Economic capacity: Neither a borrower nor a lender be?
The nature of the resources that can be presented in a tender to demonstrate a contractor’s economic capacity raises doubts concerning the permissible forms in which economic capacity can be realistically shared. But the latest case law shows that there are actually many different ways for a contractor to make use of the economic capacity of another entity.
A contractor seeking the award of a public contract can rely on the knowledge, experience, technical capacity, personnel capable of performing the contract, and economic and financial capacity of other entities. In Poland, under the Prime Minister’s regulation of 22 February 2013 on documents that can be demanded by contracting authorities, the contracting authority’s ability to verify whether an entity lending its capacity would actually participate in performance of the contract was broadened from the previous regulation.
Realistic sharing of capacity
This mechanism is intended to avoid the previous problem of third parties superficially pretending to lend their resources solely for the purpose of meeting the conditions for participating in the tender, when their resources would not really be available at the stage of contract performance. Previously there was no basis in the regulations for requiring the contractor to demonstrate that an entity lending its resources would actually ensure support in performing the contract.
Under the rules set forth in the 2013 regulation, the contracting authority will specify in the contract announcement what conditions must be met in the declaration by an entity lending its capacity and what additional documents must be submitted to meet the needs of the future contract. This is typically formulated as a requirement to demonstrate in the declaration how the resource in question will be used. For example, the participation of the third party may be defined as subcontracting, advice, consultancy, training, or providing documentation—but it must always be appropriate to the tasks covered by the contract.
“Realistically” does not necessarily mean “directly.” Various forms of participation by the third party in performance of the contract are permissible. How realistic the lending of capacity is must be evaluated in a way that is appropriate to the specific tender and the nature of the resource in question.
Realistic lending of economic capacity
Economic capacity means claims and assets under the control of an entity that can provide it financial benefits. Economic capacity is defined to include a set of economic indicators (such as turnover, profit and liquidity) applicable to the given entity. The economic capacity of an entity could thus be found from the existence of a civil liability insurance policy, or from figures contained in financial reports. Economic reliability may also be understood to mean the ability to conduct business, as well as recognition, reputation, and involvement in commerce (National Appeal Chamber ruling of 11 May 2015, Case KIO 863/15).
Thus the parameters of economic reliability of a third party cannot be relied on directly in the same way that, for example, the lending of personnel can be demonstrated by seconding of staff to the other entity to perform specific tasks under the contract.
National Appeal Chamber on methods of lending economic potential
The issue of realistic lending of economic capacity was recently considered by the National Appeal Chamber in the ruling of 11 May 2015 cited above. It turns out that there are many ways to lend economic capacity.
In that case, the appellant argued that reliability is an individual and inseparable characteristic of the contractor, and that the contractor selected in that tender did not make even a basic showing with the documents it submitted that it would have such reliability at its disposal. The winning bidder had presented a cooperation agreement and annex with the entity lending it capacity, which the appellant claimed was inadequate.
The document contained a series of undertakings by the entity lending its resources to the bidder, and each of them was disputed by the appellant as not providing a sufficient basis for lending its capacity. The appellant argued that the undertakings did not obligate either of the parties to take any specific action and did not entitle the contracting authority to assert any demands.
Economic backing by entity lending its resources
The National Appeal Chamber disagreed with the appellant, finding that it was clear from the preamble to the annex in question that it was concluded in connection with the bidder’s seeking the contract in question, and consequently there was no doubt that it would constitute a source of obligations by the third party if the bidder’s offer were selected in the tender. It was stated in the justification for the ruling that the wording of the agreement between the contractor and the third party contained specific forms of economic backing by the entity lending its resources, providing grounds for finding that the borrowed capacity was real.
First, it was to consist of a guarantee of the contractor’s obligations or other form of security required by the bank or insurance company to ensure that the entity obtained a bank or insurance guarantee which could be presented to the contracting authority as security for proper performance of the contract.
In the chamber’s view, such a declaration by a third party was equivalent to an undertaking by the third party to incur the costs of obtaining a bank guarantee or insurance guarantee for the contracting authority.
Second, the entity lending its resources promised the contractor that it would conclude a guarantee agreement with the contracting authority for the obligations under the public contract, or accede to the debt.
In this context, the chamber stated that the accession to the debt declared by the third party should not be regarded as conflicting with the fundamental principle of the Public Procurement Law that the contract is awarded exclusively to the contractor selected in accordance with the act (Art. 7(3)). As explained by the chamber, unlike the institution of assumption of debt as regulated in the Civil Code (Art. 519 and following), pursuant to which there is change in debtors, in the case of accession to the debt a second debtor, jointly and severally liable, appears along the existing debtor. The chamber took the view that such an obligation by the third party ensures the economic reliability of the contractor and thus secures the interests of the contracting authority.
Third, possible participation in performance of the contract by the entity lending its capacity was provided for.
In the justification for this ruling, the National Appeal Chamber pointed out that the fact that the economic reliability of another entity truly stands behind the contractor was most fully demonstrated by the third party’s declaration that it would participate in performance of the contract as a subcontractor. The statement that the third party would only “potentially” participate as a subcontractor did not raise the chamber’s doubts.
Nonetheless, the chamber expressly stated that it is incorrect to equate lending of economic capacity exclusively with subcontracting.
Addressing more generally the forms of potential involvement by the third party in performance of the contract, it was stated that the general nature of these forms did not justify a finding that the resources were not really being made available. This conclusion would be warranted if it were shown that the proposed mechanisms for lending third-party capacity were impermissible or ineffective.
This ruling by the National Appeal Chamber provides a number of guidelines for contractors and will surely prove helpful in formulating the conditions for cooperation with third parties to avoid an objection that the third party is not really making its economic capacity available.
Hanna Drynkorn, Infrastructure, Transport, and Public Procurement & Public-Private Partnership practices, Wardyński & Partners
