22. The implementation of supply contracts – A users’ guide

[The content of this chapter is under the responsibility of Unit INTPA.R.4. The last update was made in December 2024.]

22.1. Introduction

The general conditions govern contain the basic articles governing the post-contract-award phase of supply contracts.

They may be subject to modification by the special conditions that are part of the contract and that also 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 article of the general conditions for supply contracts; but only with those articles, which are considered essential or so complex as to require further explanation. Furthermore, the standard tender documents and contracts contain several indications, references and proposals for modifying and completing the general conditions through the special conditions.

22.2. Article 5 - 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 recover the damages from that liable person.

Likewise, when granting credit, the contractor’s bank can demand from the contractor that the payments, which 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 not imply that these bank or insurance companies will take over the further implementation of the contract.

Consequently, Article 5(2) 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 27(1) and 27(2).

In other cases, a prior authorisation of the contracting authority is required. In the 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 organisational or shareholding 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 of 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. It does not call into question the basis on which the award decision was made. For this reason, the assignee must also satisfy the eligibility and exclusion criteria applicable for the award of the contract in the original tender dossier.

For the same reason, the assignment must not alter the unit price or the 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.

The addendum is to be signed by the contracting authority, the assignor and the assignee. The assignor and assignee often 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 necessary financial guarantees 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 5(3) 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 articles 5(4) and 36(2)(d), the assignment of a contract by the contractor without authorisation by the contracting authority is valid cause for termination of the contract.

Article 5(4) also states that, in the case where the contractor has assigned the contract without prior authorisation, the contracting authority can apply, as of right, the sanctions for breach of contract. Therefore, in addition to the extra costs for completion of the contract, the contracting authority must be entitled to recover from the contractor any loss it has suffered up to the value of the supply (general damages), unless otherwise provided for in the special conditions.

22.3. Article 6 - Subcontracting

Although certain supplies may be subcontracted, the contractor remains fully responsible for his obligations under the contract (Article 6(5)). The supply 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 6(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.

Subcontracting without the authorisation of the contracting authority can result in termination of the contract (Article 6(7) and 36(2)(d)).

A tenderer may in his tender have stated the supply, which she/he proposes to subcontract and sometimes also the name of the proposed subcontractors. Before the contract is signed, it should be made clear whether the contractor is to be bound by such proposed subcontracts. This will be the case where the qualifications of the subcontractors, identified by a tenderer in his tender, have been taken into account during the evaluation of the bids and are part of the technical reasons for awarding the contract to the tenderer in question. If this is the case, the notification of award of the contract should be explicitly mentioned it.

In relation to the execution of a subcontract, it is sometimes necessary for the project manager to deal directly with the subcontractor on technical matters. In such a case, she/he may only do so with the agreement of the contractor. It is essential that the contractor is kept informed at all stages so that the contractor is immediately aware of discussions or correspondence that have taken place between the project manager and the subcontractor and can comment or take such action as she/he considers appropriate.

If, at the end of the warranty period, there is still some unexpired guarantee or other obligation due from a subcontractor to the contractor, the latter must transfer this right including any guarantee to the contracting authority if so requested (Article 6(6)). The contracting authority may also make such a request at any time after the end of the warranty period. The contractor should always include a provision in his contract with the subcontractor so that she/he can fulfil his contractual obligations in this respect.

Subcontracting should be distinguished from cases where the contracting authority enters into a separate direct contract with another contractor for supplies, which are not part of the contract, but is part of the same project. Where a project is divided into a number of separate contracts, the project manager will need to coordinate them, on behalf of the contracting authority. Whilst a contractor is fully responsible for his subcontractors, she/he is not responsible for other contractors working on the project but she/he may be responsible for liaising with them if she/he is required to do so in his contract.

22.4. Obligations of the contractor

See PRAG 2.5.3.

22.5. Article 9a - Code of conduct

The European Commission applies a zero tolerance policy regarding all forms of misconduct including sexual exploitation, abuse and harassment by its staff and those of partner organisations receiving EU funds. In this respect Article 9a(1) 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 9a(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 staff 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 9a constitutes a contractual obligation. Failure to comply with the code of conduct is always deemed to be a breach of the contract under Article 35 of the general conditions. In addition, failure to comply with the provision set out in the Article 9a 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 9a(1)), 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.

22.6. Article 9b - Conflict of interest

See PRAG 2.5.4.

22.7. Article 10 - Origin

Origin is the ‘economic’ nationality of goods in international trade. The rule of origin refers to the origin of goods and equipment.

See PRAG 2.3.4 to 2.3.7, and PRAG 4.3.9.4.

Failure to provide a certificate of origin, or providing a certificate with a non-compliant origin, as well as a certificate not reflecting the actual origin of the supplies or a fake certificate may lead, in addition to other possible sanctions, to the ineligibility of the relevant costs of the supply covered by the certificate, to damages and/or to termination of the contract (Article 10(3)). The provision of an accurate certificate of origin, issued by the institution legally empowered to do so is a contractual obligation by the contractor.

Contracting authorities are strongly encouraged to pursue the range of actions above mentioned in accordance with the gravity of the case at stake. As guidance, the following measures should be observed:

• Absence or non-compliant certificate of origin: ineligibility of the costs of the supplies affected, these items will not be paid for (see Article 35(4)). The claim of damages and/or the termination of the contract may also be envisaged depending on the seriousness of the case in relation with the total contractual amount and on the status of implementation of the contract. In the case of liquidated damages, they can be calculated on the basis of the contractual portion affected by the lack or non-compliant certificates (financial amount of items).

• Proved faked certificate(s): in addition to the above measures, the contracting authority should consider launching a procedure to impose administrative measures (exclusion and/or financial penalty) on the contractor.

In order to apply these measures, the contracting authority has to take into account not only the impact of the case in relation with the total contractual amount and the status of the contract in terms of degree of implementation, but also additional factors such as urgency, room for manoeuvre to award another contract with a different supplier, etc.

22.8. Article 12 - Liabilities and insurance

Article 12 contains two liability caps: Article 12(1)(a) caps compensation for damage to the supplies, while Article 12(1)(b) caps compensation for damage in respect of the contracting authority. The liability is capped to the contract value / EUR 1 000 000  for each part of this article. The overall liability is therefore not capped to the contract value / EUR 1 000 000 in aggregate.

22.9. Article 13 - Programme of implementation of tasks

If so required in Article 13(2) of the special conditions, the contractor must submit to the project manager a programme of implementation of tasks. The programme should contain, at least, the order in which the contractor proposes to carry out the tasks, the time limits within which submission and approval of drawings are required, a general description of the method, which the contractor proposes to carry out the contract, and such further details and information as the project manager may reasonably require (Article 13(1)).

The contractor sends the programme to the project manager within the deadline set in the special conditions. It is subject to the approval of the project manager within the time limit provided therein. The programme has contractual significance for the actions taken by the contractor, the project manager and the contracting authority. The programme will enable the project manager to take timely action in monitoring the progress of the implementation and to enable the contracting authority to arrange for the provision of drawings, documents and items. It also permits the contractor to effect timely orders and the allocation of resources (materials, equipment, etc.).

The special conditions should give any additional information or specification about the manner in which the programme should be presented. The special conditions may specify the format for the programme.

The project manager, on observing that the implementation of the tasks has departed materially from the approved programme, may instruct the contractor to revise the programme within a given time and in the manner that the project manager considers appropriate (Article 13(4)). The purpose of having a revised programme is to show how the contractor intends to make up for any delay to complete the remaining tasks within the time available. Proper management of the contract is only possible with a realistic programme, which reflects the actual progress already made.

Where the contractor is proceeding with the tasks in accordance with or in advance of the programme, it should not be necessary for the project manager to order such a revision. On the other hand, the contractor is not permitted to modify the programme of implementation of tasks without the approval of the project manager.

The contractor is not entitled to any additional payment for revising the programme.

22.10. Article 16 - Tax and customs arrangements

Clearance through customs, import and export licenses, port regulations, storage and transport regulations are normally the responsibility of the contractor and she/he should take all necessary steps in sufficient time to meet the requirements of the contract.

See PRAG 4.3.2. on the Incoterms delivery conditions.

22.11. Article 22 - Amendments

See PRAG 2.11. on modifications of contracts in general and PRAG 4.7. on modifying supply contracts.

22.12. Article 23 - Suspension

Various reasons can justify the suspension — in principle temporary — of a contract. Sometimes, the law governing the contract provides for special causes of suspension, which are in addition to the specific causes in the contract. Article 23 of the general conditions foresees two cases of contract suspension.

22.12.1. Suspension by administrative order of the contracting authority

Traditional event of suspension, concerns all the contract or part of it for such time or times and in such manner as the contracting authority may consider necessary.

22.12.2. Suspension for presumed substantial errors, irregularities or fraud

Suspension may be notified by the project manager or the contracting authority. It needs to be kept in mind that in the event that substantial error, irregularity or fraud are not confirmed and/or attributable to the contractor, this case of suspension allows the contractor to be compensated for the expenses incurred due to any precautionary measures related to the suspension.

The contractual and financial consequences of the suspension are set out in Articles 23(4) to 23(6).

22.13. Testing, acceptance and maintenance

22.13.1. Introduction

The contractor is required to provide the supplies, which conform to the specifications, samples, etc. laid down in the contract (Article 24(1)).

The various stages in the checking procedure result in preliminary technical acceptance for certain materials, if required in the special conditions (Article 24(2)), provisional acceptance (Article 31) and final acceptance of the supplies (Article 34).

The provisional and final acceptance are the two stages in which the supplies are taken over effectively. The provisional acceptance takes place when the supplies have been delivered. The final acceptance takes place once the warranty period expires and any defects have been properly made good by the contractor. The contract may permit the provisional acceptance of the supplies in parts (partial provisional acceptances).

The warranty period stated in the contract commences on provisional acceptance. For defective items, which have to be replaced or repaired, the warranty period restarts at the time of replacement or repair being made to the satisfaction of the project manager.

The contractor is responsible for rectifying all defects, which are observed in the supplies during the warranty period, provided that the defects are due to his default. She/he will not, however, be liable for defects that can reasonably be attributed to normal wear and tear or to faulty design or acts of the contracting authority or of the project manager.

The contracting authority and the head of delegation should be kept duly informed on the acceptance process.

22.13.2. Preliminary technical acceptance: inspection and testing of materials and workmanship

If preliminary technical acceptance is requested it needs to be specified in Article 24(2) of the special conditions.

When the contractor considers that certain items are ready for preliminary technical acceptance, she/he takes the initiative by sending a request to the project manager (Article 24(2)). This is particularly important for inspections and tests not carried out on site but at the place of manufacture. If the project manager finds them satisfactory, she/he must issue a certificate stating that the items meet the requirements for preliminary technical acceptance laid down in the contract.

Before delivering such a certificate, the project manager[1] will proceed to inspection and testing as specified in Article 25(2) of the special conditions. Inspection is essentially visual in nature. It includes examining and measuring components and materials to check their conformity with the drawings, models, samples, etc., as well as checking the progress of manufacture against the program of implementation of tasks. Testing is the carrying out of technical tests on materials, components and manufactured goods, as described in the contract, to check that they are of the specified quality.

Inspection and testing may take place at the place of manufacture, the site or other places as may be specified in the contract (Article 25(2) of the special conditions). If no place is specified the place should be agreed between the contractor and the project manager.

In preparing his program of implementation of tasks, the contractor should allow for inspection and testing by the project manager and for the acceptance procedures and the contractor’s tender price should include costs for all tests; all contractor’s responsibilities relating to testing and inspection are specified in Article 25(3).

If the project manager and the contractor disagree on the test results and where either party can require the test to be repeated or can request that the test is carried out by an independent expert. In that case, the party who is proved wrong pays for the repeat test. The result of the retesting is final (Article 25(6)).

Components and materials that are not of the specified quality must be rejected. Article 30 describes the procedure to be followed in that case including the possibility for the contracting authority to employ another contractor to make good any rejected part of the supply (Article 30(3)) although it is preferable that it is the contractor who rectifies the defects, since employment of another contractor can confuse liabilities especially if the replacement order is not properly done.

It should be pointed out that the signing of a preliminary technical acceptance certificate is not final and depends on the project manager. It does not prevent the project manager from rejecting components or materials should any defect in them become apparent at a later date or when the supplies are submitted for provisional acceptance (Article 24(3)).

When tests have shown no failure and the supplies fail to meet non-essential technical requirements of the contract only at a later stage, the project manager may investigate with the parties to the contract whether an acceptable solution can be found based on adjustment of payment. This is particularly the case where replacement would lead to long delays, yet where the supplies delivered still meet the essential technical requirements. Although it is not provided for in the contract, this may be in the best interests of all concerned. Any agreement reached should take due account of the savings to the contractor in not having to replace the supplies and in not having to pay liquidated damages. On the other hand, the contracting authority could gain in smooth and timely achievement of the tasks, especially in cases where rejecting materials already delivered and installed entails serious delays or disruption in the contract implementation.

In carrying out his duties, in particular during inspection and testing, the project manager often gains access to much information of a commercial nature regarding methods of manufacture and how an undertaking operates. She/he is required to respect the confidentiality of this information and describe it to others only on a ‘need to know’ basis (Article 25(7)).

22.13.3. Partial provisional acceptance

Partial provisional acceptance involves the acceptance on a provisional basis of parts of supplies, which have been delivered separately (Article 31(5)).

This may be with or without the contract specifying different lots (Article 31(4)).

22.13.4. Provisional acceptance

The contractor is required to initiate the process of provisional acceptance of the supplies. The project manager, on his part, is obliged within 30 days after the receipt of the contractor's application, either to issue the certificate of provisional acceptance to the contractor, with a copy to the contracting authority, or to reject the application (Article 31(2)). These firm time limits for implementing the procedures are designed to reduce to the minimum possible the time needed for provisional acceptance. If the project manager fails either to issue the certificate of provisional acceptance or to reject the contractor’s application within the period of 30 days, she/he is deemed to have issued the certificate on the last day of that period (Article 31(4)).  Only for contracts financed by a basic act under the Multiannual Financial Framework 2014-2020, the provisional acceptance certificate cannot be issued without previous positive assessment of the certificate of origin (see Section 22.6.). Partial provisional acceptance can be envisaged if needed for an efficient contract implementation (delivery by big batches in different periods, issues pending with some certificates, etc.).

Upon provisional acceptance of the supplies, the contractor is required to dismantle and remove from the place of acceptance all his remaining equipment, temporary structures and materials she/he no longer requires and any litter or obstructions and restore the place of acceptance to the condition specified in the contract (Article 31(6)). The obligation of the contractor to leave the place of acceptance in proper condition is of utmost importance as it carries both cost and environmental consequences. Particular attention should be paid not only to the place of acceptance and its vicinity but also to any quarries, borrow pits, buildings, water sources etc., which were put at the disposal of the contractor by the contracting authority. The project manager should ensure that this obligation is enforced.

After provisional acceptance and without prejudice to the warranty period referred to below, the contractor must no longer be responsible for risks that may affect the supplies and that result from causes not attributable to her/him.

22.13.5. Warranty period and obligations

On the date of provisional acceptance a warranty period commences, which is 365 days if not otherwise specified in the contract (Article 32(7) of special conditions). Separate parts of the supplies may be assigned different defects liability periods, if need be (Article 32(3)).

The warranty period for items that have been replaced or repaired commences only after the observed defects have been remedied by the contractor and certified by the project manager.

The main purpose of the warranty period is to demonstrate, under operational conditions that the supplies have been provided in accordance with the requirements of the contract. During this period, the contractor must not only make ready such outstanding items of supplies as may be listed in the certificate of provisional acceptance. She/he should also remedy any defects, which are revealed during the warranty period (Article 32(2)).

The contract does not generally require the contractor to perform further warranty obligations, unless provision has been specifically made for this in the contract documents (with corresponding provisions in the technical specifications) (Article 32(6) of special conditions). This can be the case of the commercial or manufacturer warranty, which is the warranty the manufacturer, provides for a defined period that the supply will be free from structural defects due to substandard material or workmanship, under conditions of normal commercial use and service.

The contracting authority or the project manager should notify the contractor if any defect appears or damage occurs for which the contractor is responsible during the warranty period. If the contractor fails to remedy a defect or damage within the time limit stipulated in the notification, the contracting authority itself may carry out the repairs or employ someone else to do so, at the contractor’s risk and expense. In this case, the costs to the contracting authority for carrying out the repairs are deducted from monies due to or from guarantees held against the contractor or from both. Alternatively, the contracting authority may terminate the contract (Article 32(4)). However, it is always preferable to give the contractor every opportunity to make good defects in order to avoid disputes, which may arise if the repair supply is not satisfactory.

The issue of the notification of defect or damage to the contractor, referred to in Article 32(4), would normally fall within the duties of the project manager.

22.13.6. Final acceptance

The project manager should issue a final acceptance certificate to the contractor within 30 days upon the expiration of the latest contractual warranty period or as soon thereafter as any supply have been provided and defects or damage have been rectified if that replacement or rectification did not take place before the end of the latest warranty period (Article 34(1)). A copy should be sent to the contracting authority, who should keep the head of delegation informed.

Notwithstanding its wording, the final acceptance certificate does not release the contractor from all his obligations under the contract and the contractor remains responsible as from the date of provisional acceptance for his obligations, as laid down in the law of the state of the contracting authority. For latent defects or faults of the supplies, which were not discoverable at the end of the warranty period, the contractor remains liable for the period specified in the law of the state of the contracting authority, which also specifies the nature and extent of this liability.

A number of consequences follows from the issuance of the final acceptance certificate. For example, the contractor is required to return to the contracting authority any drawings, specifications or other relevant contractual documents (Article 7(1)). The performance guarantee is also released within 45 days after the signed final acceptance certificate has been issued (Article 11(7)). There may still be some matters in dispute at this time; therefore, the performance guarantee is released for its total amount except for amounts, which are the subject of amicable settlement, arbitration or litigation.

22.14. Article 26 - Revision of prices

See PRAG 4.3.2.

22.15. Payments

22.15.1. General

The contractor is entitled to pre-financing and final payments. These payments must be made in euro or in national currency as specified in the special conditions (Article 26(1)). Unless otherwise specified in the special conditions (Article 11(1)), a performance guarantee is mandatory. If so, no payments can be made before the contractor has provided the performance guarantee.

The final payment is made to the contractor after receipt by the contracting authority of an invoice and of the application for the certificate of provisional acceptance (and, only for contracts financed by a basic act under the Multiannual Financial Framework 2014-2020, presentation of the certificate of origin when required, see Article 10(3)).

In indirect management with partner countries, for contracts with ex ante Commission control, the contracting authority makes payments after clearance and endorsement by the Delegation, directly to the contractor by the Commission.

According to Article 26(3) supplemented by the special conditions for indirect management with partner countries, payment delays vary according to criteria.

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.

22.15.2. Pre-financing and final payment

Pre-financing payment, equal to maximum 40% of the total contract amount, can be made only after the contract has been concluded and the performance guarantee (Article 11) and the pre-financing guarantee have been provided (Article 26(5)), unless otherwise provided for in the special conditions.

Pre-financing payment must be made in accordance with Article 26(3) of the general and special conditions and upon receipt of an admissible invoice by the contracting authority. The invoice must not be admissible if one or more essential requirements are not met.

In case of use of an electronic exchange system as foreseen in Article 4(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 final payment (equal to maximum 60% of the total contract value, as payment of the balance), must be paid within the time limit laid down in Article 26(3) of the general and special conditions after receipt by the contracting authority of an invoice and of the application for the certificate of provisional acceptance as per Article 31(2). The balance should only be paid after the provisional acceptance certificate has been issued by the project manager. When the balance is paid the pre-financing and liquidated damages, if any, should be deducted.

Contractors should submit reports and other 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).

22.15.3. Delayed payments

All payments to be made by the contracting authority to the contractor must be executed in accordance with Article 26(3). Once the time limit for payment has expired, the contractor must, within two months of receipt of the late payment, receive default interest. Under indirect management, however, the contractor is entitled to late-payment interest upon demand to be submitted within two months of receiving late payment (Article 28(2) of the special conditions).

Default interest must be calculated:

• at the rediscount rate applied by the central bank of the partner country if payments are in the currency of that country;

• at the rate applied by the European Central Bank to its main refinancing transactions in euro, as published in the Official Journal of the European Union, C series, if payments are in euro;

• on the first day of the month in which the time limit expired, plus eight percentage points.

By way of exception, when the interest calculated in accordance with this provision is lower than or equal to EUR 200, it must be paid to the contractor only upon demand submitted within two months of receiving late payment.

The late-payment interest must apply to the time, which elapses between the date of the payment deadline, and the date on which the contracting authority's account is debited.

Note that pursuant to Article 28(3), the contractor has the right, after giving notice to the contracting authority, to suspend performing the contract or to terminate it when payment is late by more than 90 days. Performance will resume once the contractor has received payments or has received reasonable evidence that the payment has been proceeded with.

22.15.4. Payments to third parties

Article 27(1) is linked with Article 5 on assignment. Orders for payments to third parties may only be carried out after an assignment of the contract or part of it to a third party has been notified to the contracting authority by the contractor, and the contracting authority has given its written consent (Article 5(2)).

22.16. Financial guarantees

For the financial execution of the supply contract two types of financial guarantee could be required:

• the performance guarantee (Article 11)

• the pre-financing guarantee (Article 26(5)(a)).

The financial guarantee templates in Annex V to the supply contract (annexes c4h and c4i to PRAG) should be used.

22.16.1. Performance guarantee

See PRAG 4.3.2. for international open tenders, PRAG 4.4. for local open tender and PRAG 4.5. for the simplified procedure.

The performance guarantee is autonomous from the underlying supply contract; therefore calling on the guarantee is not conditioned to any objections related to the underlying contract, save a few exceptions (namely a fraudulent claim by the contracting authority), which the contractor has to back with actual evidence.

22.16.2. Pre-financing guarantee

The pre-financing guarantee is released within 30 days of issue of the provisional acceptance certificate for the supplies. However, for contracts applying general conditions before PRAG 2015 version, the time limit for release is 45 days.

22.17. Article 35 - 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. 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 are defined in the Glossary of Terms, annexes a1a to the PRAG.

Liquidated damages are damages, which have been agreed beforehand by the parties. They are 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, usually the performance 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.

22.18. Article 36 - Termination by the contracting authority

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

The period of 7 day-notice mentioned in Article 36(2) is not aimed at giving the contractor a final chance to remedy his failures.

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, 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)).

Any modification, which 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 it cannot accept. In that case, termination of the contract is possible.

At any time and with immediate effect, the contracting authority may terminate the contract for other reasons than those provided in Article 36(2), whether they are provided elsewhere in the general conditions or not.

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 may be entitled to claim an indemnity for loss suffered, in addition to sums owed to her/him for supplies already delivered. Such ? loss includes that of profit on the remaining part of the supplies to be delivered. Termination of the contract does not result in a cessation of all rights and obligations and activities as between the parties. The project manager has to draw up a detailed report of the supplies that have been delivered by the contractor, of the incidental siting or installation performed and has to take an inventory of the materials supplied and unused.

The net amount due to the contractor can be ascertained and paid only when all supplies have been completed and the full value of contracts with third parties and other costs have been deducted from monies due to the contractor (Article 36(7)).

The contracting authority is also entitled to recover from the contractor, in addition to the extra costs necessary for completion of the contract, any loss it has suffered because of inadequacies in work already completed and paid for.

22.19. Article 37 - Termination by the contractor

Unlike the contracting authority, the contractor can terminate the contract only on few specific grounds listed in Article 37:

• the contracting authority has not paid her/him sums due for longer than 90 days after the expiration of the contract payment deadline, consistently fails to meet its obligations under the contract, or

• has suspended the contract for more than 180 days for reasons that are not specified in the contract and that are not due to any failure by the contractor.

The termination takes effect automatically 14 days after the contractor has given notice of termination to the contracting authority. In the notice, the contractor should specify the grounds for the termination.

The contractor is entitled to be paid by the contracting authority for any loss or damage it has suffered (Article 37(3)).

22.20. 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, 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 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.

An additional case of force majeure concerns the suspension of cooperation with the partner country when it implies suspension of funding this contract (Article 38(2)). This case protects the interests of the contractor, who can terminate the contract 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 forfeit the performance guarantee, 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. The contractor is required to make proposals on how to continue with 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), in order to release all parties from their respective contractual obligations.

22.21. Article 40 - Dispute settlement procedures

Although a party can decide to initiate the dispute settlement procedures of Article 40 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. If there is a dispute that concerns an ongoing contract, this does not relieve the contractor of its responsibility to continue complying with its contractual obligations with due diligence.

22.21.1. 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) 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 V2 and – as a follow-up – template V3).

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. Whenever possible, they are 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) 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. The maximum time limit for reaching an amicable settlement is fixed at 120 days, unless both parties agree otherwise. The amicable settlement procedure can even 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.

22.21.2. Litigation

If the attempt to resolve the dispute through amicable settlement 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 counterpart 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. Generally, 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 indirect 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. 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)

22.21.3. 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.

Conciliation is often initiated when one of the parties has already submitted the dispute to a court or arbitral tribunal. 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. As a general rule, the conciliator will 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 limit 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 that describes its steps and principles (and that should have been previously signed by the parties).[3]