Ranging from toilet paper for public institutions to medical consumables for (public) hospitals to the absence of staff in public transport, corona already exhibits a massive impact on companies’ business activities. Supply chains are interrupted, employees are being quarantined. Even public contracts can either not be fulfilled at all, or not on time, or not in their entirety.
What are the legal consequences? Are public clients and contracting authorities able to claim damages or to assert liquidated damages if their contractors fail to (duly) perform? Will contractors subsequently be ineligible in the future or even have to be banned from public contracts due to deficient performance of a prior public contract?
According to Section 124(1)(7) Act against Restraints of Competition, contracting authorities may exclude companies from participating in procurement procedures if they have significantly or persistently produced deficiencies in performing a (prior) public contract which led to early termination or damages. Depending on the duration or severity of the deficient performance, companies may also be excluded from participating in public procurement procedures for up to three years.
Unless contractually agreed otherwise, the General Terms of Contract for the Provision of Supplies and Services (VOL/B) or the General Terms of Contract for the Execution of Construction Work (VOB/B), which are regularly used in the context of public contracts, will apply:
Under Section 5(2)(1) sentence 2 VOL/B and Section 6(2)(1c) VOB/B, in cases of force majeure, the performance periods for construction work, deliveries, or services are to be extended within reason if contractors are prevented from performing them.
An extension of performance periods is therefore possible in cases where contractors are directly affected by official closures or if a large part of the workforce is in quarantine.
As soon as the impediments to the performance cease to exist, contractors must send written notifications to that effect and resume work without delay (Section 5(3) VOL/B, Section 6(3) sentence 2 VOB/B).
Where contractors are permanently unable to perform or cannot reasonably be expected to perform, they will be released from their obligation to perform in accordance with Section 275(1) German Civil Code. In such events, the contracting authorities will not be obligated to provide remuneration (Section 326(1) sentence 1 Civil Code).
On the other hand, public authorities may only claim damages or assert liquidated damages in cases where the contractors are at fault. This is usually not the case if the lack of performance is due to force majeure or if companies are shut down by the authorities. Public authorities are only entitled to terminate the contract – to the extent that this even remediates the situation – if delays exceed a period of three months (Section 5(2)(2) sentence 1 VOL/B, Section 6(7) sentence 1 VOB/B).
What this means for contractors: As a consequence, (non-culpable) deficient performance cannot lead to a ban on participating in public procurement procedures or to an exclusion under Section 124(1)(7) Act against Restraints of Competition.