil liability – culpa in contrahendo – which arises both in situations where there is a breakdown in negotiations and in cases where contracts are declared void or ineffective, and the duty of good faith necessarily rules the duty to pay compensation.

The law expressly recognises responsibility for fault in the conclusion of a contract and, accordingly, in the run-up to the execution of the contract, the behaviour of the contracting parties will have to be reciprocally loyal and upright; in addition, the parties must also work towards entering into contract or pursuing the negotiations commenced with a view to the execution of a legal act.

The decisive legal criterion to be taken into account in these situations is the one in Article 227(1) of the Civil Code with the heading “Fault in contract formation”.

“Any person who negotiates with another towards the conclusion of a contract shall, both in the preliminary acts and in the formation thereof, proceed in accordance with the rules of good faith, at the risk of being liable for any damage which is wilfully caused to the other party.”

Article 227(1) of the Civil Code is applicable on a subsidiary basis to the non-execution of public contracts in the absence of laws and administrative regulations which make provision for analogous cases, as well as in the absence of general principles of administrative law, and provides that any person who negotiates with another towards the conclusion of a contract shall, both in the preliminary acts and in the formation thereof, proceed in accordance with the rules of good faith, at the risk of being liable for any damage which is wilfully caused to the other party.

The legal precept of “culpa in contrahendo” comes about when a breach of duties of protection, information and loyalty leads to the trust of the counterparty being frustrated as a result of the actions of the person in breach of these duties or when such a breach deprives the negotiations of their profound substantial direction for the search for consensus in the formation of a valid contract.

Thus, as there is an obligation to compensate, it is necessary to ascertain what kind of damage can be compensated. In terms of compensation for damage caused, it is necessary to distinguish between positive contractual interest (for instance the sums that the injured party did not receive owing to the fact of the work not going ahead) and negative contractual or trust interest (which are the direct costs incurred by the injured party in the preparation of the work).

Within the scope of pre-contractual liability, most legal doctrine and court jurisprudence arising out of Article 227(1) of the Civil Code takes the view that only damage resulting from the non-execution of the contract is compensable, that is to say, negative contractual interest.

In support of this position, the harmonising ruling of the Supreme Administrative Court (STA) No. 1/2012 established the following as court jurisprudence:

If, after the award of a public works contract, the site owner does not go ahead with the execution of the contract, the right of the awardee to be compensated for negative damage (trust damage) covers the expenses incurred in the acquisition of the tender process and the preparation of the bid, which have to do with negative contractual interest, since they have an actual connection with the specific illegality which gave rise to the pre-contractual liability.”

Thus, an injured party may request compensation under Article 227(1) of the Civil Code from a contracting body which, after authorising the award, fails to execute the relevant contract, for damage deriving from the non-execution of the contract, that is, resulting from the negative contractual interest, which are the direct costs incurred in the preparation of the tender process.

Cláudia Roque de Almeida

ca@acfa.pt