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Government Emergency Intervention in Private Contracts in Times of COVID-19: A User’s Guide
- Edited by Ewoud Hondius, Marta Santos Silva, Andrea Nicolussi, Pablo Salvador Coderch, Christiane Wendehorst, Fryderyk Zoll
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- Book:
- Coronavirus and the Law in Europe
- Published by:
- Intersentia
- Published online:
- 10 December 2021
- Print publication:
- 01 August 2021, pp 567-602
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Summary
This contribution provides a preliminary analysis of the legal instruments that governments use to provide emergency regulation of contracts in the wake of the turmoil resulting from the COVID-19 pandemic. We identify the acute liquidity concern afflicting virtually all agents along the contractual chain in a large number of sectors as the most pressing problem. We then introduce some of the main criteria to understand and design response measures in the area of private contracts in times of emergency: (1) the systemic and urgent character of response measures; (2) keeping things simple, minimising ex ante controls and transaction costs; (3) the urgency of preventing a chain reaction of defaults along contractual networks and the economy at large; (4) the relational value of existing contracts and the ways to preserve it; (5) how tailor-made agreements in M&A and finance have developed over time means to cope with the impact of extraordinary contingencies.
INTRODUCTION
The health emergency associated with COVID-19 has put enormous pressure on the foundations of family, social and economic lives across Europe and the world at large. It has also challenged the resilience of contracts and economic relationships, as well as the consistency and wisdom of the law that governs them.
Understandably, the harsh economic impact that has resulted from the various measures adopted to combat the spread of the contagion and provide health systems with the means and time to cope with the pandemic, coupled with the prospects of an ensuing economic recession have forced many economic agents to figure out how to absorb the losses already suffered or anticipated or, alternatively, to explore ways of shifting – or sharing, if one prefers a more “polite” term – current or expected losses to other parties in existing contractual relationships.
Several means of intervening in ongoing contracts have been proposed, discussed, and implemented in the midst of the dramatic disruption of the normal functioning of society and in the wake of the uncertain future ahead in terms of economic and social well-being. In this contribution, we try to offer some guidance on how to think and implement a number of legal tools that can be deployed to minimise the negative impact of the recent and current disruption following the public health emergency on the functioning of contracts.
13 - Managing risky bids
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- By Andreas R. Engel, Consultant at TWS Partners, Germany, Juan-José Ganuza, Associate Professor of Economics, Pompeu Fabra University, Barcelona, Spain, Esther Hauk, Associate Professor of Economics, Pompeu Fabra University, Barcelona, Spain, Achim Wambach, Professor of Economics, University of Cologne, Germany
- Edited by Nicola Dimitri, Università degli Studi, Siena, Gustavo Piga, Università degli Studi di Roma 'Tor Vergata', Giancarlo Spagnolo, Stockholm School of Economics
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- Book:
- Handbook of Procurement
- Published online:
- 04 November 2009
- Print publication:
- 28 September 2006, pp 322-344
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Summary
Introduction
Public procurement is plagued by bankruptcy. In the United States more than 80,000 contractors went bankrupt between 1990 and 1997, leaving unfinished private and public construction projects with liabilities exceeding US$ 21 billion. Bankruptcy is very costly for the buyer: the direct bankruptcy costs (e.g., administrative costs or lawyers) vary between 7.5 and 20 percent of the liquidation proceeds, and indirect costs (e.g., delays and other losses) are estimated to be even larger. Bankruptcy may arise when the payment (and therefore the winning bid) lies below the possible realized cost of the project. Why are suppliers willing to bid below the possible realized cost of the project? There are three main answers to this question: (i) the winning supplier underestimates the cost and bids too optimistically; this phenomenon is known as the ‘Winner's Curse’ and is studied in Chapter 6; (ii) the selected supplier expects to renegotiate the contract later on when it is very costly for the buyer to replace the incumbent contractor; this renegotiation generates cost overruns for the buyer and rents for the incumbent that are discounted in the bid and are discussed in Chapter 5; and (iii) aggressive bids might also be due to suppliers in a bad financial situation struggling for survival by taking a risky strategy. The possibility to file for bankruptcy implies that supplying firms have limited liability. If things go too badly, the supplier simply shuts down. Hence, the supplier's possible losses are bounded while its possible gains are not.