An interview with Mirella Lechna, the partner in charge of the Infrastructure & Transport and Public Procurement & Public-Private Partnership practices at Wardyński & Partners, about the recent amendment of the Public Procurement Law concerning subcontractors.
Litigation Portal: The provisions of the Public Procurement Law in force since 24 December 2013 regulate for the first time ever in Poland the contractual relationships between contractors in public procurement and their subcontractors. How has the market responded to the new rules?
Mirella Lechna: The response to these provisions, introduced by the amending act of 8 November 2013, has not been uniformly positive. During the legislative process, some institutions commenting on the bill complained that it lacked a comprehensive analysis of the issues covered by the amendment and was addressed more to ad hoc concerns rather than addressing the procurement system as a whole. Some commentators also took the view that the new rules, which significantly intervene in the legal relationships between parties which are not subject to the rigours of public finance, are inconsistent with the principles of business freedom and freedom of contract.
What new things were introduced by the amendment?
The amendment introduced detailed rules for payment of fees to subcontractors and sub-subcontractors by the contracting authority in situations where they have not received the fee they are owed from the contractor or subcontractor for construction works—in other words, a mechanism of direct payments.
Is this new approach more beneficial for companies participating in performance of contracts as subcontractors?
The impetus for drafting the amendment and the justification for adopting the amending act of 8 November 2013 was that lawmakers had identified a need to regulate issues concerning failure to make timely payment to subcontractors in public procurements and to create a system of guarantees of payment of fees owed to subcontractors. This initiative was spurred by the pathological situation observed in road construction projects. Many contractors had gone bankrupt during the course of implementation of public works projects, while many others sought to avoid bankruptcy by abandoning the construction site, leaving the subcontractors unpaid.
The drafters of the amendment regarded the existing rules in the Civil Code as insufficient. Under Civil Code Art. 6471, for many years a principle of joint and several liability has been applied in dealings with contracting authorities, that is, the rule that the investor is responsible for the debts owed to an approved subcontractor just as it would be for its own debt, which gives the subcontractor the right to demand payment from the investor (including by judicial compulsion). In the case of the Public Procurement Law, it is hard to say that the contracting authority is liable for the subcontractor’s fee. There is a mechanism for direct payment, but the act does not make the contracting authority jointly and severally liable to the subcontractor. The Public Procurement Law also limits the direct payment to the principal amount—without interest on delay—while the Civil Code provides a right to seek interest as well.
Under the practice of applying Civil Code Art. 6471 over the course of several years, effective standards have been developed, such as the rule that for the investor to become jointly and severally liable, it is sufficient to consent to conclusion of the subcontract implicitly or after the fact, when the subcontract has already been concluded and the subcontractor has already completed its portion of the project. The vast importance of this rule for protecting the interests of subcontractors is demonstrated by market practice. The failure to obtain prior written approval for hiring a subcontractor or consent to expansion of the scope of its work often results from oversight by the contractor or errors of a formal nature. Even in that case, under the Civil Code, unlike under the Public Procurement Law, the contractors are not deprived of their claims for payment from the contracting authority.
At a certain stage in the legislative process, however, the drafters decided to introduce a provision that the rules in the Public Procurement Law concerning direct payment shall not infringe the rights and obligations of the contracting authority, contractor and subcontractors arising out of Civil Code Art. 6471.
So how is the relationship between the contracting authority and subcontractors structured now?
Subcontractors of supplies and services may use the mechanism of direct payment from the contracting authority only on the basis of the Public Procurement Law. But in the case of contracts for construction works, subcontractors have two legal grounds available to satisfy claims for the fees owed them. It appears that this may become the source of problems involving a conflict between the regulations—for example concerning the definition of “construction works,” because since the beginning of 2013 there has been a separate definition in the Public Procurement Law.
The purpose of the Public Procurement Law is to set forth rules and procedures for awarding public contracts, and primarily to eliminate situations that foster corruption in spending of public money. Is it proper to regulate in this law issues concerning performance of public contracts by subcontractors, which has traditionally been governed by civil law?
During the legislative process it was argued that the essence of the new regulations is not to regulate the terms of the agreements between contractors and subcontractors. However, at least in the case of contracts for supplies and services, the contractors and subcontractors are required to use written form for all supplies and services which are part of a public procurement, even when this is not required by the Civil Code. These and other requirements imposed on agreements with contractors, limiting the freedom of private parties to frame their civil arrangements, will certainly make it more difficult to negotiate and conclude subcontracts.
However, the lawmakers accepted that the new restrictions introduced at the level of dealings between the contractor and the subcontractor are justified by the special nature of contracts awarded in the public sector. It should be pointed out that although this argument was not included in the justification for the bill, extending control to cover the dealings between contractors and subcontractors is consistent with the trend in EU law.
Under Directive 2014/24/EU of 26 February 2014 (one of a set of new directives superseding the EU’s existing procurement directives 2004/18/EC and 2004/17/EC, to be implemented by the member states by 18 April 2016), it is necessary to assure transparency in the chain of subcontractors for the purpose of monitoring who is participating in performance of a public contract. It was also deemed to be essential to have the ability to make direct payments to subcontractors in public procurements, while also providing that the member states are free to adopt more rigorous measures with respect to direct payments to subcontractors.