The case of the panama canal expansion: Pacta sunt servanda versus rebus sic stantibus in public works procurement
| Date | 01 March 2016 |
| DOI | https://doi.org/10.1108/JOPP-16-01-2016-B003 |
| Pages | 52-82 |
| Published date | 01 March 2016 |
| Author | Francisco L. Hernández González |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 16, ISSUE 1, 52-82 SPRING 2016
THE CASE OF THE PANAMA CANAL EXPANSION:
PACTA SUNT SERVANDA VERSUS REBUS SIC STANTIBUS IN PUBLIC
WORKS PROCUREMENT
Francisco L. Hernández González*
ABSTRACT. The Panama Canal expansion is one of the most important public
works projects in recent times. Both the awarding of the contract and its
execution have been su rrounded by intense controversy. The situation came
to a head in February 2014 when the contractor halted construction work
due to the canal authority’s failure to maintain the economic balance of the
contract. This article explains the circumstances surrounding this dispute
and analyses the causes and consequences of modifications to the contract.
These are classic problems that affect all public procurement systems. The
lessons drawn from this extraordinary case are valid for other legal systems.
INTRODUCTION
On 8 July 2009, the Panama Canal Authority (ACP) awarded the
contract to build the third set of locks to a consortium of companies
from different countries led by the Spanish construction company
Sacyr. Despite procedural safeguards, the ACP’s decision was dogged
by controversy, and the ability of the consortium to execute the
contract was called into question. Despite these criticisms, the works
went ahead without a hitch and continued over the following years
until, on 7 February 2014, a serious dispute sparked off without
warning, threatening the success of the entire project. The cause of
the dispute was the consortium’s decision to suspend work when the
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* Francisco L. Hernández Gonz ález, Ph.D., is Professor of Administrative
Law at the University of La Laguna (Spain). His teaching and research
interests are in public utilities, governme nt procurement and urban law. T his
article is part of the research project “T he impact of the crisis on public
procurement” (Ministry of Econom y and Competitiveness of the Government
of Spain; DER2012-32911).
Copyright © 2016 by PrAcademics Press
THE CASE OF THE PANAMA CANAL EXPANSION: PACTA SUNT SERVANDA VS REBUS SIC STANTIBUS 53
canal authority defaulted on the obligation to restore the economic
balance of the contract as a result of a cost overrun exceeding 40%
of the original tender amount.
The dispute arising from this suspension of works went beyond
mere contractual relationship, leading to an institutional crisis
between the countries involved (mainly Panama, Spain and Italy),
which required intense diplomatic deployment. On one side of the
dispute was the obligation of the contractor to fulfil the terms of the
signed contract, at their risk and cost (pacta sunt servanda); on the
other side, the obligation of the ACP to compensate the consortium
for the unilateral modifications (ius variandi) and the extraordinary
events that occurred during the execution of the works (rebus sic
stantibus or the principle of economic-financial balance in public
contracts).
This article aims to analyse this conflict, examining both the
formal and substantive issues surrounding the tender and the
contract modifications that underlie the contractor’s claim (and the
memorandum adopted by both parties to resolve the situation). It
should be noted that this article does not intend to be an abstract
scholarly study of public procurement, nor of the problems posed by
application of the rebus sic stantibus clause and the ius variandi
prerogative (which have already been the subject of incisive analysis
in legal literature worldwide). This article proposes a quite different
approach: an analysis of applied legal theory that aims to look at the
practical consequences of applying these principles to large-scale
public infrastructure contracts. The ultimate goal is to formulate some
general rules from a paradigmatic case study; rules that are global in
scope, fully transferable to other legal systems, and may help improve
the current regulatory framework.
THE WORKS, THE KEY PLAYERS AND THE PROBLEM
The Panama Canal Expansion Program
The Panama Canal expansion is one of the biggest public works
projects of this century.1 It s aim is to bolster the competitiveness of
one of the most important international shipping lanes against its
direct competitors (the Suez Canal and US transpacific intermodal
routes) by adapting it to the characteristics of the new container
ships. In order to achieve this goal a new lane was needed to link the
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