Principle of transparency and certainty of terms in public contracts and beyond | In Principle

The principle of transparency and certainty of terms are essential for ensuring fair and efficient trade, particularly within the public procurement sector. A case currently before the Court of Justice of the European Union (C-82/24), in which we have the privilege of representing the contractors, underscores the dangers of interpreting contractual terms unpredictably after a contract is awarded, and issues that can arise if governing law is applied inconsistently or arbitrarily to public contracts, disregarding the principle of party autonomy. The opinion issued in the case by Advocate General Sánchez-Bordona explains how EU law can safeguard contractors by preventing such risks.

The background case

The case involves a contract between a Polish public employer and a consortium of contractors from various EU member states, engaged to design and construct an industrial plant. During the warranty period, a component of the plant broke down, and the contractors replaced it under the warranty, despite suspecting that improper use might have caused the issue. This replacement component failed again long after the warranty period had ended. Nevertheless, the employer demanded another replacement, arguing that the warranty period recommenced when the plant component was initially replaced.

The "warranty card," which formed part of the contract, spanned multiple pages and detailed numerous warranty terms, including the duration, said nothing about that. However, it referred to the Polish Civil Code (and public procurement law) for "matters not regulated in it." The Polish Civil Code includes a provision (Article 581) stating that a quality warranty recommences when its subject is replaced or undergoes a major repair. However, this provision pertains to warranties in sales contracts and is primarily intended to protect the weaker party (the buyer) in consumer sales. Its application has significantly different implications in a typical sales contract, where the cost of producing another unit of the product and replacing it is usually minimal, compared to a construction contract. In construction contracts, the subject is often a complex, custom-built, and capital-intensive structure attached to land. Despite this, the employer in case C-82/24 argued that the provision should apply to the construction contract by analogy. The Polish court handling the dispute questioned, "why not?" We argued that the proper question is rather "why should it?"

Freedom of contracts, freedom not to contract and the principle of transparency

A fundamental principle of contract law is that parties have the freedom to determine the content of their contracts. This encompasses not only the liberty to include terms that both parties agree upon but also the freedom not to include any terms they do not wish to incorporate. Regardless of how beneficial or prudent lawmakers or courts might find it to add additional terms. Freedom of contracts also means freedom not to contract or not to include unwanted terms. Except for essential terms necessary for the existence of a contract, or situations where implied terms are needed to ensure the contract's commercial viability, the law should not impose terms on parties in professional trade. This imposition should only occur when a significant public interest, such as preventing abuse or safeguarding good faith and fair dealing, genuinely necessitates it. This approach aligns with the fundamental principle of party autonomy and the closely related principle of certainty of terms.

Professionals want two things when they contract. They want to be free to agree on terms, but, first and foremost, they want to be certain that they can rely on what was agreed - that except for extraordinary situations, they will be bound by all that they agreed to, and only by that. Or in other words, that except if they conclude a relational contract or a contract with terms deliberately left open (which may require to be supplemented or developed by their very nature), the bargain which the parties had struck and recorded in their agreement, will be effectively and faithfully upheld.

The significance of this is particularly evident in public procurement. Companies bidding for public works and expected to offer their best prices need certainty about what they are pricing. They must know with sufficient clarity what will be required of them if they win. This is also true in private trade, but it is especially crucial in public contracts. Without this certainty, effective competition for public works is impossible, and public resources are misspent. Offers submitted by bidders cannot be compared if it is uncertain whether they had the same scope of obligations in mind. Moreover, bidders cannot be sure they won't be exploited by the state party if the contract, after being concluded, can suddenly be filled with additional terms that either limit the contractors' rights or expand their obligations. This not only violates the contractors' rights but also deters bidders and diminishes competition for public works in the long run. Such issues rarely arise from outright changes to the contract. Instead, they occur when the employer engages in creative interpretation of the contract's terms, which he deliberately and improperly left vague at the tender stage, or when he demands an arbitrary application of poorly developed law to "supplement" the contract after its conclusion.

The consortium argued that the employer's actions in C-82/24, by insisting on the application of Article 581 of the Polish Civil Code to their construction contract, exemplified this issue. They contended before the court that not only was such an application improper under a correct interpretation of the code—as confirmed by a significant portion of relevant jurisprudence and doctrine—but it also violated the EU public procurement law principle of transparency. This principle requires that the public employer clearly and comprehensively state the conditions of the tender, including the terms of the proposed public contract, to promote fair and effective competition for public works. The Polish court handling the matter referred this issue to the CJEU for a preliminary judgment. While the judgment is still awaited, Advocate General Manuel Campos Sánchez-Bordona has already issued an opinion.

Principle of transparency according to AG Sánchez-Bordona

The opinion confirms that the EU public procurement law principle of transparency is not limited to the tender stage and continues to apply after the tender closes and the contract is concluded with the successful bidder. As established case law already dictated, it governs subsequent amendments to the public contract to prevent favouritism or discrimination against unsuccessful bidders. But in addition, it influences how the contract is interpreted during performance, how the relevant law is invoked by the employer to supplement the contract, and how it is applied by the relevant courts. This is to protect the successful bidder and prevent improper, ex-post, "back-door" extensions of their obligations. The Advocate General essentially confirms in his opinion that certainty of terms in public contracts is a crucial element of the EU public procurement law principle of transparency.[1] It depends not only on how the contract is drafted but also on its subsequent interpretation and the quality and application of the applicable law by the relevant courts. In other words, to comply with the principle of transparency, Member States must ensure that their contracting authorities properly draft public contracts, fairly interpret them afterward, and that the state's laws are sufficiently clear, stable, and consistently and predictably applied by the courts to those contracts.

According to the Advocate General, public contractors must exercise reasonable prudence in informing themselves about the relevant national law applicable to their contracts. However, as can be inferred from the opinion, the vagueness of that law or inconsistency or arbitrariness in its application by the Member State's courts cannot be used against the contractors to impose additional obligations that, for transparency's sake, should have been stipulated by the employer in the contract. The Advocate General also indicated that when parties regulate a certain matter in a contract in a way that appears complete, they typically do not expect the provisions of local law to "supplement" that explicit contractual regulation. Indeed, parties often conclude comprehensive "self-regulating" agreements (like the FIDIC contract in question in case C-82/24) to minimize the potential application of the relevant law and avoid potential distortions or surprises. Moreover, parties do not typically expect a provision of national law dealing with a contract of a different economic nature to apply "by analogy" to their contract, as explained by the Advocate General.

Advocate General Sánchez-Bordona essentially argues that arbitrarily applying a provision of the relevant national contract law, which extends a contractor's obligations beyond the original agreement, can undermine the contractor's certainty regarding the contract's terms. More broadly, this practice can render bidding for public works unnecessarily risky and expensive, thereby stifling competition and leading to the inefficient use of public resources. Consequently, such actions may breach the EU public procurement law principle of transparency.

Broader significance

It remains to be seen whether the CJEU will follow Advocate General Sánchez-Bordona's opinion. Regardless of the outcome, his observations will remain pertinent, extending beyond the realm of public procurement. The principle of transparency, as outlined above, is applicable not only in this specific area but also in any context where the state or the EU spends public funds to achieve public objectives in collaboration with competing private contractors. Furthermore, the "certainty of terms" aspect of this principle holds broader significance for all professional contracting. A lack of certainty in contractual terms can have similarly adverse effects on the security and efficiency of trade in private commerce.

Advocate General's remarks highlight that the efficiency and cost-effectiveness of contracting in a given state are influenced not only by the quality of contract drafting but, more importantly, by the quality of the applicable contract law and jurisprudence. This holds true even in states that ostensibly uphold the principle of contractual freedom. An unconscious disregard for this freedom can arise from lawmakers' well-intentioned efforts to systematize "typical transactions" and codify rules for them. Such codification can create incentives for courts to bypass thorough analysis in favour of ready-made but not entirely adequate solutions, potentially leading to interventionism, arbitrariness, inconsistency, and unpredictability. This tendency is especially harmful during periods of rapid economic change and disruption, which give rise to new business and cooperation models. These models often rely on non-standard or hybrid contracts that should not be forced into the confines of convenient but possibly inadequate regulations.

Finally, Advocate General's insights shed light on why English law and New York law are the most favoured choices for governing contracts in international trade, despite neither having a civil code or a code of obligations and both requiring familiarity with decades of jurisprudence or extensive commentaries to understand contract law. The AG's opinion illustrates that even the most meticulously codified contract law, crafted by leading academics, is less crucial for ensuring trade efficiency and security than a well-functioning judiciary that fosters consistent and organic development of the law and upholds the principle of party autonomy. This observation should not necessarily prompt countries like Poland to abandon their codes in favour of a common law system. However, it suggests that without a robust hierarchy of courts—both formal and intellectual, as embodied in the principle of stare decisis—and a genuine respect for the autonomy of parties in professional trade, countries like Poland may struggle to thrive in the evolving economy.

Switzerland, often ranked just behind England and New York as a preferred jurisdiction for international transactions, exemplifies how systems based on statutory law and continental judicial models can also provide certainty and security in trade for professional parties. This is achievable if the criteria of consistent jurisprudence and respect for party autonomy are met. Within the EU's public procurement sector, the principle of transparency helps ensure these standards. In other areas where such standards are equally necessary, they can be derived from constitutional principles, such as economic and personal freedom, with freedom of contracts and certainty of terms being key components.

Stanisław Drozd, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners