Public contracts subject to the audit court – F Castelo Branco

Portugal’s Audit Court (Tribunal de Contas) is an independent body that supervises public accounts and expenditure and prosecutes public financial violations.
The Court, among other things, issues opinions on public annual accounts and controls expenses arising from decisions or contracts entered into by public entities. It assumes an important (and sometimes decisive) role in public procurement – works, services or supply exceeding €350,000 require prior clearance (visto) of the Audit Court in order to be effective financially.  Public contracting entities do not however necessarily need to wait for the clearance to initiate the performance of the contracts. In fact, the private contracting party is usually required to carry out the supply, the provision of services or initiate the construction before the Court issues a decision on the clearance procedure.

Portugal’s Audit Court (Tribunal de Contas) is an independent financial court which, under the provisions of Law 98/97 of 26 of August, supervises public accounts and public expenditure and prosecutes public financial violations. For these purposes, the Court, among other things, issues opinions on public annual accounts and controls public expenses arising of decisions or contracts entered into by public entities subject to the Court’s supervision.

In view of the above, the Audit Court assumes an important (and sometimes decisive) role in public procurement. In fact, several public contracts, including the classical contracts for works, services or supply (contracts also subject to the EU Directives on public procurement) with a price (currently) exceeding €350,000 require a prior clearance (visto) of the Audit Court in order to be effective financially.

It should be noted that, when the contract is subject to this clearance, only its financial effects – meaning the payments to the private contracting party – are suspended until a favourable decision of the Court. In all other aspects, the contract is considered effective for performance unless it provides otherwise (which is not usual), Therefore, public contracting entities do not necessarily need to wait for the Court’s prior clearance to initiate the performance of the contracts subject to this supervision mechanism, as the law expressly allows that a contract may be performed before it receives clearance.

In fact, the private contracting party is usually required to carry out the supply, the provision of services or initiate the construction before the Court issues a decision on the clearance procedure. In these cases, the public contracting party is prevented from paying for the services, the supplies or the works until the prior clearance. This means that the private contracting party sometimes needs to wait weeks or even months, before receiving payment for the services, goods or works already provided. Therefore, when entering into a public contract subject to prior clearance, suppliers and contractors should be aware that, for a certain period of time, they may have to bear their costs related to the contract without expecting payment.

When the Audit Court finally grants its clearance, the public contracting party may then start paying the contractual price. Problems arise, however, when clearance is refused and the contract (that was already being performed) becomes ineffective. When clearance is denied, the law foresees that the private contracting party shall receive payment for all works, services or supplies carried out from the date of execution of the contract until the date in which the public contracting party was notified of the Audit’s Court decision. It should be underlined, however, that this payment may not exceed what would have been paid during such period according to the payment schedule. Therefore, even if this performance of the contract exceeded the contractual programme, the private contractor will only be paid for the supplies, services or works that should have been performed during the period in question according to such programme.

Irrespective of the importance of the Audit Court’s supervision (especially in turbulent times of financial crisis), the fact that public contracts may be performed before they receive the Court’s clearance creates several problems to both private and public contracting parties and is a source of disputes between them that, quite often, need to be solved through litigation.

As such, the kickoff date is a detail that should not be neglected when entering into a contract subject to this supervision mechanism.

In 2010 several high profile contracts did not receive the Audit Court’s prior clearance and needed to be amended, which is usually the outcome of a clearance refusal as the Court’s decisions are final and contracting parties are compelled to follow them.

Miguel Lorena Brito is a partner with FCB&A Advogados in Lisbon. He can be reached via mlb@fcb-legal.com