My opinion: truths and untruths about terminating government contracts


There seems to be a lot of misinformation regarding the fallout from government cancellation of contracts. Without a doubt, rescinding any contract is serious business, and such a step should only be taken after careful consideration of the costs and benefits. Such vital deliberations, however, should be based on clarity and truths, rather than myths and fears. So here are some realities.

False: that the country’s sovereign rating will drop with the government’s cancellation

If the contractual termination by the government is in accordance with the contractual provisions, coupled with the payment of appropriate compensation, the country’s sovereign rating should not be affected.

There are many examples where countries have done exactly this without impacting their ratings, including the most recent in the United States regarding the Biden administration’s review of the termination of the border wall contracts. This debate is about better use of public funds and environmental concerns over the roughly $ 3 million per day idling costs paid to contractors and the questionable effectiveness of cross-border control. Likewise, in June, the UK Cabinet Office in a policy opinion conceded that the time had come for public sector clients to discuss contract terminations, overturning the April notice to help contractors and suppliers with such contracts during the Covid-19 pandemic. Throughout the consideration of contract termination in these examples, the impact on sovereign ratings was not even discussed.

Legal termination by a government should not be confused with a country defaulting or unilaterally changing contractual terms, both of which can have disastrous effects and affect sovereign ratings. For example, Argentina’s decision in 2019 to extend the maturity of its loan led the S&P to reduce the country’s long-term credit rating by three notches to CCC-, relegating credit to the lowest level of junk debt.

The Malaysian government has never breached a contract in this way and therefore there is no fear of legal termination or restructuring for these reasons.

True: The contractual basis for termination is important in determining compensation / damages

In government contracts, the standard grounds for termination are mutual agreement, national interest, contractor default, force majeure, corruption, and illegal or illegal activity.

Thus, the provisions of the contract protect the interests of the contractor and should ensure fair compensation for work completed, reflecting the negotiated agreement (except in the event of termination for bribery and unlawful or illegal acts where the issue of fairness takes hold. a different tone). Fair payment would generally include the value of all work completed; the cost of materials ordered for the work (which have been delivered or for which the contractor is legally bound to accept delivery); any expense reasonably incurred and not covered by other payments; and the cost of protection works and the removal of equipment and facilities from the site following termination.

In the event of termination for corruption and illegal or illegal activities, the government must give immediate notice and may activate the performance bond and / or waive the amount of the performance bond. The government may also be entitled to all losses and expenses, including all incidental costs incurred as a result of such termination, and the entrepreneur would not be entitled to any form of losses, including loss of profit.

False: contractors will not bid on future projects if the government cancels contracts

Typically, the goal of terminated contractors has been to maximize compensation, and therefore disputes typically focus on the quantum. In many cases, governments resolve these disputes without going to court or arbitration. It is only in rare cases that the contractor would challenge the termination because, generally, the contractor would fear being blacklisted. Thus, the challenge would only take place if the entrepreneur invoked unjustified termination and inadequate compensation (inability to recover or account for all actual legitimate costs).

Thus, contractors would not refrain from bidding on government projects for fear of termination. Rather, it is the fear of a lack of good governance and unethical bidding processes that is most likely to prompt the decision to abstain. The cost of preparing large international tenders is seven or eight figures and entrepreneurs will not invest in the process if they are concerned that the bid will not be evaluated fairly or that it is a problem. ‘a trick (ie the customer has already decided to whom the offer will be awarded). A good example of a fair tendering process can be found in the Large Scale Solar Tenders (LSS) of the Energy Commission. The process has attracted many local and international bidders, with LSS 4 attracting 138 bidders to post prices as low as 17.68 sen / kWh, baffling industry experts. With the resulting lower energy costs, the beneficiaries have been consumers / the public.

True: Terminating a foreign G2G contract must not ruin international relations with a counterpart country

Likewise, if contractors have little to fear from termination of the contract, then the governments of their host countries should have little reason to worry about international relations (except in special circumstances). For example, the recent termination of the KL-Singapore High-Speed ​​Rail (HSR) agreement saw Malaysia pay Singapore Ringgit 320 million for costs incurred by the latter. In a joint statement, it was stated that “the two countries remain determined to maintain good bilateral relations and to cooperate closely in various fields, including enhancing connectivity between the two countries.” The termination process was professional and friendly. The two countries honored their respective obligations and kept open the possibility of future collaboration, reinforced by the Singapore Transport Minister’s comment that Singapore remained open to discuss future TGV proposals or similar projects with a spirit of spirit. open. (A new TGV project could recoup some of the compensation paid to Singapore if, among other things, previously undertaken works and designs could be reused at least partially, if not entirely.)

True: Termination is a difficult process with many potential pitfalls

The termination process includes issuing a termination notice, securing the site, equipment and facilities and, if applicable, submitting a new tender for the completion of the project. The disadvantages of termination include:

• Delay of the project;

• Increased project costs due to the call for tenders. The attractiveness of the project could also be diminished for potential bidders due to the reduced scope;

• Risk of abandonment of the site by the contractor, failure to ensure adequate protection of completed works and bulk materials (already paid for by the government), resulting in loss or damage;

• Contractor’s refusal to remove all of his buildings, tools and temporary equipment;

• Potential legal and contractual claims from the contractor, subcontractors and suppliers leading to arbitration or litigation; and

• Potential industrial relations complaints by staff of the licensed subcontractor.

True: termination should be a last resort, occurring only if its benefits outweigh the above costs

The government should only terminate a contract as a last resort and only when there is compelling justification that shows tangible benefits to taxpayers / the public, and those benefits far outweigh the costs of termination. Renegotiation could offer a viable alternative in certain circumstances if the project is considered required. Here are two recent and high profile examples of local megaprojects where the government has chosen to renegotiate rather than terminate:

(1) MRT2, where the government and MRT Corporation signed two revised agreements with contractor MMC-Gamuda (MMCG) for the latter to deliver and be responsible for the design, execution and completion of the project on a turnkey basis instead of the previous Project Delivery Partner (PDP) model. This resulted in savings of 8.82 billion ringgit – from 39.35 billion ringgit to 30.53 billion ringgit (22.4% savings). The factors that contributed to these huge cost savings were: conversion to a turnkey contract; rationalization of the allocation of reimbursements; contingencies and provisional sums; postponement of certain stations; and streamlining the scope of mechanical and electrical work; and

(2) LRT3, where the cost of the project was reduced by 47%, from 31.65 billion ringgit to 16.63 billion ringgit (savings of 15.02 billion ringgit), thanks to renegotiations between the government and MRCB-George Kent JV. The main factors leading to this cost reduction were: reduction / rationalization of the scope; extending the completion date to 2024; and the restructuring of contracts from a PDP model to a “fixed price” turnkey contract.

The review of these drafts made international headlines for smart, transparent and comprehensive good governance, with congratulations to the government for its action.

Conclusion: the truth

In fact, rescinding any contract should only be considered as a last resort, when all other remedies have failed. The decision to do so should be analyzed and guided in a professional manner (preferably with independent and expert advice), and weigh the pros and cons (including for the economy and the community). Indeed, if the terms of the government’s contract and the relations between the parties involved are unfeasible, ending both may offer a healthier solution for all parties while protecting, above all, public and national interests for generations to come. .

Datin Shalini Ganendra is a lawyer who is currently a visiting scholar at the University of Oxford

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