•  Legal framework
  •  Recent innovative decision
  •  Coverage issues

Legal framework

Under the consolidated act on public procurement (TUEL), the procurement of goods and services by local public entities is conditional on the approval (by the same entities) of the relevant expenditure budget.

In a nutshell, when public goods or services are needed, a local public entity must:

  • identify the provider of the goods or services to be procured (eg, through a public tender);
  • approve the relevant expenditure budget; and
  • enter into an agreement with the provider.

What happens if a public official acting on behalf of a local public entity authorises an agreement with a service provider in the absence of a previously approved expenditure budget by the competent body within said entity?

The answer is found in Article 191(1) of the TUEL, which stipulates as follows:

In the case of the procurement of goods and services in breach of the obligation set forth in paragraph 1… [ie, in breach of the provision requiring the approved expenditure budget] the contractual relationship arises, also as far as the consideration due is concerned… between the service provider and the public official who authorized the procurement.

In other words, if a public official authorises an agreement for the procurement of goods or services without an approved budget, that agreement is considered to have been entered into directly by the public official and the service provider.

However, in that case the public official's liability can be mitigated by the relevant public entity's initiative. Article 194 of the TUEL enables local entities to ratify retrospectively agreements entered into in the absence of an expenditure budget if an entity gains benefit from the relevant goods or services.

Therefore, where a public official enters into an agreement for the procurement of goods or services in breach of the expenditure budget rule, the local public entity might assess that they have benefitted from it and acknowledge the debt towards the service provider through special resolutions(1) in order for the public official in question to be released from liability for payment of the consideration due for the procured goods or services.

Conversely, in the absence of retrospective ratification, a procurement agreement is considered to have been entered into by the public official and the provider. In such cases, the prevailing court precedents have clarified that the provider:

  • is entitled to claim payment from the public official for the goods or services provided; and
  • can take no action against the relevant public entity.(2) 

Recent innovative decision

On 25 September 2018 the Court of Modena departed from the prevailing court precedents by ruling that, in the scenario described above, a claim by a provider against a public official is conditional on an unsuccessful claim against the relevant public entity under Article 2041 of the Civil Code.(3)

Article 2041 provides that "any party who unlawfully enriched to the detriment of another is obliged to indemnify such other party to the extent of the unlawful benefit obtained" (ie, it would be unfair if one party could enrich itself without consideration and at the expense of another party).

In other words, according to the Court of Modena:

  • a provider can claim payment from a public official only if it has been established that the relevant public entity has not benefited from the goods or services procured in the absence of an approved budget; and
  • the public might decide at its own discretion not to ratify retrospectively the contract entered into in the absence of a previously approved expenditure budget and therefore expose the public official to personal liability towards the provider – and this is unreasonable.

Coverage issues

Claims by goods and service providers against public officials for breach of the expenditure budget rule are increasing. Often, insurers are involved in such actions by public officials, who claim to be indemnified under their public official policies for the sums that they might be ordered to pay to the providers.

Public official policies typically cover claims for damages brought by third parties against public officials for wrongful actions committed while performing their duties at the public entity where they work.

Claims for payment brought by providers against public officials appear to fall outside the scope of coverage, given that the provider aims to obtain a consideration for provided goods or services rather than compensation for damages (ie, they are not claims for damages).

Further, most public official policies provide for the exclusion of claims arising from intentional actions or liabilities undertaken by the insured outside the scope of their duties. In principle, when a public official enters into an agreement in the absence of an agreed budget, it could be argued that:

  • they are not acting on behalf of the relevant public entity because they are in breach of the expenditure budget rule; and
  • their liability derives from an intentional action.

To date, it appears that no court precedents have thoroughly examined these coverage issues. Given the apparent increase of claims in this area, public official insurers should focus on policy wordings to ensure that TUEL claims are properly considered.

Endnotes

(1) This acknowledgement cannot be inferred from any of the entity's other compliant actions or behaviour (Court of Cassation, judgment 12014/2018).

(2) Court of Cassation judgments 15145/2018, 11036/2018 and 12014/2018.

(3) Judgment 3886.

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