Defence contract disputes and risk allocation in Italy

Disputes and risk allocation

How are disputes between the government and defence contractor resolved?

Disputes between the government and defence contractors are dealt with according to the general regulations concerning settlements between contract authorities and economic operators. Part VI of the Italian Public Contract Code of 2016 defines the forms of dispute resolution in a unitary way (article 204 ff of the Code). This kind of approach is frequently subjected to legislative interventions and amendments, however, the means of dispute resolution provided for in the Code consist of the typical judicial remedy and of alternative dispute resolution systems. A typical judicial remedy is provided for in article 204 of the Code, which, in turn, refers to article 120 of the Code of Administrative Procedure. If alternative means are required, they are provided for in Chapter II of the Code, which establishes three other modalities in order to solve disputes:

• the friendly agreement procedure (article 205);
• settlement by compromise (article 208); and
• arbitration procedure (disposed by article 209 of the Code).

However, member states usually conclude bilateral agreements to deal with particular sets of problems.

To what extent is alternative dispute resolution used to resolve conflicts? What is typical for this jurisdiction?

Alternative dispute resolution is the instrument most frequently used to solve conflicts in public procurement, as well as in the defence and security field. In fact, the friendly agreement procedure, arbitration procedure and settlement by compromise are characterised by their procedural rapidity. Moreover, these alternative dispute resolutions can also be less expensive than the judicial remedy (article 204 of the Italian Public Contract Code of 2016) or the pre-litigation procedure established by the National Anti-Corruption Authority (ANAC). For a jurisdiction related to defence and security procurement, the arbitration procedure is typically used by economic operators for the above-mentioned reasons; in fact, these procedures speed up procedure time and reduce costs.

What limits exist on the government’s ability to indemnify the contractor in this jurisdiction and must the contractor indemnify the government in a defence procurement?

The government administration’s liability obligation is not limited by specific elements. The administrative court has the competence to define the value of the contractor’s compensation and the related government obligations in accordance with the rules concerning administrative proceedings provided by Law No. 241 of 1990.

If an economic operator fails to comply with his or her obligations, as established in the defence procurement contract, the contractor authority may request him or her to provide reasons. These reasons should be presented in 20 days, and when the administration evaluates the extent of the default, it can decide to keep the guarantee deposit or to apply the penalties given by the procurement framework.

Can the government agree to limit the contractor’s liability under the contract? Are there limits to the contractor’s potential recovery against the government for breach?

There are no particular limits. When the government takes part in a public contract procurement, it is subject to contract obligations. This means that contract parties are in an equal position concerning liability and any other contract element.

Is there risk of non-payment when the government enters into a contract but does not ensure there are adequate funds to meet the contractual obligations?

In the field of defence and security procurement, there is no particular risk of non-payment by the government or of failure to ensure adequate funds to meet contractual obligations. This kind of field deals with services that are particularly sensitive and, for this reason, in Italy, every public procurement process can start only if an ‘economic hedge’ is assured. In other words, the contract may only be concluded if financial security is provided for the specific established amount. This condition also applies to long-term activities and for NATO agencies. All this means that an accurate and adequate evaluation of economic and financial conditions must be conducted before the Defence Administration decides to issue a call for tender concerning defence and security sectors.

Further, reference should be made to the European Defence Agency. The Agency presents projects concerning activity and research developments in the defence and security scope to member states. Even if reference is made to the Agency, or to other agencies or programme offices, the other cautions given above should still be adopted.

Under what circumstances must a contractor provide a parent guarantee?

Each contract requires a bank guarantee, a provision of guarantee or another form of guarantee for an amount equal to 10 per cent of the contract. Such guarantees are required as an assurance for the procurement contract and, more specifically, as a guarantee for the part that corresponds to the company profit. This part of the profit is reduced by 50 per cent when the economic operator shows that he or she has adopted certificated quality systems in accordance with European standards (eg, ISO 9000, AQAP).