20. The implementation of service contracts – A users’ guide

[The content of this chapter is under the responsibility of Unit INTPA.R.4. The latest update was made in December2024.]

20.1. Introduction#Service contracts

The general conditions govern the implementation of service contracts. The standard tender documents and contracts contain several references and options for modifying and supplementing the general conditions through the special conditions. The special conditions may thus include the necessary additions to the general conditions. Through these additions and modifications, the special conditions should take into account the specific subject matter of the contract as well as the specific circumstances of the project to which the contract relates. This guide does not deal with each and every article of the general conditions for service contracts but only with those articles that are considered essential or so complex as to require further explanation. Other provisions of the general conditions speak for themselves.

20.2. Article 3 – Assignment

Contractors sometimes need to assign rights under the contract for the benefit of their creditors or insurers: for instance, when the contractor insures herself/himself for possible losses, the insurance contract will often require the contractor to transfer to the insurer his right to obtain relief against the person liable, so that the insurer can in his turn recover the damages from that liable person.

Likewise, when granting credit, the contractor’s bank can demand from the contractor that the payments that the contractor receives under the contract are directly paid to the bank. Such assignments for the benefit of the contractor’s creditors or insurers do, of course, not imply that these bank or insurance companies will take over the further implementation of the contract.

Consequently, Article 3(2) of the general conditions stipulates that for the situations under points (a) and (b) of that article, the prior written consent of the contracting authority is not required. Still, even for those cases, the contractor will have the responsibility to notify the contracting authority of the assignment, as covered in Articles 33(1) and 33(2) of the general conditions.

In all the other cases a prior authorisation of the contracting authority is required. In these situations the contractor’s rights and obligations under the contract can be transferred to a third party, the assignee, who then in his turn becomes the new contractor for the contract or a part of it. An assignment could, for instance, become necessary following an internal organisational change in the group of which the contractor forms part (e.g. acquisition, merge, etc.) when such change entails a modification in the juridical status of the contractor.

The assignment through which the assignee takes over the further implementation of the contract requires the prior written consent of the contracting authority formalised through an addendum to the contract. As the initial contractor, the assignor, obtained the contract through a public procurement procedure, the contracting authority, when giving its consent, has to assure that the assignment is not a way to circumvent the award procedure and does not call into question the basis on which the award decision was made. For this reason, the assignee must, for instance, also satisfy the eligibility and exclusion criteria applicable for the award of the contract. In addition, and depending on the scope of the assignment, the contracting authority might need to check if the assignee fulfils the relevant selection criteria.

For the same reason, the assignment must not alter the fee-based prices and contract conditions of the initial contract. As a result, the addendum formalising the transfer of the contract will often be limited to a mere modification of the contractor’s identity and bank account details.

Although the addendum is to be signed by the contracting authority, the assignor, and the assignee, often the assignor and assignee will lay down the arrangements between them in a separate deed to which the contracting authority is not and should not be a party.

Before giving its prior written consent to the proposed assignment, where necessary, the contracting authority should receive the pre-financing guarantee from the assignee. As the assignee takes over all contractual obligations without limitation, the assignee will bear full liability for any contractual breach, regardless whether the cause took place before or after the assignment. Article 3(3) of the general conditions states that assignment does not relieve the contractor of its obligations for the part of the contract already performed or the part not assigned.

By virtue of Article 3(4) of the general conditions, the assignment of a contract by the contractor without authorisation by the contracting authority, is a valid cause for the sanctions for breach of contract (Article 34 of the general conditions) and for termination of the contract (Article 36(2)(d) of the general conditions).

20.3. Article 4 – Subcontracting

The subcontracting of certain specialised parts of the services may be necessary in the implementation of a contract. Although the contracting authority may wish to have the contract carried out by the service provider that has been selected, it is recognised that other persons or firms may be able to carry out particular services more efficiently than the contractor.

Although implementation of certain services may be subcontracted, the contractor remains fully responsible for the execution of the contract in accordance with the terms of the contract (Article 4(4)). Subcontracting is different from assignment in that, in the latter, rights and responsibilities vis-à-vis the contracting authority are transferred to another party, the assignee.

A tenderer may in his tender have stated the services that it proposes to subcontract and the name of the proposed sub-contractors. If it has already been foreseen in the technical offer, the award decision means approval of the proposed subcontractors by the contracting authority and no further authorisation is necessary, unless the subcontracted services or subcontractors change in the course of the implementation of the contract. Also in cases where experts are not directly contracted or employed by the contractor but through a third party, the latter is a subcontractor.

In other cases, the services to be subcontracted and the names of the subcontractors must be notified to the contracting authority. The contracting authority then notifies the contractor of its decision authorising or refusing to authorise the proposed subcontract within 30 days. Where the contracting authority refuses authorisation, the reason for the refusal should be stated (Article 4(2)). The reasons for refusal could be one of the following: The subcontractor:

• does not satisfy the eligibility criteria applicable for the award of the contract;

• falls under the exclusion criteria described in the tender dossier;

• is subject to EU restrictive measures;

• is implementing critical task which were announced in the tender dossier.

• Is refused by the partner country in case the subcontractor is a key expert (see PRAG Section 3.4.10.5.)

If the contracting authority fails to provide notification of its decision within the 30 days, the proposed sub-contractors are deemed approved. The use of subcontracting without prior authorisation of the contracting authority is valid cause for the sanctions for breach of contract (Article 34 general conditions) and for termination of the contract (Article 36(2)(d) of the general conditions).

Critical tasks

Point 18(8) of Annex I to the Financial Regulation (FR)[1] foresees the possibility for the contracting authority to require ‘critical tasks’ to be performed by the tenderer itself and not subcontractors, in the case of some contracts (works contracts, service contracts and siting and installation operations in the context of a supply contract). Likewise, according to Article 63(2) of Directive 2014/24, contracting authorities may require certain critical tasks to be performed directly by the tenderer itself or, where the tender is submitted by a group of economic operators, by a participant in that group. Whilst that provision now expressly allows restrictions on subcontracting during the examination and selection phase, such restrictions are acceptable only in so far as they concern well-defined tasks regarded as ‘critical’ for implementing the contract. This provision should however be used with extreme caution since it could be a restriction on the freedom of enterprise. This provision is not to be understood as the possibility to cap subcontracting.

• The contracting authority may announce in the tender documents, that it may require that certain critical tasks be performed directly by the contractor itself, be it a sole entity, or by a participant in the group, in case of consortium. This assumes that all tasks are very well defined and that one or two of them are identified as critical for the contracting authority. In this case, there must be a direct contractual link between the contracting authority and the entity performing these tasks, i.e. they cannot be performed by a subcontractor.

• -If the critical tasks have not been defined in the tender documents, the contracting authority may not decide to define critical tasks during contract execution.

• -Moreover, during the contract execution, the contracting authority may not decide to redefine the critical tasks to broaden its scope and therefore further limit subcontracting.

Subcontracting of experts

The qualification as a subcontractor depends on the existence or not of a legal person acting as an intermediary between the expert and the EU contractor (Art. 4(2)).

In the legislation of some Member states, an individual company (aka ‘one person company’, or ‘sole proprietorship’) can be set up that has no distinct legal personality from that of its sole founder. In this case, such company, not being distinct from the natural person who created it, is not a sub-contractor.

However, where the expert and the tenderer/contractor do not have a direct relationship, and the expert is made available through an intermediary, i.e. another company, including cases where the expert owns (or co-owns) a company (e.g. in France an entreprise unipersonnelle or in Belgium a SPRL Unipersonnelle which have a distinct legal personality), the relationship between the intermediary and the contractor is subcontracting.

Whether costs charged under the fees or the incidental part of the budget, does not define whether those costs qualify as subcontracting:

Case 1: If a key expert or non-key expert, as listed in the financial offer and annex IV to the contract is sub-contracted, it’s fees are charged under the fees of the service contract with the contractor.

Subcontracting is defined in Art 4.2 GC Service contract: “For the avoidance of doubt, where experts are not directly contracted or employed by the contractor but through a third party, the latter is a subcontractor”.

Therefore, the qualification as a subcontractor depends on the existence or not of a legal person acting as an intermediary between the expert and the EU contractor.

Case 2: If the sub-contracted costs are part of the incidentals as described in section 6.5 of the ToRs of the service contract with the contractor, then this is charged under incidentals, even if it entails fees (e.g. for a translation expert).

Annex II of the Terms of Reference clearly states about incidentals:

”The provision for incidental expenditure covers ancillary and exceptional eligible expenditure incurred under this contract. It cannot be used for costs that should be covered by the contractor as part of its fee rates, as defined above.”

Since the contracting authority should ensure that the third party is eligible (namely respects the rule of nationality), that it is not in an exclusion situation, and that it is not subject to EU restrictive measures, nor included in EDES, the qualification of a subcontractor is not just a formality, but a key element in the procurement procedure and further on during the contract management.

See also PRAG Section 2.6.11.1. on the general principles on subcontractors.

See also PRAG 3.4.10.3. on the nationality requirements of subcontractors, including the cases where an expert is made available through an intermediary.

20.4. Article 7 - General Obligations

See PRAG 2.5.3.

20.5. Article 8 – Code of conduct

Article 8(2) covers any form of physical, sexual and psychological conduct as well as any form of verbal and non-verbal abuse and intimidation, including harassment and sexual harassment.

Further to this and in accordance with Article 8 (7) the contractor or any of its subcontractors must respect the values on which the Union is founded, and which are set out in Article 2 of the Treaty on European Union. Furthermore, the Union institutions, bodies, offices and agencies as well as the Member States, when implementing Union law, must respect the fundamental rights enshrined in the Charter of Fundamental Rights of the European Union.

EU values are:

• Respect for human dignity

• Freedom

• Democracy

• Equality, including women and men, non-discrimination

• Rule of law

• Respect for human rights, including rights of persons belonging to minorities

• Pluralism, tolerance, justice, solidarity.

Accordingly, there can be no discrimination based on sex, race, colour, ethnic or social origin, genetic features, language, religion or belief, political or any other opinion, membership of a national minority, property, birth, disability, age or sexual orientation during the implementation of the action or work programme.

Contractors must immediately notify to the contracting authority any misconduct involving sexual exploitation, abuse and harassment. Following this notification, if the contracting authority is an EU delegation, the EU Delegation must also inform the relevant ‘Finance and Contracts’ unit at Headquarters as well as the central contact point in Headquarters (DG INTPA Director R. Security Coordinator).

As a minimum this notification should include the following information: misconduct category, type and short description. It is for the contracting authority to assess the gravity of the misconduct, taking into account possible remedial measures taken.

These remedial measures may include for instance:

• the active collaboration with the investigating authorities;

• the implementation of safeguarding procedures to prevent, respond and manage the harassment / sexual harassment and sexual exploitation and abuse situations, such as: creating internal procedures to address the risk of sexual exploitation and abuse in the contractor personnel programme, developing a code of conduct with standards that include the sexual exploitation and abuse principles, developing complaints procedures for the staff and other personnel to report incidents, developing internal investigation procedures, ensuring disciplinary actions and sanctions, establishing and implementing a victim assistance mechanism;

• the evidence of appropriate staff reorganisation measures following the misconduct, such as the dismissal of the employee responsible of the infringement.

Investigations should be completed within an acceptable time frame and the contracting authority should update DG INTPA Directorate R and the appropriate geographical directorate on outcomes and actions taken.

If the contracting authority considers the remedial measures to be not sufficient, it must inform the contractor.

These procedures should take into consideration all relevant data protection and confidentiality related requirements. The contracting authorities must treat the related information as ‘special categories of personal data’ and in doing so ensure appropriate confidential storage and handling. To this end, the contracting authorities must have in place appropriate safeguards for the rights of the data subjects concerned, in particular adequate technical and organisational measures to ensure the security and confidentiality of such categories of data, to prevent accidental or unlawful destruction, loss, alteration, unauthorised disclosure of, or access to personal data transmitted stored or otherwise processed. Where the contracting authority is a EU delegation the measures may, among other, take the form of secure transmission of data via Secure Electronic Mail (SECEM), definition of access rights strictly on a need to know basis, secure storage of paper files in locked cupboards, restricted access to relevant Ares files, secured electronic documents stored in common drives.

The respect of the code of conduct set out in Article 8 constitutes a contractual obligation. Failure to comply with the code of conduct is always deemed to be a breach of the contract under Article 34 of the general conditions. In addition, failure to comply with the provision set out in Article 8 can be qualified as grave professional misconduct that may lead either to suspension or termination of the contract, without prejudice to the application of administrative measures, including exclusion from participation in future contract award procedures.

The grave professional misconduct covers not only the misconduct related to offensive behaviours as defined in the ‘zero tolerance’ clause (Article 8(2)), but also any wrongful conduct that has an impact on the professional credibility of the contractor and denoting a wrongful intent or gross negligence. In practical terms, the contracting authority may invoke the grave professional misconduct for all wrongful conduct that implies a breach of the obligations stated in the code of conduct/ethical obligations by contractors that the contracting authority can demonstrate with any means. In this respect, the grave professional misconduct may lead to suspension or termination of the contract, without prejudice to the application of administrative measures, including exclusion from participation in future contract award procedures.

See also PRAG 2.5.6 and 2.4.2.1.

20.6. Article 9 – Conflicts of interest

See PRAG 2.5.4.

20.7. Article 13 – Medical, insurance and security arrangements

The contractor maintains full responsibility for the health and security conditions of all persons working for him/her. Article 13 of the general conditions stipulates therefore that the contractor takes all necessary medical and professional insurances, as well as insurance covering its liabilities as laid down in Article 12 of the general conditions. The insurance content is specified in Article 13(3) of the general conditions.

According to Article 13(2) of the general conditions, proof of the insurance coverage (cover notes and/or certificates of insurance) must be available at the latest when the contract is countersigned and provided to the contracting authority upon its request.

The contractor has to ensure adequate security arrangements corresponding to the level of risk of the country where the contract has to be performed. Under a fee-based, the cost of these measures is generally part of the incidental expenditures and is described in Section 6(5) of the terms of reference.

20.8. Article 14 – Intellectual and industrial property rights

See PRAG 3.4.3.2 and Terms of Reference 6.1.1 and 6.4.

20.9. Article 15 – The scope of the services

See PRAG 3.2.1 and 3.2.2 on Global price contracts and Fee-based contracts.

20.10. Article 16 – Personnel

When the contract concerns the provision of technical assistance personnel, the contractor is under an obligation to provide the personnel specified in the contract. This specification may take different forms.

Firstly, the contract identifies and designates the key experts that the contractor must provide under the contract. These are the experts that the contractor proposed in his tender, in the offer it made before the conclusion of the contract. The offer of the contractor must contain the detailed profile of these experts. Secondly, Article 16(1) states that the contractor must also specify the categories of personnel other than the key experts that he/she intends to use to implement the tasks. The terms of reference also set out the level of training, qualification, experience, and specialisation necessary for the non-key experts.

All of these factors must be taken into account in a situation where the contractor must replace personnel after signing the contract or during its implementation.

The contracting authority may object to the contractor’s selection of any categories of personnel proposed to work under the contract.

However, for the appointment of non-key experts the contractor needs to submit to the project manager a request for approval in advance (Article 16(4)). The contractor may propose the non-key experts of its choice, provided the provisions included in Section 6.1.2 of the terms of reference are respected. The nationality rule does not apply to experts.

Experts are considered as being the personnel of the contractor regardless of whether they are self-employed or employed by a third party, if the following cumulative conditions are fulfilled in accordance with the terms of reference of the service contract:

• a contractor has a contract to engage the expert to work for it;

• the expert must work under the direct instructions/supervision of the contractor;

• the expert must work in the premises defined in the terms of reference (if applicable);

• the output of the work belongs to the contractor;

• travel and subsistence costs related to such expert's participation in activities defined in the contract or to travel relating to the implementation of the contract is directly invoiced by the contractor to the contracting authority;

• the expert uses the contractor's infrastructure and administrative support (i.e. user of the ‘overheads’).

Neither the contracting authority nor the European Commission have contractual relations with any of the personnel employed by the contractor under the contract. This means that if one of the personnel appeal to the contracting authority or the European Commission to resolve disputes with the contractor, the contracting authority or the Commission are not able to respond favourably to such a request, if this is not related to the application of the general conditions.

20.11. Article 17 – Replacement or removal of experts

Where an expert listed in Annex IV of the contract has to be removed or replaced during the implementation of a contract, the replacement must possess equivalent or better qualifications and experience, and the fee/rate may in no circumstances exceed that of the expert replaced.

See PRAG Section 3.6. on the obligatory steps to follow in case of the replacement of an expert.

See annex b14 which provides a template for acknowledgement of receipt of the proposal to replace a key expert, and pre-information in case of liquidated damages.

In case there is an agreement to replace an expert, it should be formalised through an addendum. The project manager should prepare an explanatory note (using PRAG annex a6) confirming that the new expert has at least equivalent qualifications as those of the expert to be replaced and that the fees remain unchanged, or that the new expert meets the minimum requirements indicated in the Terms of Reference and that the fees have been renegotiated downwards. The documentary proof (e.g. expert’s profile, diplomas) of the expert to be replaced and of the new expert should be annexed to the note, together with the statement of exclusivity and availability of the new expert. If the contracting authority is the European Commission, this note must also be accompanied by a confirmation that the representative of the partner country accepts the new expert.

20.12. Article 18 – Trainees

In order to ensure the long-term viability of projects, the training of nationals of the partner country is an important element in the provision of technical assistance and should be encouraged.

Article 18 sets out the terms under which the contractor must provide this training. The contracting authority must, in accordance with the training schedule, make trainees who possess the basic knowledge required for this training available to the contractor. The details of the training requirements should be clearly defined in the Terms of Reference, which should also include mechanisms to monitor the training (evaluation reports, activities that are entrusted systematically to trainees, etc.) in order to ensure that the objectives are attained and to avoid future trainees or organizations having unrealistic expectations.

The idea is that the trainees chosen by the contracting authority to collaborate with the contractor are integrated into the team of experts with clearly defined responsibilities. The level of training that the trainees are expected to acquire must be clearly defined. In this regard, it should be noted that the contractor must have the possibility to request the contracting authority to replace a trainee that is judged incompetent or ill-suited on the basis of an evaluation of the trainee’s work. The contracting authority must comply with such a request, unless it considers that the reasons given by the contractor are not valid.

Although the cost of the training is included in the contract amount, the remuneration of trainees, and their travel and accommodation expenses and other expenses incurred by them, are the responsibility of the contracting authority. The cost of the training should be included in the incidental expenditures.

20.13. Article 20 – Amendment to the contract

See PRAG 2.11 and 3.6.

20.14. Article 26 – Interim and final reports

See PRAG 3.2 and 3.4.3.2.

The objective of the Agreed-Upon Procedures (AUP) is to provide the Contracting Authority with factual findings to be able to assess that the costs and revenue declared by the contractor in the financial report on which the payment request is based are real, accurately recorded and eligible in accordance with the service contract.

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20.15. Article 27 – Approval of reports and documents

If the contracting authority does not approve the report, it must either indicate the changes that are deemed necessary, or reject the report with a justification for the rejection. If further changes are requested, the time period for the implementation of these changes should be specified. As the approval of reports must be given within the payment deadline, in case of rejection of a report the contracting authority may halt the countdown towards the payment deadline. See Article 29(2) of the general conditions.

Although the contractor is formally responsible to the contracting authority, in the case of a contract signed in indirect management with partner countries with ex ante control by the Commission, the Commission must be able to verify that the implementation of the projects is progressing as foreseen. This is the reason for which the contractor may be required, by virtue of Article 29(5) of the special conditions, to send to the Commission a copy of the invoices accompanied by the reports that it submits to the contracting authority. Contractors should submit invoices, reports and other supporting documents (if any) related to a payment request in electronic version, unless this is not allowed by the national law of the contracting authority (under indirect management). For the same reason, the contractor may wish to inform the European Commission of difficulties that arise, if it considers that this may help to avoid complications or delays.

Also, where services contracts are signed in direct management, in accordance with standard practice, the partner country should be involved in the discussion and in the approval of reports. This must be specified in the terms of reference.

20.16. Article 29 – Payments and interests on late payment

The contractor has the right to payments at different stages of the implementation of the contract: pre-financing, interim payments, and final payment. These payments are made in the currency of the contract (Article 29(5)). Payments due by the contracting authority must be made to the bank account listed on the contract. Changes to the bank account to be made through the Participant Identification Code (PIC) and in line with the contract conditions.

Pre-financing may be conditioned on the delivery of a financial guarantee by the contractor to the contracting authority.

Pre-financing should enable the contractor to deal with expenses resulting from the commencement of the implementation of the contract. However, the contractor cannot condition the beginning of the implementation of the project on the provision of pre-financing.

The pre-financing payments are made in the form of a lump sum, and their total amount may not exceed 20% of the contract price for fee-based service contracts, and 40% of the amount of the contract for global price contracts. The contract amount is understood to include all budget lines, thus including the incidental expenses in the case of fee-based contracts.

In case of use of an electronic exchange system as foreseen in Article 2(4) of the special conditions, the pre-financing payment shall be made without receipt of an invoice within 30 days of the signature of the contract. Otherwise, the contractor must send an invoice requesting the pre-financing payment and therefore it is not paid automatically. The contractor may decide the amount that it wishes to receive, within the limits specified above. It sometimes happens that contractors decide to reduce the amount of pre-financing to which they are entitled in order to avoid having to provide a financial guarantee, which is acceptable.

The pre-financing payments are cleared when 80% of the value of the contract has been paid. However, if the pre-financing is covered by a guarantee that stops being valid without the contractor renewing it, the contracting authority can deduct the amount of the advance payment from subsequent interim payments, or terminate the contract (Article 30(3)).

The total pre-financing and interim payments may not go above 90% of the value of the contract – the minimum final payment must correspond to 10%. The final payment is made after approval by the contracting authority of the final report. In accordance with the general conditions, the payment periods include the approval of reports, subject to what is specified in the special conditions.

The payments deadline for pre-financing is 30 days for contracts funded by the EU general budget, 60 days for the 11^th EDF and 90 days for the 10^th EDF (Article 29(1) of the special conditions derogating from the same article of the general conditions).

The payment deadlines for interim payments are 60 days in accordance with the general conditions. This payment deadline applies to the contracts in direct management. Article 29(1) provides a derogation for the contracts in indirect management with partner countries and for the contracts under the EDF. In this case, the payment deadline is 90 days. Indeed, for the budget, the contracts in indirect management are considered as ‘complex’ contracts, in the sense of the Financial Regulation, and for the EDF, the Financial Regulation sets a payment deadline of 90 days, regardless of what the mode of management may be.

The payment deadlines for the final payments are 90 days in all cases.

If the payment deadlines are not respected, the contractor has the right to late-payment interest. Article 29(3) of the general conditions states that the contractor receives them automatically, except if the amount of the interest is less than EUR 200, in which case the contractor has to make a demand within the two months following the late payment. As a result of a derogation from this article that is made in the special conditions, in indirect management the payment of interests is never automatic and the contractor must make a demand in all cases, while still respecting the two month deadline following the late payment.

Be aware that in accordance with Article 37(1)(a) of the general conditions, if payments are due for more than 120 days after the deadline, the contractor is permitted, after having given 14 days’ notice to the contracting authority, to terminate the contract.

For the purposes of the provision for incidental expenditure (article 29(5)):

• when according to the contract the currency of payment is in Euro, the conversion into Euro of actual expenditure borne in other currencies is done at the ‘InforEuro’ monthly accounting rates in force on the first working day of the month in which the expenditure was incurred.

• when according to the contract the currency of payment is in the national currency, the conversion into national currency of actual expenditure borne in other currencies is done at the InforEuro monthly accounting rates in force on the first working day of the month in which the expenditure was paid.

20.17. Article 30 – Financial guarantee

For fee-based contracts, the guarantee must be returned to the contractor when 80% of the value of the contract has been paid. For global price contracts, the guarantee should be retained by the contracting authority until payment of the final amount.

20.18. Article 34 – Breach of contract

A breach of contract is committed where one of the parties to the contract fails to discharge any of its obligations under the contract. Some breaches are of only minor importance, whereas others, such as the non-implementation of the contract by the contractor or the failure by the contracting authority to pay amounts due to the contractor, are major breaches and have serious consequences. Only serious breaches entitle one of the parties to terminate the contract, and these are enumerated in Article 36 (breaches by the contractor) and Article 37 (breaches by the contracting authority). For other breaches the injured party may claim damages, suspend payments, or suspend the implementation of the contract.

The injured party is then entitled to recover damages from the other party either by negotiation and agreement or, if necessary, by a court action.

The damages to which an injured party is entitled may be either general damages or liquidated damages, both of which are defined in the Glossary of Terms, Annex a1a to the PRAG.

Liquidated damages are damages that have been agreed beforehand by the parties, and recorded in the contract, as being a genuine estimate of the loss suffered by the injured party for a particular breach of contract.

General damages are not agreed beforehand. An injured party seeking to recover general damages must prove the loss it has suffered, whether it attempts to do so by direct agreement with the party in breach or by means of arbitration or court action.

Any amount of damages, whether liquidated or general, to which the contracting authority is entitled, can be deducted from any sums that it is due to pay to the contractor, or alternatively from an appropriate guarantee, the pre-financing guarantee. If at the time in question there are no amounts due to the contractor, the contracting authority can only recover sums from the guarantor or through legal action against the contractor.

20.19. Article 36 – Termination by the contracting authority

The general conditions enumerate several grounds that entitle the contracting authority to terminate the contract, and also stipulate its rights upon termination.

The period of 7 days notice mentioned in Article 36(2) is not aimed at giving the contractor a final chance to remedy his failures, but instead to give him/her a chance to make the necessary preparations to achieve his tasks.

Termination is a serious step and should only be taken after exhaustive consultations between the contracting authority and the project manager. Before resorting to termination, the issue of warnings to the contractor or instructions to remedy should be considered. The grounds for termination mentioned in Article 36(2) all relate to defaults or lack of ability on the side of the contractor. Some of those cases are also applicable to members of the administrative, management or supervisory body of the contractor and/or to persons having powers of representation, decision or control with regard to the contractor, to persons jointly and severally liable with the contractor for the performance of the contract, or to subcontractors. Nevertheless, attention should be drawn to the fact that the contracting authority may terminate the contract for reason of any organisational modification in the legal personality, nature, or control of the contractor, for which it did not obtain the prior consent of the contracting authority through an addendum to the contract (Article 36(2)(f)).

Of course, any modification that is acceptable to the contracting authority should be formally agreed. This is most likely to occur in the case of a change to the legal relationship between the parties within a consortium or a joint venture. However, there may be changes that affect the rights of the contracting authority in a way that it cannot accept. In that case it has the possibility to terminate the contract.

The contracting authority may also, at any time and with immediate effect, terminate the contract for other reasons than those provided in Article 36(2), when they are provided elsewhere in the general conditions .

Where termination by the contracting authority is not due to a fault of the contractor, force majeure, or other circumstances beyond the control of the contracting authority, the contractor is entitled to claim an indemnity for loss suffered, in addition to sums owed  for services already rendered. Such ? loss includes that of profit on the remaining part of the services to be implemented. Termination of the contract does not result in a cessation of all rights and obligations and activities as between the parties. Indeed, in such a case, the project manager has to draw up a detailed report of the services that have been rendered by the contractor.

If, according to article 36.3, the contracting authority concludes another contract with a third party to complete the services at the contractor's own expense,  the net amount due to the contractor can be ascertained and paid only when all services have been rendered and the full value of contracts with third parties and other costs have been deducted from amounts due to the contractor (Article 36(6)).

20.20. Article 38 – Force majeure

There is no default or breach of contract if implementation is prevented by force majeure (Article 38(1)). Because of the seriousness of the consequences that arise, it is important that any notification of force majeure should be carefully examined to ensure that the event in question is genuinely outside the control of the parties. For example, strikes and lockouts may be caused by some action of the contractor, and would then not be considered as resulting from force majeure. Provisions of force majeure should, therefore, not be used as an escape from contractual obligations or to improperly terminate the contract. Any dispute between the parties arising from the application of this article should be resolved under the procedures for settlement of disputes.

If a situation of force majeure occurs, it is likely that at least one of the parties suffers some loss. The general principle here is that ‘the loss lies where it falls’, meaning that each party bears its losses.

Another case of force majeure general conditions concerns the suspension of cooperation with the partner country. This case allows for the protection of the interests of the contractor who can terminate the contract in this way without putting itself in default towards a decentralised contracting authority with whom cooperation has been suspended.

As a result of Article 38(3), the contracting authority does not have the right to demand the payment of liquidated damages or to terminate the contract for the contractor’s failure of implementation, to the extent that this failure is due to force majeure. Similarly, the contractor is not entitled to interest on delayed payments or to other remedies arising from the contracting authority’s failure to fulfil its contractual obligations, or to terminate the contract for failure of implementation, where these failures are due to force majeure. The procedure to be followed in the event of force majeure is set out in Article 38(4). It is initiated by either party giving prompt notice of the event in question. The contractor is then required to make proposals on how to continue with the implementation of the contract. The contractor is entitled to any extra costs incurred as a result of the project manager’s directions (Article 38(5)).

Both parties should monitor the evolution of the circumstances of force majeure especially when those are long-lasting. If the situation of force majeure continues for a period of 180 days, each party is encouraged to make recourse to the 30-day notice for termination provided for in Article 38(6) of the general conditions, in order to release all parties from their respective contractual obligations.

20.21. Article 40 – Settlement of disputes

Although a party can decide to initiate the dispute settlement procedures of Article 40 of the general conditions at a moment when the contract is still being implemented, these procedures may also begin once the contract has been completed, or after the termination of the contract by one of the parties. It should be noted that if there is a dispute that concerns an on-going contract, this does not relieve the contractor of its responsibility to continue complying with its contractual obligations with due diligence.

20.21.1. Amicable settlement

When a dispute relating to the contract arises, the parties are required to make every effort to settle this dispute amicably. To this end, as an obligatory first step, Article 40(2) of the general conditions requires one of the parties to notify the other party in writing of the dispute, stating its position and requesting an amicable settlement (see template T1 and – as a follow-up – template T2). A prior information letter issued in the view of a recovery order can also take the place of a formal request for amicable settlement, if so indicated in the letter itself. The other party is to respond to that request within 30 days with its position on the dispute. The general principle is that disputes are discussed by the parties and, whenever possible, resolved in an amicable way. The way of pursuing an amicable settlement may vary according to the internal administrative procedures of the contracting authority concerned, but it is usually of an informal nature. Nevertheless in order to ensure a certain efficiency and transparency, Article 40(2) of the general conditions sets clear time limits to the attempt for amicable settlement. These time limits guarantee that a party cannot indefinitely prolong the amicable settlement negotiations in an attempt to gain time and without any genuine intention to come to a settlement. As such, the maximum time period for reaching an amicable settlement is fixed at 120 days, unless both parties agree otherwise. The amicable settlement procedure can be considered to have failed earlier if the other party did not agree to the request for an amicable settlement or if it did not respond to that request within 30 days.

Unlike the attempt to reach an amicable settlement that is mandatorily foreseen in Article 40(2), Article 40(3) provides for the possible recourse to conciliation by a third person, and sets maximum time periods for reaching a settlement. See also 20.21.3. below.

20.21.2. Litigation

If the attempt to resolve the dispute through amicable settlement fails and, if so requested, the conciliation procedure fails, each party can, by way of last resort, submit its claims to a court or initiate arbitration proceedings, as stipulated in the special conditions of the contract.

• Unlike with an amicable settlement, a court or arbitral tribunal may take a decision on the submitted claims even if the other party does not cooperate during the legal proceedings - for instance if one party does not attend proceedings, the court or tribunal may still make a decision. Unlike a proposal made during a conciliation procedure, the final decision taken by a court or arbitration tribunal will be binding. Whether a court or an arbitral tribunal will be competent and, if so, which court or arbitral tribunal, will be laid down in the special conditions of the contract. As a general rule, whenever the Commission is the contracting authority, the courts in Brussels are designated as being exclusively competent for the litigation. In the case of indirectly managed EDF/NDICI-GE financed contracts, the special conditions will distinguish between disputes arising in a national contract and disputes arising in a transnational contract. Disputes arising from a national contract, i.e. a contract concluded with a national of the State of the contracting authority, are under Article 68.4 of the special conditions, to be settled in accordance with the national legislation of the Partner Country concerned.

• Disputes arising from a transnational contract, i.e. a contract concluded with a contractor who is not a national of the State of the contracting authority, are to be settled by arbitration in accordance with the PRAG procedural rules on conciliation and arbitration (Annex A12b)(for NDICI-GE financed contracts) or the Procedural Rules adopted by the decision of the ACP-EC Council of Ministers (the EDF Procedural Rules)[2] (for EDF-financed contracts).

In an EDF indirectly managed transnational contract, parties further have the option to agree not to submit the dispute to arbitration, but instead to follow either the national legislation of the ACP State concerned or its established international practices. Such agreement can be reached at the start of the contract before any dispute has arisen, or later on. In any event, the agreement to deviate from recourse to arbitration in a transnational contract must be recorded in writing and signed by both parties.

If an internal administrative appeal procedure exists within the ACP State, the EDF arbitration must be preceded by that procedure. The contractor will only be in a position to initiate EDF arbitration if internal administrative appeal procedures fail or are deemed to have failed (that is if there are no such procedures in the ACP State in question) as indicated in Article 4 of the EDF Procedural Rules.

Arbitration is a kind of private dispute resolution procedure in which the parties contractually agree to submit their dispute to an arbitral tribunal and accept the decision of this tribunal to be binding. If the parties agree or if the contract so provides, the arbitral tribunal can consist of one single arbitrator. If not, each party selects, on its own, one arbitrator, who then jointly nominate a third arbitrator who will act as chairperson of the tribunal. The arbitration procedure is an adversarial procedure, with written statements exchanged between the parties and concluded with oral proceedings. No appeal is open against the final decision taken by the arbitral tribunal. EDF arbitration procedures are not public, while NDICI-GE ones are, and both are subject to payment – the cost must in principle be borne by the party losing the arbitration.

For more information on arbitration in EDF contracts, please see the rules of procedure for conciliation and arbitration of contracts financed by the EDF (Annex A12a to the PRAG). For more information on arbitration in NDICI contracts, please see the PRAG procedural rules on conciliation and arbitration (Annex A12b to the PRAG):  Annexes - EXACT External Wiki - EN - EC Public Wiki (europa.eu)

20.21.3. Conciliation

Once the dispute has arisen, the parties may agree to have recourse to conciliation by a third party.

The main difference between conciliation and arbitration is that, unlike arbitration, the proposal made by a conciliator is not binding for the parties. They remain free to accept or reject any settlement-proposal made by the conciliator. Unlike the attempt for amicable settlement, the conciliation is not an obligatory step.

Often, conciliation is initiated when one of the parties has already submitted the dispute to a court or arbitral tribunal. Indeed, as a protective measure, a party may, for instance, already have lodged a request for arbitration to avoid such possibility to become time-barred. In that respect, one should bear in mind that Article 18 of the EDF Procedural Rules for conciliation and arbitration stipulates that the notice initiating arbitration must be time-barred unless it is given not later than 90 days after the receipt of the decision closing the internal administrative proceedings taken in the ACP State. The conciliator will, as a general rule, request the parties to suspend arbitration proceedings pending conciliation.

Like under the amicable settlement procedure, conciliation starts with a party requesting the other party in writing to agree on an attempt to settle their dispute through conciliation by a third person. The other party must respond to this request within 30 days. The same safeguards as for the amicable settlement procedure govern the conciliation procedure: unless the parties agree otherwise, the maximum time period for reaching a settlement through conciliation is 120 days.

Should conciliation fail, the parties may refer their dispute to, or continue their dispute before, a court or arbitral tribunal, as specified in the special conditions. If so, nothing that has transpired in connection with the proceedings before the conciliator must in any way affect the legal rights of any of the parties at the arbitration.

In a contract to which the Commission is not a party, the Commission can act as a conciliator, and if so, this will take the form of a good offices procedure. Such a good offices procedure can be conducted by the delegation or by Headquarters, depending on the availability of resources and competences. In any event, it is crucial that both parties have confidence in the impartiality and capacity of the conciliator and fully accept his mission.

For more information on the good offices procedure, please consult the document to be previously signed by the parties, which describes its steps and principles[3].