Work commissioned without a valid contract: what the contractor can recover from the public authority
Irregular procurement by public authorities, in particular through oral commissions or contracts that are void for breach of the procurement rules, raises a classic conflict between the prohibition of contracting outside the law and the need to prevent the unjust enrichment of a public authority that has received and taken the benefit of the works or services. The judgment of the Third Chamber of the “Tribunal Supremo”, Spain's Supreme Court, of 15 June 2026, Fourth Section, cassation appeal 9117/2024, sets precise limits on the compensation available in such cases: the contractor may recover the actual cost of the works or services, including any value added tax —the Spanish “Impuesto sobre el Valor Añadido”, or IVA— which it has been unable to recover, but not the overheads (“gastos generales”) or the profit mark-up (“beneficio industrial”) proper to a validly awarded contract. Moreover, the late-payment interest regime of Law 3/2004 on combating late payment in commercial transactions does not apply automatically; what applies is the statutory interest laid down in the “Ley General Presupuestaria”, Spain's General Budget Act. The question is of particular relevance for local-authority contractors and public bodies which, in practice, continue to receive work without proper contractual cover.
1.Nullity of the contract and its effects under the “Ley de Contratos del Sector Público”, Spain's public procurement act
The starting point lies in Law 9/2017 of 8 November on Public Sector Contracts —the LCSP—. Article 37 proclaims the formal character of public sector procurement, prohibiting oral contracting save in emergency contracts and requiring the formalisation of the contracts of public authorities in accordance with article 153. Article 39 sets out the grounds of nullity under administrative law, referring to article 47 of Law 39/2015 and adding specific grounds in procurement matters, such as the lack of capacity or standing of the successful tenderer, the absence or insufficiency of budgetary appropriation, the failure to publish the contract notice, the failure to observe formalisation periods in a way that prevents the special procurement review, the formalisation of the contract without regard to the automatic suspension of the challenged act, the breach of the rules on the award of contracts based on framework agreements or dynamic purchasing systems and the serious breach of European Union law on public procurement.
Article 42 governs the effects of a declaration of nullity and the effects in cases of voidability. It provides that a declaration that the preparatory acts or the award are void, once final, entails the nullity of the contract, which enters the liquidation stage, with mutual restitution of the things received and, where that is not possible, restitution of their value, the party at fault being under a duty to pay damages. It adds that, if the administrative declaration of nullity were to cause serious disruption to the public service, the effects of the contract may be allowed to continue under its own terms until urgent measures are adopted to avert the harm, and that those effects may also be ordered by a judgment of the administrative courts following a declaration that the act is detrimental to the public interest, a “declaración de lesividad”.
In the case decided by the STS of 15 June 2026, the Council had commissioned urgent maintenance work on municipal buildings by email, dispensing with the award and formalisation procedure required by Law 9/2017. The procurement was declared void ab initio for the omission of essential steps, but the public authority acknowledged that the work had been carried out and that the prices were correct. The issue in dispute was no longer the nullity, but the extent of the compensation due to the contractor.
2.Unjust enrichment and the scope of compensation: actual cost yes, profit no
The Third Chamber starts from the premise that, once the contract has been declared void, the contractor cannot be afforded the same economic regime as it would have had under a valid contract. Compensation is framed in terms of unjust enrichment: the aim is to prevent the public authority from benefiting free of charge from works or services received and turned to account, but without turning irregular procurement into a route to the same profit as a contractor which has taken part in a lawfully conducted procedure. The civil-law doctrine of enrichment without cause, set out in article 1895 of the “Código Civil” —Spain's Civil Code—, under which a person who receives something he was not entitled to receive and which has been unduly delivered to him by mistake is bound to return it, operates here in administrative terms: the public authority must restore the value of what it has unduly received.
The Supreme Court reiterates its settled case law to the effect that, in the liquidation of void contracts, the compensation payable to the contractor must be confined to the actual loss, that is, to the real and effective cost of the works or services, and not to the loss of profit, which would include overheads and the profit mark-up. Overheads and the profit mark-up are concepts proper to the economics of a valid contract, remunerating the contractor for its business organisation and for the risk assumed in tendering and performance. To recognise them in a context of void procurement would place the contractor which has taken part in irregular procurement on the same economic footing as one which has complied with the rules of Law 9/2017, which would run counter to the principle of equal treatment and to the deterrent effect that nullity must have.
The Chamber stresses that excluding overheads and the profit mark-up serves a twofold purpose: to prevent the contractor from profiting from irregular conduct in which it has taken part and to maintain a deterrent effect against contracting outside the law. Compensation is therefore confined to the actual cost of the works or services, understood as the body of direct costs necessary to carry out the work, duly evidenced by invoices, certificates and accounting records.
3.VAT as a recoverable cost when it is not deductible
The most significant development in the STS of 15 June 2026 lies in its treatment of value added tax. The public authority had excluded VAT from the compensation, arguing that it was not a cost for the contractor but a tax passed on to the recipient. The Supreme Court qualifies its earlier case law and holds that VAT may be a real cost for the contractor where, by reason of the nature of the transaction and of the absence of a valid contract, it has been unable to pass it on and deduct it in accordance with Law 37/1992 of 28 December on VAT.
Article 88 of Law 37/1992 provides that taxable persons must pass on the full amount of the tax to the recipient of the taxable transaction, who is bound to bear it provided that the passing-on complies with the law, and that the passing-on must be effected by invoice, stating the tax amount separately. Article 92 recognises the right to deduct input tax borne by way of direct passing-on or paid on certain transactions, and article 99 governs the exercise of the right of deduction, making it conditional on holding an invoice and on the goods and services being used for transactions giving rise to a right of deduction.
In the case of void contracts, the position may be different. The contractor has carried out works or services which are subject to and not exempt from VAT, has borne input tax on the acquisition of the goods and services needed to carry them out and, in principle, should pass the tax on to the Council by invoice. But the absence of a valid contract and the public authority's refusal to acknowledge the transaction as such may prevent the tax from effectively being passed on and fully deducted. If the contractor has paid over the VAT on the transaction without having collected it from the Council, or if it has borne input tax which it has been unable to deduct because the goods and services were not used for transactions carrying a right of deduction, VAT becomes a real cost which, if it is not made good, gives rise to unjust impoverishment.
The Supreme Court concludes that compensation for unjust enrichment must include VAT to the extent that the contractor has been unable to recover it. The public authority must pay not only the actual cost of the works or services, but also the amount of chargeable VAT which the contractor has paid over or borne with no possibility of deduction. Otherwise, the compensation would be incomplete and the public authority would benefit from taxable works or services without bearing the corresponding tax.
4.Late-payment interest: the Late Payment Act versus the General Budget Act
Another relevant aspect is the interest regime. Law 3/2004 of 29 December laying down measures to combat late payment in commercial transactions governs, in article 4, the payment periods in commercial transactions between undertakings and between undertakings and the public sector, setting a general period of thirty calendar days from the receipt of the goods or the supply of the services, extendable by agreement to sixty days, and provides, in articles 6 and 7, for the automatic accrual of late-payment interest where those periods are not met, at a rate of default interest higher than the statutory rate and with a right to compensation for recovery costs. Law 9/2017 incorporates that regime in article 198, by providing that the public authority must pay the price within thirty days of the approval of works certificates or documents evidencing acceptance, and that, if it is late, it must pay late-payment interest and compensation for recovery costs on the terms of Law 3/2004.
In the case of void contracts, however, there is no valid contractual relationship allowing the regime of the Late Payment Act to be applied directly. The STS of 15 June 2026 makes it clear that, since there is no valid contract, the late-payment interest of Law 3/2004 does not fall to be applied automatically. Compensation for unjust enrichment lies on a different plane, one in which the reference point is the statutory default interest laid down in budgetary and tax legislation.
Article 17 of Law 47/2003, the General Budget Act, provides that sums owed to the State Treasury accrue default interest from the day after they fall due, and that the default interest results from applying, for each year, the statutory rate set in the Budget Act. Article 26 of Law 58/2003, the “Ley General Tributaria” —Spain's General Tax Act—, governs default interest in tax matters, setting it at the statutory rate of interest increased by 25 per cent, unless the Budget Act sets another rate, and provides for it to be charged in situations such as the late payment of debts arising from tax assessments or penalties.
In compensation for unjust enrichment arising from void contracts, the Third Chamber chooses to apply the statutory rate laid down in the General Budget Act, running from the date of the contractor's administrative claim. This is not a commercial transaction governed by Law 3/2004, but an obligation to make good arising from the nullity and from the unjust enrichment. The rate of interest is therefore the statutory rate, not the late-payment rate, and the dies a quo is the date on which the contractor claims payment, not the date on which the works or services were received.
5.Practical relevance for local-authority contractors and public bodies
The doctrine laid down in the STS of 15 June 2026 is of obvious practical relevance for local-authority contractors and public bodies. In many councils and agencies, the pressure of urgency and the lack of a culture of compliance with Law 9/2017 lead to commissions given orally or by email, with no procurement file and no formalisation of a contract. When those commissions are subsequently regularised, the public authority may be tempted to deny any payment or to keep it to a minimum, relying on the nullity. The Supreme Court's doctrine prevents the public authority from being unjustly enriched: it must pay the actual cost of the works or services and the VAT not recovered, with statutory interest from the date of the claim.
At the same time, the doctrine preserves a deterrent effect against irregular procurement: the contractor cannot expect to obtain the overheads or the profit mark-up proper to a valid contract, nor the late-payment interest of Law 3/2004. Contracting outside the law becomes a risky activity, in which the contractor can aspire only to recover its costs and the input tax borne, but not to obtain the business margin it would have had in a regular tender procedure.
6.Conclusion: a balance between the prohibition of irregular procurement and protection against unjust enrichment
The judgment of 15 June 2026, recorded in the Third Chamber's official case-law report for the 2025–2026 biennium, strikes a reasonable balance between the prohibition of irregular procurement and the protection of the contractor against the unjust enrichment of the public authority. Once the contract has been declared void for breach of Law 9/2017, the contractor cannot claim the economic regime of a valid contract: it has no right to overheads, profit mark-up or late-payment interest. But it may indeed require the public authority to make good the actual cost of the works or services performed and the VAT it has been unable to recover, with statutory interest from the date of the claim.
For public authorities, the lesson is clear: contracting outside the law does not come free. Even if the payment of profit and overheads is avoided, the actual cost and the tax must be paid, and nullity cannot be used as an excuse to take the benefit of works or services without paying their value. For contractors, the doctrine offers a route to compensation where they have been drawn into irregular commissions, but it also reminds them that the only way fully to secure their remuneration and their margins is to take part in procurement procedures validly conducted in accordance with Law 9/2017.
