By: Giuseppe Giamundo Neto and Fernanda Leoni

The termination of administrative contracts, in its various forms, has always been an essential issue in Administrative Law, despite being briefly regulated by legislation and often addressed in an imprecise way by contracts. Even Federal Law No. 14,133/2021, which brought more organized provisions on the subject, did little to innovate in this area.

Much like article 78 of Federal Law No. 8,666/1993, the new legislation sets out, in its article 137, the situations that give rise to termination of the administrative contract [1], with a somewhat clearer division between the situations caused by the contractor (items I to IX) and by the Public Administration (§2).

In very broad terms, Law No. 14,133/2021 retained only the provision on the minimum owed to the contractor when termination is caused by the contracting Administration. Following precisely the same wording as the previous legislation, it provides that, in addition to duly proven losses, the contractor will be entitled to the return of the guarantee, the payments owed for performance of the contract up to the date of termination and payment of demobilization costs (article 138, §1). The law therefore still does not regulate what may be claimed by and paid to the contractor in the other cases of termination (unilateral, due to the contractor’s fault, by mutual agreement or even judicial/arbitral).

Reading this provision, it seems to us that, in all termination situations, two of these items are indisputably due, and the contractor is entitled, in any of the forms mentioned above, to receive payment for the losses proven and for the services duly performed up to the time of termination, even if these amounts are in some way withheld during the termination process.

The understanding that this would be a minimum guaranteed to the contractor stems from the principle prohibiting unjust enrichment, which would prevent the Public Administration from unduly benefiting from work performed without the corresponding consideration.

Judicial or arbitral sphere

In the judicial or arbitral sphere, the issue does not seem to pose major complications, since lawsuits or arbitration proceedings seeking to recover losses incurred during performance of the contract or as a result of its termination fall within the logic of compensation, so that everything secured by the axiom of maintaining economic and financial balance and duly proven in the evidentiary phase of these proceedings may be paid/reimbursed to the contractor.

In cases where the contract is terminated by unilateral act of the Public Administration due to the contractor’s fault, however, the amounts owed to the private party are subject to greater reservations. This is because even amounts arising from services and deliveries actually made up to the time of termination may be withheld to compensate for losses caused to the contracting Administration (article 139, item IV), and the contractual guarantee may also be used for this purpose (article 139, item IV and article 156, §8), and is therefore not returned immediately, as happens in termination without the contractor’s fault.

But the area that certainly raises the most questions, although not often discussed, concerns termination of the contract by mutual agreement, which can now also be done through conciliation, mediation or with the assistance of a dispute resolution board, provided the Public Administration has an interest (article 138, item II) — a subject that, once again, was left without regulation protecting the interests at stake.

Indeed, negotiation in administrative contracts has always been a thorny issue, as it involves understanding limits that are not always well established and that often permeate an empty debate between disposable rights and the supremacy of the public interest. For many years, this discussion was even an obstacle to submitting administrative contracts to alternative dispute resolution methods and, even today, with greater legislative openness to this possibility, many doubts and misunderstandings persist about how consensual a negotiation aimed at terminating an administrative contract actually is.

Although the case law of the Courts of Auditors firmly holds that amicable termination is not discretionary and applies residually, whenever the other legal grounds are inapplicable [2], this is a restrictive interpretation that is inconsistent with the text of the law, which did not establish any alternative relationship between the measures. On the contrary, the wording of the new procurement law reinforces that the Administration’s interest is the determining cause of this form of termination, so that only a case-by-case analysis will allow a conclusion on whether amicable termination is appropriate.

Following the logic that this form of termination will be appropriate when the Administration has an interest, there is no reason for any compensation to be subject to generic payment limits. In this respect, we agree with Heraldo Garcia Vitta’s view on the breadth of the duty to compensate, covering, “in addition to actual damages (proven, including the contractor’s financial expenses in obtaining bank loans), loss of profits on the remaining unperformed part of the contract (what the contractor reasonably failed to earn)” [3].

In this case, therefore, in addition to the amounts owed for services delivered, proven losses and demobilization costs, the contractor may claim what it reasonably failed to earn as a result of the early termination of the agreement negotiated by mutual consent between the parties [4].

Despite this understanding, which seems to us quite correct, there is no doubt that the matter is far from settled. By failing to regulate more precisely the amounts owed upon termination of the contract, Law No. 14,133/2021 leaves significant gaps and misses an interesting opportunity for innovation, leaving the matter in constant debate before the Judiciary or the Courts of Auditors, which naturally take a more restrictive view of the subject.

Even if not every matter can actually be regulated, the lack of clear guidelines for negotiations and compensation upon termination of a contract perpetuates legal uncertainty, reflecting a protectionist and unbalanced view that offers no path toward modernizing public contracts.

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[1] The terminology itself has even been corrected, with the new legislation referring more broadly to “termination” (extinção), since the term “rescission” (rescisão) used by the previous law was often criticized for having a specific meaning, distinct, under the General Theory of Contracts, from resolution and resiliation.

[2] In this sense: “Considering the Administration’s power-duty to ensure faithful performance of the contract and the very principle of the non-disposability of the public interest, I understand that the contracting entity does not have the discretionary freedom not to unilaterally terminate the agreement if the private party’s default is established. Accordingly, there is only room for amicable termination of an administrative contract when it is convenient for the Administration and none of the situations provided for unilateral termination of the agreement occurs” (TCU. Plenary Judgment No. 740/2013. Reporting Justice Benjamin Zymler. Session of 04/03/2013).

[3] VITTA, Heraldo Garcia. Aspectos da rescisão dos contratos administrativos. Revista RJLB. Year 1, no. 4, 2015.

[4] This is the position expressed by the Superior Court of Justice: “Administrative contracts are governed not only by their clauses and by public law rules, but private law rules also apply to them on a supplementary basis (art. 54 of Law 8,666/93), so that compensation for loss of profits is due for breach of an administrative contract (EDcl in EDcl in REsp 440,500/SP, 2nd Panel, Rep. Justice Carlos Fernando Mathias – Federal Judge Summoned from the TRF of the 1st Region –, DJe of 4.25.2008; EDcl in REsp 440,500/SP, 2nd Panel, Rep. Justice João Otávio de Noronha, DJ of 11.13.2007; REsp 190,354/SP, 1st Panel, Rep. Justice Humberto Gomes de Barros, DJ of 2.14.2000; REsp 737,741/RJ, 2nd Panel, Rep. Justice Castro Meira, DJ of 12.1.2006)”.

Originally published by Conjur (in Portuguese)