Can the Administration or the contractor modify administrative contracts?

As a result of the global pandemic, it is very likely that the Public Administration will need to modify, increase or decrease the object of the contracts it has signed, with the context of each public entity being very different, depending on the social function it is supposed to perform.  In some cases, such as the CCSS (Costa Rican institution that provides universal healthcare) or in institutions with responsibilities in public health, the impact may be very high.

The power (in Spanish “potestad”) to unilaterally modify administrative contracts is regulated by Article 12 of the LCA (Public Procurement Law) and Article 208 of the RLCA (Regulations to the LCA). Moreover, in Costa Rica the legal concept “potestad” is not solely a power of the Administration but a figure that embodies a power and a duty simultaneously. Moreover, the principle of “mutabilidad”, that gives origin to the Administration’s power/duty to unilaterally modify contracts, is constitutionally established (see Vote # 998-98 of the Constitutional Chamber of the Costa Rican Supreme Court) and this power for unilateral modification is exclusive to the Public Administration.

This is an exorbitant power of private law in that the Administration, unilaterally and without the consent of the contractor, may agree to vary, increase or decrease the object of the contract, and must comply for these purposes with the regulations and procedures established in the aforementioned regulations.

This power to unilaterally modify is based on the fact that the Administration must satisfy public interest needs and, therefore, this general interest justifies the law granting it a series of prerogatives that allow it to achieve these objectives.

What are the assumptions and limits to the power of unilateral modification of the object of the contract? 

In accordance with the regulations of article 12 of the LCA and 208 of the RLCA, the assumptions and limits to the exercise of this power are of two types: i. qualitative; and ii. quantitative. The former relate to the nature of the contractual object and the latter to the percentages allowed.

In both types of modification, the assumptions contained in these regulations must be applied – insofar as they are rationally applicable.

When can the modification be made?

The unilateral modification of the object of the contract can be made as soon as the contract is perfected, which allows the modification to be applied before starting the execution of the contract or during its execution. The contract is perfected once the there is a firm award and the performance guarantee has been validly granted, in the cases where it is required (article 197 RLCA).

What are the qualitative limits? 

The qualitative limits are as follows:

  1. Nature of the contractual object

Per article 208 a) of the RLCA, it stipulates that the modification cannot change the nature of the contractual object, nor should the modification prevent it from fulfilling its functionality or initially proposed purpose.

The qualitative constraint is mainly linked to the nature of the contractual object, so slight changes in some of the characteristics or conditions of the object that imply an improvement and are of benefit to the Administration would be acceptable, but substantive aspects such as delivery time, guarantees, payment terms, etc. cannot be unilaterally modified.

In addition, article 208 paragraph b) of the RLCA stipulates that the increase of the object of the contract must involve similar goods or services, which must be justified in the respective administrative act that agrees to it.

  1. Existence of a just cause

It is regulated in article 208, paragraphs d) and e) of the RLCA.

The cause must be:

  • Unforeseeable (article 208, paragraph d): The cause must be unforeseeable when the procedure was initiated, so that the Administration could not know about it despite having taken the minimum technical and planning measures when it defined the object; in other words, the cause of the modification could not be foreseen in the conditions and time when the public procurement was promoted.
  • Healthy Administration (article 208, paragraph e): It must be the best way to satisfy the public interest.
  1. Construction Contracts

As stipulated in Article 208 of the RLCA, in cases of construction contracts, “only aspects that are not susceptible to independent contracting may be increased without altering, damaging or hindering uniformity, sequence, coordination and other equally important interests”.

What are the quantitative limits? 

The quantitative limits are as follows:

  1. Percentage

The percentage of increase or decrease of the object of the contract cannot exceed 50% of the amount of the original contract, including price adjustments or revisions.

It is important to note that the Administration may increase or decrease the object of the contract more than once. If it proceeds in this manner, it may agree to several modifications which, in the aggregate, may not exceed 50%, as indicated in article 208, paragraphs b) and c), of the RLCA.

Moreover, there is another limit that must be examined in parallel with this percentage, which could mean that the 50% indicated above cannot be reached. Thus, in the event of an increase, the threshold governing the Administration, with respect to the procedure used for the contract in question, cannot be exceeded (Article 208, paragraph f, RLCA).

According to the interpretation of the General Comptroller’s Office, in the case of the direct procurement procedure, low amounts must be considered for these purposes, since in the other cases, the modification could be agreed upon as long as the other limits mentioned above are met.

  1. Other factors or criteria to consider

The following criteria should be considered when applying the 50% limit:

  • Contracts with continued execution: both the object and the term can be modified, the latter case up to 50% of the originally contracted term without considering extensions.
  • Independent items:  When the object is composed of independent lines, 50% must be calculated on each of them and not on the general amount of the contract.
  • Remuneration:  The increase or decrease in remuneration is calculated in proportion to the conditions established in the original contract.
  • Decrease of the object: In this case the contractor has the right to have the expenses incurred to attend the total execution of the project recognized.

Does unilateral modification require authorization or endorsement from the General Comptroller’s Office?

Unilateral modification of administrative contracts does not require authorization from the General Comptroller’s Office, except in the case of failure to comply with any of the requirements established in articles 12 of the LCA and 208 of the RLCA.

In accordance with the provisions of article 4 of the “Regulations for the Endorsement of Public Administration Contracts”–amended by resolution number R-DC-114-2016, published in Scope No. 1 of La Gaceta No. 3 of January 4, 2017– “contractual modifications that arise after an endorsement process, will be subject only to internal endorsement”, for which the Administration must verify that the modifications made are in accordance with regulations in force.

What if the contractor cannot comply with the unilateral modification? 

In this context of a COVID-19 pandemic, it is relevant to highlight some implications that the unilateral modification of the contract could have.

On the one hand, in the face of an administrative decision of this nature, where, as indicated, the consent of the contractor is not required, the companies could experience negative impacts if they do not have the business capacity to comply with the contract according to the variation in the object.  We must take into account that we are not in a situation of normal market functioning, so we have to consider if this in turn could generate situations that make it difficult or even impossible to bear a certain modification, which could lead to a conflict.

On the other hand, as indicated before, unilateral modification is a prerogative exclusive to the Administration, so, even if the Administration does not modify the object of the contract, particular situations could arise in this pandemic that could prevent or difficult compliance for contractors, with the contract in its original agreed form, either because it depends on inputs or other factors to which it cannot have access in an expeditious manner due to the world crisis, because of the economic impossibility of hiring all the personnel required or any other circumstance of force majeure, fortuitous event or another consequence derived from the pandemic or from the measures that the Costa Rican Government has adopted in the face of this crisis. However, we insist on the fact that these events do not fall within the scope of articles 12 of the LCA and 208 of the RLCA and could therefore be a source of conflict.

In any of these cases, the corresponding analysis must be carried out on a case-by-case basis, taking into account that it is crucial for companies to be able to establish a causal link between the situation of force majeure or fortuitous event and its impact on the contract, and to adequately document the evidence and technical justifications required to set forth the corresponding issue in a timely manner before the Administration.

 

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