The Supreme Court interprets that the compensation for damages to which a contractor is entitled when a contract is terminated for any of the causes attributable to the Administration includes lost profits, also in those contracts before Law 9/2017

Written on 18 Dec 2019

The Supreme Court's interpretation opens the door for contractors who request the early termination of contracts for the management of public services for delays of more than 6 months in payment by the Administration to claim lost profits, possibility that was finally introduced in the new Law 9/2017.

On 25 September 2019 the Fourth Section of the Contentious-Administrative Chamber of the Supreme Court handed down a judgement annulling the judgement handed down by the Supreme Court of Justice of Andalusia, recognising the contractor's right to compensation to be paid by Albox Town Council for the early termination of a concession contract for the cleaning of municipal premises and other public buildings, street cleaning and maintenance of municipal parks, squares and gardens in Albox, dated 22 May 2000, that should have included loss of profit. The termination of the contract was requested by the contractor under article 168 a) of Law 13/1995, of 18 May, on Public Administration Contracts (LCAP) - with the same wording as the subsequent contract laws - which contemplates as grounds for termination the delay of more than six months by the Administration in the delivery to the contractor of the consideration or auxiliary means to which it was obliged under the contract.

In this process in which the Public Law Department has advised the contractor in all judicial stages, the early termination of the contract was requested by the contractor  including the loss of profit as part of the damages. The Contentious-Administrative Court of Almeria recognized the contractor's right to such compensation for lost profits. The City Council filed an appeal against this ruling, which was partially upheld by the Contentious-Administrative Chamber of the Andalusian Supreme Court of Justice, which annulled the compensation for loss of profit recognised by the court.

The  High Court of Justice considered that the cause of resolution alleged by the contractor (article 168 a) of the LCAP "the delay of more than six months on the part of the Administration in the delivery to the contractor of the consideration or auxiliary means to which it was bound under the contract", that is to say, the resolution by the contractor's will, does not explicitly provide for compensation for future income that the contractor no longer receives. This express provision only refers to the causes of resolution of paragraphs b), c) and d) of the same article 168, with respect to those that article 170 when referring to causes of resolution attributable to the Administration (the rescue of the service by the Administration, the suppression of the service for reasons of public interest or the impossibility of the exploitation of the service by agreements by the Administration subsequent to the contract), that do not depend on the will of the contractor, do expressly contemplate compensation for loss of profit.

In response to the ruling issued by the High Court of Justice, the contractor filed an appeal in cassation, in which it held that article 170.4 of the LCAP does not exclude compensation for "all" damages -including loss of profit-, since it provides that the contractor is entitled to the damages suffered and, if the legislator had wanted to limit their extent, it would have done so expressly. In short, the fact that they are not expressly included does not imply their exclusion. He concluded by invoking that the termination of the contract proceeded not only because of a delay in payment of more than six months, but that there was a definitive breach of the obligation to pay that led to the frustration of the legal business concluded, causing damages that must be fully compensated.

The Supreme Court upheld the appeal upholding the appellant's thesis and held that when the termination of the public service management contract is caused by a delay of more than six months in the payment to the contractor by the Administration, the contractor is entitled to compensation for damages including loss of profit, considering that Article 170.3 of the LCAP does not exclude the contractor's right to such a compensable concept.

Thus, it confirms that when the resolution is requested by the contractor, it does not remove the cause of the Administration's failure to pay what is due; and that to the causes of resolution requested by the Administration itself - in which there is no doubt as to the obligation to compensate for lost profit - we must add that which, although requested by the contractor, has its origin in the Administration's failure to pay, and therefore gives rise to the same compensatory consequence.

The Supreme Court concludes that both the causes of termination linked to the Administration's failure to pay what is due, and those arising from the Administration's determination to terminate the contract for reasons beyond the contractor's control (redemption, suppression and impossibility of providing the service), coincide in that they may have an unexpected effect on the contractor, whose expected earnings are not received. Therefore, it is not possible to exclude that expectation in the person who has been providing the service, and also sees that expectation frustrated by a significant delay to the completion of the service, rather than an occasional or short delay, which means it does not make economic sense to maintain the contractual relationship.

The interpretation made by the Supreme Court has been confirmed in the current Law 9/2017, on Public Sector Contracts, which in its articles 294 and 295 provides for compensation to the contractor for damages and losses incurred, including future earnings foregone, when the cause of resolution is attributable to the Administration, which includes the delay in payment for a period exceeding 6 months.

In short, this criterion opens the door so that, in public service management contracts entered into with the Administration under the validity of the contract laws prior to Law 9/2017, contractors can claim and be compensated for future earnings lost as a result of the early termination of the contract that the contractor requests for the delay in payment by the Administration for a period exceeding six months.