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Unit III Concession

Unit III Concession

Introduction

Objectives

At the end of this chapter, students will be able to:

  • define concession
  • appreciate modes of concession
  • consider how to vary, revise and terminate administrative contracts.
  • understand the special nature of concessions.
  • appreciate how the law strikes a balance between two conflicting interests.
  • understand how the law protects the interest of the public.

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  Definition

 What is concession?

In its legal sense, concession is not clear contract so just like any other contract the requirements of the law of contracts should be met. But what makes concession a special contract is its being an administrative contract. With this, all the peculiarities that we tried to see in the last two chapters are conditioned upon.  In concession contracts what would otherwise be done by administrative authorities is done by another person called the grantee.

If so, nonetheless, concession is a special form of administrative contracts. This very nature in turn is regulated by Art 3207(2) of our civil code. It says:

“The concession of a public service is the contract where by a person, the grantee, binds himself in favor of an administrative authority to run a public service getting a remuneration ( there of) by means of fees received on the use there of”. Let us consider the elements one by one:

“Grantee”-One of the contracting parties, a private individual that enters in the activity of providing a public service. As the case may be this person can be a juridical or physical person.

  “Grantor”- however will be the administrative authority. It is the administrative authority that undertakes to control the grantee and supervise the work of the same.

 Public service-In chapter one, we said public service is one of the issues which necessitates government’s intervention in its provision. It is one of the reasons why we have administrative contracts. As per Art.3207 (1) it is any activity which a public community has decided to perform for the reason that it has deemed it to be necessary in the general interest and considered that private initiative was inadequate for carrying it out…”.The inadequacy of private initiative emanates from different reasons. Lack of infrastructural capital, expert management and exposure to externalities can be mentioned as reasons.

RemunerationThis makes the agreement onerous. It is not for free that the grantee will bind himself in favor of administrative authorities. He must get remuneration in the form of fees. So, users of the service will pay fees and these fees will be remunerations. The basic idea behind concession contracts is not profit. Still one cannot say that the grantee should run the service for free. Unlike other business undertakings the grantee is not as free as ever to set discriminatory prices. The public should equally benefit from the prices set by the parties.

Concession is an administrative contract among other things because one of the parties is an administrative authority-see Art .3132(1) cum Art. 3207. The involvement of administrative authorities however should be regulated. This clearly emanates from the responsibility that administrative authorities have for the good running of the public service. 

The role of the administrative authority is supervisory. The grantee has a functional role. For fear of domination, this will result in direct exploitation by the administrative authorities. Art. 3210 (1) says the control should not be excessive. Otherwise, the nature of the concession will be altered.

 Variation clause (3213)

The concession contract may have a stipulation to the effect that adjustments in prices and tariffs will be in place by default. Two issues are important here:

  1. The variation is conditional on changes occurring in the prices of certain materials, commodities or services. Not all variations in prices matter but only changes in certain materials, commodities or services. There should be a close relationship between the service provided by the grantee and the variable prices in materials, commodities or services. The changes should affect the prices of the public service. Unreasonable price adjustment is not favored here.

Example:

XYZ Co. has recently agreed to run a cafeteria in one of the institutions of the Federal Government. Among the services provided, food and drinks take the maximum share. Very recently the grantee is thinking of increasing the price of food in a significant way. When responding to the reasons behind the increment, the grantee mentions the increase in the price of fuel as one of the reasons in addition to the increase observed in the price of sugar. Now the institution in which the service is ran (the grantor) wants to solicit your opinion as to validity or invalidity of the adjustment. Advise it.

  • The new prices should be proportional to the change in the other prices. You may not impose disproportional tariff on users of public service under the guise of variation. In case of disputes, courts are authorized to fix prices. In the above example, one has to consider the magnitude of the increment in addition to the reasons of increment.

Revision clauses (3214)

          Still the parties may agree to the effect that modification may be introduced “where economic circumstances change considerably…” The magnitude of the economic change is very much important in this case than the causes of the change. Because parties are free to agree on and about their terms, the law provides the possibility. How considerable should the economic change be? The determination depends on the specific condition of the time. The underlining element in the determination of the magnitude of the economic change must be the very implication of the change on the provision of the service. We must take considerable change to mean a change which significantly affects the position of the grantee to efficiently carry out the obligations under the contract. Changes in the prices of important raw materials, without which it is impossible to provide the service and the increase of which cannot be reasonably foreseen should entitle the grantee to have revision of the contract. Otherwise, minor economic changes as well as those economic changes that a reasonable business person may foresee must not be grounds of revision.  

But Art 3214(1) simply mentions the possibility of revising tariffs without fixing the prices. (Note: do not forget that under Art.3213 (1), in addition to putting the possibility of revising prices, fixation of prices is also achieved). Here, parties therefore should sit down and negotiate the addition of an additional clause in the contract which will possibly be a clause fixing prices. If the parties fail to agree, “the court may fix a tariff” taking in to account the grantee i.e. a tariff ensuring an equitable remuneration to the grantee.(Art 3214/3/). Until now, we have discussed briefly about one from of modification called bilateral (contractual) modification. Now, we will turn to another form of modification called unilateral modification. Concession contracts are arranged to serve the public. They have public policy issue in account. To this end, one of the parties is an administrative authority having a supervisory capacity. For such reasons, administrative authorities have the prerogative of unilaterally modifying the terms of the contract. This prerogative is so valuable that it cannot even be reversed by agreeing to the contrary. (Art. 3216/3/). 

By modification, we are referring to making the obligation of the grantee more burdensome. Art.3216/1/) envisages the possibility and also the grounds of doing so. Thus, administrative authorities may impose not only an obligation but even “all the obligations…” that go with the basic undertaking. The imposition of obligations presupposes conditions. Let us see these conditions:

  1. “… Fit for the proper operation…of the service…”.Because administrative authorities are responsible for the good running of the public service, they should make decisions coincident with such a responsibility. One is taking a course of action via Art. 3216 (1)). For example the grantor may make it an obligation on the grantee that the latter control and regulate unreasonable behavior in the vicinity of the institution where service is provided. To this end the grantee may have the obligation of prohibiting smoking in the institution ran by the grantee. This obligation might be burdensome but still legal.
  1. “…fit for the improvement of the service…”- The point is the modification should be inspired by such grand principles a responsible administrative authority should appreciate. Though we cannot talk about the extent in importance of the improvement to the public in general, it is not possible to deny that the improvement should be important to the public and it should not be a ground of abuse.  

There are limitations and even prohibitions on this prerogative of unilateral modification. A brief discussion on the limitations and prohibitions will be available here.

1. Only service -related modifications are valid.Art.3217 (1) reads as “Only the clauses concerning the services and its operation may be modified”.

 Administrative authorities may increase or reduce the service to be operated. They may also impose an extension of the service. In no case however the authorities may impose modifications which actually change the nature or object of the contract. This is an obvious legal remark serving as a safety measure to maintain concessions as they are. If the nature or object is changed they are no more concession contracts. The organizational change in particular is abhorred by the law. In particular such organizational change as substituting a management under state control for concession is prohibited.

 Example:

            K waterworks is a grantee which has undertaken the duty of providing water to the public with the local water supplies agency herein under called the grantor. Among the duties that the grantee has, providing water to more than ten villages is one. Explicitly, they have also agreed to the effect that the grantee shall undertake the installation of pipes to forty-four thousand households. Very recently however the grantor is thinking of expanding the extent of the service to additional twenty-thousand households. But the grantor is not sure as to the consequences of this decision. What advise can you give to the grantor? Under a similar setting, assume that the grantor is to modify the service provided by the company to include the task of providing consultation to the municipality on issues of advancing and expanding water supply to the community. What is your opinion on the new plan of the grantor?

  • The nature of the service and the potential of the grantee-the nature of the service and the potential of the grantee are some the considerations that should be made when the administrative authority thinks of modifying the service. When we say the nature of the service we are referring to the fact that the modification should not result in the imposition of completely new service on the grantee. The introduction of novel services in the scene is not legal. The grantee   should not be forced to manage new (novel) service nor he be imposed with an obligation which surpasses his potential. Novel services might even be grounds of surpassing the potentialities of the grantee. As such novel services might be burdens on the grantee because they may come up with a special arrangement for their performance. Though possible to say that novel services are recognizable easily, it is possible to hold that the grantor may impose a new service on the grantee under the guise of extension. Even though courts will have a final say on the matter, it is still possible to outlaw such disguised extensions by resorting to the second option i.e. that the services surpass the potentials of the grantee. A service may surpass the potentials of the grantee in different ways. A service may be beyond the capacity of the grantee financially. In this case we say the service cannot be provided by the grantee given its financial capacity. At other times, the grantee may not have the required expertise to carry out the service. This independent treatment of the ways should not give the image that they are not related. For example, lack of financial capacity may be a ground not to have the required expertise from the market.  

3. Financial interest of the grantee– financial benefits that accrue to the grantee as per the concession may not be modified   unilaterally by the authorities. On issues involving the interest of the grantee the grantor is not as such free to fix the remuneration unilaterally. In our previous example, would it be against the interest of the grantee if the grantor modifies the contract to the effect that the grantee will provide consultation services to sub-contractors engaged in the construction of water works? Why? Why not?

Duration of Concession

Concessions are contracts of perpetuity. They are perpetual in nature. Still these arrangements are not unlimited by time, thought they cannot limit time. 

Under normal course of things, durations are regulated by the contract. Just like any other issue, failure to regulate by the contract will invite in place one legal presumption. The concession will be deemed to have been made for a period of seven years (Art 3227/3/). This is not the end. Failure to renew the concession within two years implies the implicit renewal of the concession for another seven years. The renewal goes on like this for a maximum period not exceeding sixty years.  

Termination of Concession Contracts

By now we suppose you very well know the effects of termination of contracts in general. The effect of termination of concession contracts is different from the rest of contracts. This basically arises from the very nature and object of the undertaking. As such concession contracts result in the establishment of an organization to effectively provide public service. 

Hence, when the contract is terminated a winding up procedure will be the effect. This winding up in turn will entail the “settlement of accounts between the grantee and the authorities. (Art 3229/1/) The rules of winding up are supposed to be stipulated (3229/2/), short of which the provision of the law to that end will be in place. We have two types of laws applicable in this case. One is the law in the civil code. On the other hand the provisions of the commercial code will also be effective. Termination of concession has different reasons and different consequences as well. Let us first consider some causes of termination under the law.

Redemption

What is Redemption?

Redemption can be taken to mean improving of something: the act of saving something or somebody from a declined, dilapidated, or corrupted state and restoring it, him, or her to a better condition.  Normally a contract for concessions is terminated when the stipulated condition materializes or the fixed time arrives. But redemption is one way of terminating concession contract before the normal time of termination. As the definition given above implies, redemption has its own causes. It is only when the conditions that are mentioned as causes materialize that we resort to redemption. In addition to this, redemption must be resorted to only to meet the rationales of redemption.

Simply speaking, redemption is a decision whereby an administrative authority puts an end to the concession before the expiration of its time. (3236/1/) The grantee should not necessarily commit fault redemption to take place. Rather the condition in which the concession is put necessitates a decision of redemption.

The rationales of redemption might be anything except a motive to “… replace the grantee by another grantee”. Otherwise, redemption may take place at any time with the objective of abolishing all in all or partly (reorganizing) the public service. This is a very good indicator of the prerogative of administrative authorities. However the law does not totally put the law in the hands of administrative authorities. It rather fixes a standard that should be observed before deciding to redeem the service. The effect of redemption is winding up. (3237/1/). On the other hand, redemption will result in the payment of compensation the grantee. The payment made as a result of redemption is called redeeming fee.

Withdrawal Order

What is envisaged under Art 3228 is a grantee that commits a fault. The rule is the grantee can lose his right only by the order of a court. But if there is an express agreement entrusting this privilege to administrative authorities, then the grantor may order loss of right of the grantee. This order is called withdrawal order. It results in a premature termination of the concession contract. Withdrawal order presupposes the commission of an especially grave fault. This makes the order special from redemption.

We do not know what special fault is. Neither do we know which one is so grave. Courts are those who have the right to determine the nature of the fault and that will decide the loss of right. This being the rule, the law devises a general rule which allows stipulating a clause empowering administrative authorities to order loss of right without going to courts. But can we say that the administrative authorities may order loss of right in a valid way given the volatile nature of the concept of gravity of fault? The final say as to whether an act constitutes a fault or not and as to whether a fault is grave or not should be determined by a court of law.

Sequestration:   

The act or process of legally confiscating somebody’s property temporarily until a debt that person owes is paid, a dispute is settled, or a court order obeyed.

Just like the above situation, sequestration presupposes, even though not always, an element of fault on the part of the grantee. The degree of fault is not predetermined in the case of sequestration. Art 3238/1/) is quite indicative of this degree. In the case of loss of right the fault required is a special one in gravity. But Art.3241/1/ shows the fault as being default, incompetence or incapacity. What are the effects of sequestration?

Temporary suspension of rights: The concept of sequestration necessarily envisages a possibility of suspension of rights. The suspension of right is only for a limited time. It is temporary owing to the conditions attached on it. Under our law, sequestration is a measure ordered either to abort a possible interruption in the provision of services as a result of the incapacity of the grantee or sequestration is a punitive measure taken against a defaulting grantee. Though the law is not clear as to the how long the sequestration order will last, it is even ambiguous as to whether the order is temporary in the first place when it is made in lieu of punishment. Can the grantee claim repossession as of right? Who shall determine the arrival of the appropriate time for the cessation of the order of sequestration?  

Management of the expenses and works of the grantee: The other effect of sequestration is observable in connection with the management of the work. This issue is related with the first effect i.e. loss of right of the grantee. One of the rights that the grantee will lose as a result of order of sequestration is the right to manage the work. The loss of right by itself has its own effects. Although the ultimate effect is expulsion from the management of the work, because this intrinsically necessitates the fact of managing the work by another person, the grantee may have a legal duty to cover the cost of management. The law still has reservations on the matter. The management expenses are to be covered by the grantee only when the sequestration is ordered in lieu of punishment. Otherwise the expenses are going to be covered by the grantor.

        Though the above orders can be associated with the prerogative of administrative authorities, Art.3243 on the other hand tries to strike a balance between the prerogative of administrative authorities and the interest of the grantee. It is a good indicative of the fact that measures taken under Articles 3236-3242 should be in accordance with law. Illegality of the measures as ordered by the grantee entails different consequences:

  1. Cancellation of order: the orders of the grantor are not absolute in the sense that they are amenable to change by a court of law. Although the law says “The court may cancel the sanctions of coercion or dissolution, such as measures of sequestration, state control, loss of right or termination, taken by the administrative authorities against the grantee of a public service”, it is not clear as to when the court orders the cancellation. It is however clear that the order should follow an arbitrary and manipulative decision of an administrative authority. Above all, it should follow an illegal order of the same.

2. Order of compensation: the sanctions imposed on the grantee will definitely cause loss to the same. Taking this into account, it is important to force the administrative authorities to make good what they have made bad by their decision. The authorities are obliged to compensate the grantee only if they have injured the interest of the grantee by their fault. Art.3243 (2) reads as follows:

“It may order the authorities to pay compensation for the damage caused to the grantee in consequence of sanctions applied by such authorities contrary to the law”.[emphasis]

Summary     

Concession contracts are special contracts which require a special legal regime which governs their formation, object, effect and modification. Concessions involve two parties called the grantor and the grantor having two distinct interests in the arrangement. While the grantee seeks to derive remuneration for the service which it renders in the contract, the grantor undertakes to protect the interest of the public by supervising and controlling the grantee.

Even though contracts in general concern the contracting parties, concession contracts are made in a way that they concern a third party. To this end we can say concession contracts are made in the interest of the public.

Because concession contracts are made to endure the effects of time, variation clauses which will make the contract last for long without being broken have the chance to be pars of the contractual undertaking. Accordingly variation clauses may be stipulated in the contract to enable the parties to adjust their undertakings in accordance with a changing time. The law also stipulates the possible situations that will warrant modification. Possibilities that will bring the concession to an end prematurely are envisaged in the law. Sequestration, redemption and loss of right are some of them.                                                                                                                 

Review Questions

  1. Discuss the differences between sequestration and redemption.
  2. What are the causes of order of loss of right?
  3. Define concession in terms of its elements.
  4. What are the reasons behind giving a public service to be run by a grantee?
  5. Discuss the consequences of sequestration.
  6. Why does the law become stringent when it comes to cases involving the unilateral modification of the contract concerning the financial interest of the grantee?

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