The National Department of Transport and Infrastructure, supported by a decision of the Federal Court of Accounts, has been unilaterally amending public contracts in order to apply discounts on previously agreed payments to contracted parties, based on the allegation that they were overpaid. This will directly affect contractors hired by the department for the execution of work or the maintenance of highways managed by the department.

Highways administered by the department are federal, but the services carried out in regard to them are often performed in different municipalities. As such, they are subject to a local services tax (ISS). Each municipality charges a different ISS rate and collects the tax from the service provider.

Given the variation in such rates, contractors typically include an estimated ISS amount in their bids, based on their expectations of where the services will be performed. However, when the actual work has been completed, variance from the original estimation is common.

The department has recently been comparing the ISS tax paid by contracted parties against the amounts quoted in their original proposals and, when the actual taxes turn out to be lower than the amount originally quoted, applying discounts to obtain corresponding rebates. This practice is supported by a Federal Court of Accounts decision (32/2008) and has awakened the interest of other government bodies seeking to reduce the amounts paid to contracted parties.

However, the department's practice has no legal grounds and cannot be admitted in court. Any parties faced with such a practice should avail themselves of the judiciary, in order to prevent the discounts being applied.

Article 65 of Law 8666/93 clearly specifies the circumstances under which such contracts may be altered. If none of the circumstances established therein are found, any revision to the contract can be challenged. The restriction stems from Article 37(21) of the Federal Constitution, the main goal of which is to preserve the public interest (ie, preserve the conditions set out in the proposals).

The rule is enforceable against both the government and contracted parties. Thus, when a party makes a mistake in its proposal regarding the cost of a product or service, it cannot claim an increase in the price of that item unless it can prove, for example, that the economy has changed significantly and unexpectedly. The rule's aim is to maintain the terms and conditions of the original proposal.

The Federal Court of Accounts made an error regarding Decision 32/2008 by allowing the government to revise a contract if the fiscal costs actually incurred by the contracted party were lower than those estimated in their proposal, even where the difference was not justified by the creation, alteration or elimination of taxes.

If the government follows the court's understanding and applies discounts on payments of public contracts in relation to differences in ISS rates, the affected party is encouraged to appeal to the judiciary. Following the application of such discounts by the department, both the First Instance Court of Brasilia and the Federal District Court have issued preliminary decisions in favour of contracted parties.

While no final decision has been rendered regarding any of the cases analysed, the preliminary injunctions granted show a certain willingness of the judiciary to defend the maintenance of the terms established in the proposal, thus avoiding unjustified revisions to contracted values.

In reality, no other interpretation or outcome is possible - if the law specifies limited causes to amend the contract, these must be respected. In the specific case analysed herein, contracts have already been assigned to those contractors with the most advantageous proposals for the government. In the absence of any cancellation or reduction of taxes after the submission of a proposal, differences in the taxes paid are not grounds for alteration of the service agreement.

For further information on this topic please contact Eduardo Maffia Queiroz Nobre or Silvio de Souza Garrido Junior at Leite Tosto E Barros Advogados by telephone (+55 11 3847 3939), fax (+55 11 3847 3800) or email ([email protected] or [email protected].)