Defence contract disputes and risk allocation in Portugal

Disputes and risk allocation

How are disputes between the government and defence contractor resolved?

Disputes between the public contracting authorities and private contractors are dealt with according to the general regulations concerning settlements between contract authorities and economic operators.

Under Portuguese law, the disputes between public and private contractors in the defence and security sectors are usually resolved in judicial courts. However, some recently signed contracts already contain arbitration clauses.

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

Alternative dispute resolution is a possible instrument considering what is prescribed in the Portuguese legal framework and can be used to solve conflicts in public procurement in general, as well as in the defence and security fields, especially through arbitration, which is starting to be viewed as a more efficient alternative to the common judicial litigation. In fact, for a dispute related to defence and security procurement, the arbitration procedure ensures a very swift procedure.

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 defence and security sectors do not contain any specific rule regarding the ability to indemnify. In general, the government - as any private party - must indemnify the contractor for damages arising from a breach of contract by the government, provided that damages are reasonably and foreseeably caused by the breach. Vice versa, the private contractor also has to indemnify the government for the damages that arise from a breach by the contractor. Therefore, the government administration’s liability obligation is not limited by specific elements. The administrative courts or the arbitration courts have the powers to define the value of the contractor’s compensation and the relative government obligations in accordance with the rules concerning administrative proceedings.

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?

The government is free to negotiate and accept a limitation of liability of the contractor. There are no statutory or regulatory limits to the contractor’s potential recovery against the government.

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 Portugal, public contracting authorities - as well as any private party - are bound by the contracts they have entered into, regardless of whether adequate funds are available. Therefore, a contractor may take legal action against the government for default and enforce a judgment against the government at any time.

Under what circumstances must a contractor provide a parent guarantee?

A contractor has to provide a parent guarantee only if the contractor itself does not meet the minimum requirements for financial and economic standing set by the contract.