In brief: defence & security procurement disputes and risk allocation France

Disputes and risk allocation

How are disputes between the government and defence contractor resolved?

There are traditionally two types of dispute settlement; either a conciliation procedure or a procedure before a French administrative judge. However, most defence and security contracts provide for an amicable settlement of disputes before the case is referred to the competent court. In France, amicable settlements of defence and security disputes are referred to the National Committee for the Amicable Settlement of Disputes in Public Procurement (CCNRA). This committee is neither a court of law nor an arbitration body. Its mission is to seek legal and factual elements with a view to proposing an amicable and equitable solution (articles R. 2197-1 of the Public Procurement Code (PPC)). The CCNRA then issues opinions, which the parties are free to follow or to disregard.

Where a dispute is referred to a conciliator, the referral suspends the limitation period, which resumes if the solution proposed by the conciliator is rejected by the contracting authority. If the conciliation fails, the party who initiated it can refer the matter to the administrative court within the time limit that runs from notification of the administration’s decision to refuse to follow the opinion of the conciliation committee. If a party prefers to bring the dispute before the administrative court, it must do so within two months of the rejection of its prior administrative complaint.

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

The conciliation procedure or a procedure before a French administrative judge only concern disputes between the administration and the contractor or the defence consortium and security contractor. If the dispute is between members of the defence consortium holding the contract or the contractor with a Tier 1 subcontractor or a Tier 1 subcontractor with a Tier 2 subcontractor, referral to the CCNRA by one of them is not possible. This referral is only possible for the administration and the contractor. On the other hand, there is nothing preventing any of the former parties from trying to reach an out-of-court settlement. Otherwise (if these procurement participants choose the litigation route), their litigation can only be brought before the judicial and not the administrative judge.

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?

Public procurement is subject to an extensive system of law characterised by a balance of power that gives the public contracting party the means to enable it to impose its will on its contracting partner. The government has the right (even if there is no contractual clause stipulating it) to terminate the contract unilaterally for public policy reasons, subject to the total indemnification of the operator for the damage suffered (which is composed of the loss incurred and the lost profit). The government also has extensive power to impose uni­lateral modifications on the contract. The use of this prerogative must, however, not lead to the economic disruption of the contract. A judicial tool – unpredictability theory – provides an essential guarantee for the contractor against the risk of economic uncertainties. It provides that if certain conditions are met (in the case of an event that is unpredictable, independent from the will of the parties and that leads to the economic disruption of the public contract) the operator is obliged to continue to perform the contract. However, the government is required to pay a fee to the operator relative to any increased cost of performing the contract. In general, French administrative jurisprudence has set this percentage at 90 per cent of the losses caused by the unforeseen event. Furthermore, the French administrative courts provide compensation in a situation where the contractor carries out, under its own initiative and outside the scope of the contract, work that it considers necessary for the proper performance of the contract.

The government may request indemnification from the contractor in case of third-party claims for loss or damage to property, personal injury, death, or damage to government property. The standard administrative clauses contain specific indemnities relating to damages resulting from aircraft, missiles and ammunition.

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?

It is very usual for the government to limit its own liability under the contract. The public entity may stipulate in the CCAP a clause specifically limiting the contractor’s right to compensation in the event of unilateral termination of the contract on grounds of public interest (see CAA Versailles, 7 March 2006, No. 04VE01381, Cne Draveil and CE, 4 May 2011, No 334280, CCI of Nîmes, Uzès, Bagnols, Le Vigan). Furthermore, there is nothing to prevent contractual provisions from entirely excluding any right to compensation in the event of unilateral termination on grounds of public interest (CE, 19 Dec. 2012, No. 350341, AB Trans).

With regard to the reciprocal limitation of the contractor's liability, the contract may also provide that the public body’s right to compensation for direct damage is limited in the case of a single contract to the total amount of the contract or in the case of a split contract to the minimum amount of the contract with a purchase order. The contract award procedure will determine the extent to which this limit is negotiable.

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?

The risk of non-payment for an undisputed, valid invoice by the French Defence Procurement Agency is perceived to be very low. The government’s commitment to incur expenditure is subject to the availability of credit payment provided by the finance laws and the amending finance laws.

Under what circumstances must a contractor provide a parent guarantee?

If a bidder is a special purpose vehicle set up specifically for a contract, the terms and conditions of the initial tender documentation usually require that the contractor must execute a parent guarantee for the benefit of the public entity and in accordance with a specific template. In such a case, failure to provide this guarantee will result in the disqualification of the contractor from the procurement process. Under French law, the granting by a company, in whatever form, of a guarantee to secure the obligations of an affiliated company must comply with its corporate purpose and corporate interest. If the contractor wishes to transfer its contracts to a special purpose vehicle after it is awarded, the Ministry of Defence usually requests that the shareholders of the special purpose vehicle execute a parent guarantee.