- Definition. What is contract rescission (termination)?
- It’s an unusual cause for contract termination.
- It’s caused by a variation in the agreed essential conditions which prevent contract performance, such as fortuitous event, force majeure or public interest reasons. Theses causes must be justified or proven.
- Termination is total. The parties dispense with the initial terms of the contract.
- As an introduction, what else could be added regarding contract rescission?
- Confirm there is no contract breach, by the contractor or the Administration, because breach causes termination with liability, not contract rescission.
- Seek legal advice before initiating contact with the Public Administration, because the particular terms of each agreement must be assessed.
- What are the effects of rescission on the contractual relationship?
- The effects depend on the cause of contract rescission; there are two possible causes:
- Because termination of the relationship is more favorable to the public interest (i.e. the Administration takes over the direct provision of a public service).
- Because of the occurrence of an event of force majeure or fortuitous event (i.e. the Declaration of a State of National Emergency by COVID-19, Executive Decree No. 42227-MP-S).
- Contract rescission by agreement of the parties is authorized only for cases of public interest.
- The effects of rescission for cases of public interest are more favorable to the contractor than rescission on grounds of force majeure or fortuitous event:
Right by Law
Fortuitous event / Force majeure
|Payment of the contract portion effectively performed.||Yes||Yes|
|Verified, reasonably incurred expenses, in anticipation to the execution of the contract.||Yes||Yes|
|Verified compensatory damages.||Yes||No|
- Procedure: How is contract rescission performed?
- It can be performed by a unilateral decision of the Administration or by agreement of the parties.
- There is an administrative procedure composed of several stages, which includes an opportunity for the contractor to file defense arguments and evidence for economic compensation, within 10 business days.
- It is essential to document evidence very well and sufficiently, regarding amounts of the contract portion effectively performed, expenses incurred during contract execution, and, if it applies, compensatory damages and lost profits, to file during the administrative procedure. It must be done under criteria of reasonableness and proportionality, taking into account the remaining contractual execution term, the progress of the execution of the contract, and the complexity of the contractual object, among others.
- In the event of contract rescission for reasons of public interest, the contractor must expressly request the Administration for compensatory damages.
- In some cases, the final decision of contract rescission must be approved by the General Comptroller’s Office. It must be confirmed on a case-by-case basis if your contract requires it. In such a case, it is important to note that:
- The General Comptroller’s Office checks that there is no contract breach by either party.
- The General Comptroller’s Office corroborates that the settlement is very well documented, with sufficient proof of expenses, damages, lost profits (anything paid to the contractor).
- The General Comptroller’s Office carefully reviews the grounds for contract rescission (public interest, fortuitous event or force majeure).
- What risks can the contractor face in the event of contract rescission?
- If rescission by Force Majeure or a fortuitous event, prove that expenses were reasonably spent; price speculation caused by COVID-19 may prevent reasonableness.
- The Administration may object to the degree of progress in the execution of the contract or to the remaining execution term.
- Advance payments (made for a future cause) for services that have not been performed, or for a cause that has ceased to exist, must be returned to the Administration.
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