"No verbal agreements!": The Supreme Court clarifies public procurement rules
The Plenum of the Supreme Court of the Republic of Azerbaijan has adopted a new decision aimed at ensuring uniformity in judicial practice in disputes arising from contracting agreements.
The decision provides a detailed explanation of the legal essence of a contracting agreement, the requirements for the form of the contract as applied to commercial entities, the civil law consequences of failing to comply with the requirements of the Law "On Public Procurement," as well as the rights and obligations of the parties to the contract. These legal positions serve to build contractual relations in a safer and more legally certain manner for entrepreneurs, government bodies, and citizens alike.
What is a contracting agreement?
A contracting agreement is a contract under which the contractor undertakes to perform the work stipulated by the contract, and the customer undertakes to pay the agreed remuneration (payment for labor) in a commensurate manner. The subject of a contracting agreement is the performance by the contractor of certain work and the delivery of its result to the customer.
The difference between a contracting agreement and a service agreement
The Plenum's ruling states that contracting agreements and service agreements are independent types of contracts that entail different legal consequences. Confusing these relations in practice may lead to an incorrect determination of the rights, obligations, and liability of the parties and of the legal norms to be applied. For this reason, the legal nature of a contract must be determined not only by its title, but also taking into account its actual content, the nature of the parties' obligations, and the essence of the result being achieved.
The main goal of a contracting agreement is to achieve a specific visible or materialized result (including one presented in electronic form). For example: the construction or repair of immovable property, the laying of a road, the installation of equipment, the development of a computer program, etc. The performer's liability is also linked to the quality of this result.
The provision of services, on the other hand, is an activity that brings benefit or provides assistance to the customer without creating a materialized result. Its goal is the activity itself. For example: security or cleaning services, legal or accounting services, educational services, etc. The person providing the service does not guarantee the achievement of a specific result. Unlike in contracting relations, their liability is linked not to the quality of the result, but to the proper and conscientious performance of the activity itself.
In what form must a contracting agreement be concluded?
Although the Civil Code does not establish a special requirement for the form of a contracting agreement, the fundamentals of legislation on commercial activity (the Tax Code, the Urban Planning and Construction Codes, the Law "On Cashless Settlements," and others) make it necessary to conclude such contracts in written form between commercial entities.
The systemic, complex, and profit-oriented nature of commercial relations, coupled with risks and liability, requires a higher standard of proof for these relations. A written contract ensures the precise, unambiguous, and clear expression of the parties' will, protects legal certainty, and limits the possibilities for abuse of rights. In this respect, in relations between commercial entities, a contracting agreement must be concluded in written form.
Civil law consequences of failure to comply with the requirements of the Law "On Public Procurement"
The Plenum's ruling particularly emphasizes that for contracting work to which public procurement legislation applies, the conclusion of verbal contracts is not permitted.
A contract concluded verbally, or in written form in violation of the rules established by the Law "On Public Procurement," is invalid. As a rule, claims arising from contracts concluded in such a form preclude the application of the consequences of the invalidity of a transaction (that is, each party returning to the other everything received under the transaction), as well as the emergence of other legal relations arising from the law (for example, unjust enrichment).
Thus, one of the tasks of civil legislation is to protect the rights and legitimate interests of subjects of civil law. The purpose of applying the rules on the consequences of the invalidity of a transaction and on unjust enrichment in the Civil Code is likewise precisely the protection of legitimate rights and interests. Persons who have entered into legal relations by knowingly violating the requirements of legislation do not acquire rights and interests arising from the law. Furthermore, applying the consequences of the invalidity of a transaction or the rules on unjust enrichment creates conditions for violating the Law "On Public Procurement." This is because in such a case payment of funds under these contracts is effectively ensured, with only their legal basis changing.
When considering cases of this kind, if signs of a crime are found in the actions of officials of the relevant government body, a separate ruling must also be issued in accordance with Article 265.4 of the Civil Procedure Code.
At the same time, the Plenum also provides for exceptional cases. In considering cases of this category, account must be taken of the field and duration of the contractors' activity, whether they had previously been in contractual relations with government bodies, and whether they possessed information about the requirements of the Law "On Public Procurement." If, as a result of such an assessment, it is established that these persons did not know about the unlawfulness of the contracts, had no opportunity to learn of it, and acted in good faith in this regard, the value of the expenses incurred in such cases must be determined on the basis of average market prices and recovered from the government bodies in accordance with the rules on unjust enrichment.
Recommendation
The most reliable way to prevent legal risks in contracting relations is to draw up a contract in accordance with the requirements of legislation. Using professional legal assistance when concluding a contract makes it possible not only to reduce commercial risks, but also to prevent subsequent long-term court disputes and additional expenses.
