The possibility of terminating a contract under the Public Procurement Law

Table of Contents:

  1. Can a contract concluded under the PPL be terminated without cause?
  2. Violation of provisions regarding the description of the subject of the contract

The Public Procurement Law Act of September 11, 2019, regulates the basic elements of contracts concluded under public procurement procedures, referring to the provisions of the Civil Code in matters not regulated. The provisions of the PPL generally do not regulate the termination of contracts at all. In this regard, the contracting authority relies on the provisions of the Civil Code. However, this does not mean complete freedom.

Can a contract concluded under the PPL be terminated without cause?

The National Appeal Chamber addressed the above question in its ruling of January 11, 2023, case no. KIO 3481/22. The contracting authority had provided in the contract template the possibility for either party to terminate the contract essentially without giving a reason. The Chamber agreed with the Appellant that the termination clause introduced allowed the parties essentially unlimited freedom to terminate the contract at any time. In the Chamber’s opinion, “the contested provision violates Article 433 point 4 of the PPL Act, insofar as it constitutes an unauthorized restriction of the contract without indicating a minimum value or volume of the obligation. It is not possible to properly calculate the offer and risks when the contractor is not certain of the scope of the contract to be performed. The contracting authority, by providing for a clause allowing for contract termination, is obligated to establish a guaranteed volume of the obligation, which the contracting authority did not do. (…) Undefined provisions allowing for contract termination at any stage of its performance lead to varying risk assessments by individual contractors, which undoubtedly also affects the comparability of offers in the proceedings.”

In both doctrine and jurisprudence, it is a well-established view that reserving the right for the contracting authority to terminate the contract without specifying specific circumstances dependent on the contractor (except for exceptions provided by law) contradicts the idea of the durability of the commitments made under the PPL Act.

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Violation of provisions regarding the description of the subject of the contract

In its 2014 ruling, the National Appeal Chamber also pointed out that contract clauses allowing for termination without cause may also violate provisions regarding the description of the subject of the contract in a clear and exhaustive manner, using sufficiently precise and understandable terms, taking into account all requirements and circumstances that may affect the preparation of the offer. This means that the description must specify the scope of the contract and the conditions of its performance, including the contract duration. According to established case law, it is prohibited to draft public procurement contract provisions in such a way that the scope or volume of the contract depends entirely on future and uncertain events. The unchallenged principle is that public procurement contracts are concluded for a specified period, and since this is the case, the feature of the obligational relationship resulting from the conclusion of a public procurement contract is its durability, understood in such a way that the law does not provide for the possibility of arbitrary termination of this relationship by either party. This is because contractors can rationally calculate the price, the amount of fees, and other financial parameters, as well as anticipate the risk associated with the contract (including the risk of whether their incurred costs will be compensated by revenues obtained during the specified contract period), only if they can predict for how long the parties will remain bound by the contract (National Appeal Chamber ruling of January 22, 2014, KIO 24/14).