Prevention and treatment of the government contract breach

New virus is a current factor that seriously hinders economic growth and threatens the well-being of both individuals and businesses. Regardless of the measures taken by the government to give assistance to affected businesses, the current situation is fraught with losses that are unavoidable.

First of all, it should be noted that conclusion and performance of government contracts raise some questions. It should be kept in mind that although the pandemic is recognized as force majeure, the law provides no possibility to refuse concluding a government contract after winning at the bidding process. This means that a winning bidder who did not sign a contract may be included in the blacklist of suppliers. Despite the fact that due to restrictive measures and other factors that prevent proper performance of obligations, including under government contracts, it may be difficult to perform it in due time, the client will be obliged to inform the Federal Antimonopoly Service (FAS) about the refusal to sign the contract, which in turn may decide to include the winning bidder in the blacklist of suppliers. On the one hand, such a decision may be challenged in court, and the FAS instructed its local authorities via Letter No. ИА/21684/20 dated March 18 that they should take into account that the spread of the new virus constitutes force majeure. On the other hand, provisions of the law that make it possible to make a decision on inclusion in the blacklist of suppliers have not been changed, and instructions of the FAS give no guarantees that no one will be included in the blacklist of suppliers during this period. Therefore, it is preferable to prevent, if possible, the occurrence of circumstances on the basis of which a decision on inclusion in the blacklist of suppliers may be made.

If the pandemic happened to a potential contractor under a government contract prior to actual conclusion of the contract, the most appropriate step is to notify in advance of the inability to sign the contract due to force majeure. This will allow to suspend concluding a contract for the duration of such circumstances. Although the law on the contract procurement system stipulates that the procedure may be suspended for no more than 30 days on these grounds, this will buy time and reduce risks of future missed deadlines under the contract.

Moreover, potential suppliers should not rely on extension of terms set by the Federal Law “On the contract system in the procurement of goods, works, services for state and municipal needs” on grounds of non-working days announced under the presidential Decree dated April 2 (the period of non-working days has been extended until May 11). Government Decree No. 443 dated April 3 determines that the terms set by Federal Law 44-ФЗ calculated in working days, during the declared non-working days will be calculated in calendar days (excluding Saturdays and Sundays). This means that such terms will not be rescheduled and will fall on the same calendar day as if the non-working regime had not been introduced.

Suppliers who have already concluded a contract and are in the process of performing it under the current circumstances should, if possible, continue to perform it. The terms of the contract may provide for the right of the client to unilaterally cancel the contract in case of repeated violations of delivery terms. If the client exercises this right, the supplier risks being included in the blacklist of suppliers. If it becomes obvious that it is impossible to perform the contract properly and in due time, it is better as in the case with signing of the contract to notify the client in advance and offer to terminate the contract by agreement of the parties. If the client agrees, there will be no grounds for including the supplier in the blacklist of suppliers; if not – the supplier’s bona fide behavior will increase the chances that the FAS local authority will not make a decision to include the supplier in the blacklist of suppliers, or in case such a decision is made, that it will be possible to get such a decision canceled in court later.

If the supplier is not ready and has no intention to terminate the contract, another option is to file an offer to the client on making amendments to the contract. Starting from April 24, Clause 65 was added to Article 112 of Federal Law 44-ФЗ, according to which in 2020, terms of contract performance may be changed if the inability to perform the contract is caused by the spread of the new virus or other factors determined by the Government. It is necessary to describe the situation in detail to the client, explain exactly how this situation prevents the supplier from performing the contract, and on these grounds with reference to the clause of the law above offer to change terms.

In the worst case scenario, if the client refuses both to terminate and to amend the contract, the only thing left for the supplier is to continue to perform the contract to the extent possible under the current circumstances. Subsequently, if any delay or other violations are justified by the pandemic, according to the general rules of the Civil Code on force majeure this will allow to avoid liability for such violations, primarily payment of penalty.

The main thing to remember for a participant of the contract procurement system under current difficult conditions is that contracts should be performed to the extent possible. Bona fide behavior and thorough collection of evidence proving that violations occurring in the course of contract performance are caused by the new virus are vital for minimizing losses, as well as risks of being included in the blacklist of suppliers.

Michael Oberemkov

Assistant to Lawyer

Tax and Legal Practice

Korpus Prava (Russia)

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