Claims for procurement damages following Supreme Court resolution III CZP 16/20 | In Principle

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Claims for procurement damages following Supreme Court resolution III CZP 16/20

In the past, Polish courts took the position that a contractor whose bid was not selected due to a violation of the Public Procurement Law must first file an appeal with the National Appeal Chamber (and possibly a complaint with the state court against the chamber’s ruling), and only then could seek redress from the contracting authority. This discouraged contractors from pursuing claims. A recent resolution by the Supreme Court has changed this situation.

On 25 February 2021, the Supreme Court of Poland adopted the following resolution: “Seeking compensation for damages by a contractor whose bid was not selected as a result of violation of the Public Procurement Law of 29 January 2004 … by the contracting authority does not require a prior finding of violation of the act by a legally final ruling of the National Appeal Chamber or a legally final court ruling issued pursuant to a complaint against the ruling of the National Appeal Chamber.”

Although the justification for this resolution has yet to be issued, it will be very important for participants in public procurement, as it will clarify the rules for a contractor to seek compensation from the contracting authority for loss of a contract due to violation of the Public Procurement Law in the process of awarding the contract.

The resolution was handed down in a case where the contractor to which a contract was not awarded did not file an appeal with the National Appeal Chamber (KIO), but sued directly in state court for damages. In the statement of claim, it alleged that as a result of improper application of the Public Procurement Law, the contracting authority failed to select its bid as the most advantageous and, as a result, failed to conclude a contract with the plaintiff, depriving it of the benefit it expected to obtain from performing the contract.

In light of this resolution, we discuss the most important procedural aspects of a potential case for redress of procurement damages.

What is changing?

To date, there have been doubts in the case law of the lower courts on whether seeking damages requires going through the full appeals process, before the National Appeal Chamber and, if the chamber ruling is unfavourable to the contractor, also before the regional court, to which the contractor has a right to appeal against the ruling of the chamber. Most courts required contractors to first resolve the case before the National Appeal Chamber, although the rules governing civil litigation do not make the court bound by the ruling of such a dispute resolution forum. This procedure was not attractive for contractors, in particular due to the high costs and the duration. As a result, contractors rarely decided to pursue their claims, even though the Procurement Remedies Directive (2007/66/EC) provides for a right to damages for entities harmed as a result of violation of public procurement law.

When is compensation due?

The position presented by the Supreme Court should be of particular interest to contractors which, for various reasons, cannot file an appeal with the National Appeal Chamber, e.g. because the legal deadline has passed (and it should be noted that not all violations may be identified within this period).

The resolution opens up a parallel avenue of redress directly before the state court in situations where, among others:

  • The injured contractor’s bid was not selected due to irregularities in the procedure
  • The contracting authority did not sign the contract after the contract award procedure
  • The contracting authority awarded the contract without applying the Public Procurement Law.

Although it was not explicitly stated in the resolution, it seems that contractors who followed the route of appealing to the National Appeal Chamber, but lost, will also be able to bring an action in state court. Thus a dispute over damages may potentially be used to attack an unfavourable ruling by the National Appeal Chamber.

What does the resolution mean for litigation practice?

The resolution may greatly simplify the process of seeking damages from contracting authorities directly before the state courts, as it indicates that it will not depend on exhausting the earlier appeal route provided for in the Public Procurement Law.

However, the situation may become complicated if the ruling of the National Appeal Chamber is appealed again to a state court, whose legally final judgments have the force of res judicata, i.e. they are binding on the parties and other courts. Time will tell whether the courts also allow prior judicial determinations to be challenged in proceedings seeking damages, but it seems likely.

What compensation?

Although the resolution itself does not touch on the scope of damages, it is worth considering it on this occasion, when the previous procedural hurdle has been removed and thus the pursuit of claims by contractors has been made easier.

The appropriate point of departure for determining the amount to be paid should be the principle of full compensation, which implies that in principle damages are payable for any injury caused by a violation. This is also the tone expressed on this issue by the Court of Justice of the European Union.

The loss to a contractor whose bid was not selected in breach of the Public Procurement Law may include the sunk costs of participating in the procedure (e.g. the costs of a bid bond), but also, which is of particular interest to contractors, the lost benefits that the contractor could have counted on by concluding an agreement with the contracting authority. Among other reasons, this is because conclusion of a contract is the natural consequence of selection of the most advantageous bid.

Lost or hypothetical profits: what must the claimant prove?

However, claiming lost profits due to failure to complete a transaction is quite difficult in practice, essentially for two reasons.

First, it must be proven that a transaction with the claimant would actually have occurred. In the case of formalised public contract award procedures, this is somewhat easier, as one can rely on the rules of the Public Procurement Law, which should objectively indicate the most advantageous bid. Nevertheless, this is still a matter to be proven. In addition, apart from the loss of a contract, one could allege the loss of a realistic chance of award of the contract. The latter case is obviously much more difficult to prove (both in terms of the existence of such a chance and the amount of damages). Such a situation might relate to violations at an early stage of the procedure or in a situation where the contract was awarded without a tender.

Second, the amount of lost profits must be proven. For this purpose, account must be taken of both the proceeds and the expenses (losses) that would have occurred if not for the violation. This means the necessity to deduct the cost of completing the transaction from the revenue the contractor was to receive from it. In the case of a supply contract, this may not be very difficult, but in the case of a contract for construction works, it can make the calculation very difficult or even exclude the existence of lost profits. Therefore, when claiming lost profits, a contractor whose bid was rejected may face the objection that an increase in the price of materials and labour, delivery costs etc, which occurred in subsequent years, after the contract was awarded, would reduce or perhaps even eliminate the contractor’s margin. It should be stressed that claiming hypothetical damages is excluded under Polish law.

Deadline for a decision

The analysis must take into account the statute of limitations for a claim for damages, which in most cases will be three years from the time the contractor learned of the violation of the Public Procurement Law by the contracting authority.

Is it worth litigating?

Despite the difficulties described above, pursuing damages for procurement violations directly before the state court could still be an attractive option. Indeed, the resolution by the Supreme Court clarifies the practice in this area, shortening and simplifying the legal path for a contractor that has suffered a loss as a result of an improperly conducted public procurement.

Bartłomiej Głąbiński, Dispute Resolution & Arbitration practice, Wardyński & Partners