Public procurement contracts under the new framework: A clear step toward balancing the parties’ positions | In Principle

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Public procurement contracts under the new framework: A clear step toward balancing the parties’ positions

The unique characteristics of public procurements should not impede a balanced allocation of risks between the parties. However, despite efforts by various groups this goal has remained unattainable. The drafters of the new Public Procurement Law have recognised the problems related to the parties’ unequal positions and proposed several remedies.

The contracting authority’s privileged position stems from three causes. First, the contracting authority’s role is to shape the tender conditions in a manner that most effectively protects the public interest. Second, the contracting authority is bound by public finance discipline in its spending of public funds. The third cause follows from the previous two: the contracting authority alone establishes the performance conditions for the contract. The terms of a public contract are not the result of negotiations between the parties, as is the case with contracts between private entities, but are simply confirmed through the contractor’s acceptance of the terms presented by the contracting authority.

The first two causes are seen as limiting the contracting authority’s freedom of contract, and on the other hand, the contractor is limited by its inability to meaningfully affect the terms of the contract, instead factoring the expected costs of fulfilling the specific terms of reference into the amount of its bid. Contractors also have a right to challenge the procurement’s terms of reference by filing a complaint with the National Appeals Chamber (KIO).

KIO’s review of contract terms

Currently, a contractor’s ability to rely on legal remedies to challenge the terms of reference is sometimes questioned by the National Appeals Chamber itself. According to released drafts, the new Public Procurement Law will clearly set out the National Appeals Chamber’s jurisdiction to determine the validity of contract terms in reference to specific rules of law and the proportionality principle.

A recent tender by the General Directorate for National Roads and Motorways (GDDKiA) featured an attempt to unduly burden contractors with contractual risks. The proposed contract precluded the applicability of statutory clauses allowing modification of contract terms in the event of unforeseen changes in circumstances resulting in a serious loss to the contractor (Art. 3571, 3581 §3 and 632 §2 of the Civil Code). The contracting authority’s conduct was challenged in a complaint filed with the National Appeals Chamber. In a 15 February 2018 ruling, the chamber found that the contractual provisions excluding the applicability of these statutory clauses constituted an abuse of right by the contracting authority (Art. 5 of the Civil Code). The ruling found that the contracting authority had burdened the contractors with inappropriate contractual risks by foreclosing their ability to seek amendments to the contract in light of extraordinary changes in circumstances.

The determination that the contracting authority’s conduct was inappropriate may appear obvious, but preventing it required the National Appeals Chamber’s intervention in the proceedings. Further, if no complaint had been filed, the terms of the contract would have retained their exclusions of these statutory adjustment clauses.

Such practices have highly negative effects on both parties. These include the prolongation of tender proceedings, the additional costs of proceedings before the National Appeals Chamber, the inflation of contractors’ bids to account for the potential occurrence of unforeseeable events beyond the contractor’s control, and even contractors’ decisions to withdraw from completing the contract, despite the resulting obligation to pay contractual penalties for abandoning performance.

The need for changes in laws on performance of public contracts

The public procurement system requires changes. This applies not only to the evaluation and acceptance of bids but also to the terms of performance. The current law addresses the execution phase in a cursory manner. Of course, Civil Code rules on performance of contracts can be and are applied to matters of execution of public contracts. Still, the current Public Procurement Law does not provide regulations ensuring smooth and effective performance of public contracts.

Proportionality principle

In addition to the principles of equal treatment and fair competition, the new Public Procurement Law is expected to incorporate the proportionality principle into public contracts. Similarly, the equal treatment principle has been successfully invoked in complaints against contracting authorities and has proven to be an effective tool for protecting contractors’ rights.

Such applications of the proportionality principle are not an entirely new development. Proportionality is one of the fundamental principles of EU law, and has been applied to public procurement matters starting with the Classic Directive of 2004. While it was only introduced into Art. 7 of the Public Procurement Law by the 2016 amendments, and earlier Polish law applied it only to evaluating contractors’ eligibility to participate in the procedure, the proportionality principle’s applications are, in fact, unrestricted. That is why it has been possible to invoke it in matters involving establishing the terms of reference. However, the current proposal calls for it to also be used in establishing the terms of contracts.

Catalogue of forbidden clauses

The new Public Procurement Law proposes the establishment of a catalogue of forbidden clauses (referred to as abusive clauses). The same mechanism has successfully functioned in the area of competition law. Forbidden clauses are void as a matter of law and their inclusion in contracts has no effect on the protected party.

In light of the problems related to contracting authorities’ abuse of their status as the organiser of the proceeding, it is necessary to limit their freedom in determining the wording of contracts. This is why the establishment of a catalogue of forbidden clauses affecting critical matters appears to be a positive development.

The proposed approach would result in an increase of instances where balanced public procurement contracts are obtained without the National Appeals Chamber’s involvement. It may also result in reversal of a long series of rulings by the chamber on the issue of unreasonably high contractual penalties included in public contracts. These decisions have held that the contract terms should protect the public interest even at the expense of the legitimate interests of the contractors.

The proposed new Public Procurement Law also provides for ongoing additions to the catalogue of forbidden clauses. This is certainly a worthwhile proposal. The clauses included in the catalogue should reflect the evolving nature of problems related to the performance of public contracts. The development of a catalogue of abusive clauses will certainly require input from parties actively involved in the public procurement market.

The Public Procurement Law proposal provides examples of subjects to be included in the catalogue of forbidden clauses.

            Delays caused by the contracting authorities’ actions

The first proposal calls for a prohibition on assessing contractual penalties for delays attributable to the contracting authority. A ban on such practices is clearly appropriate. However, we should note that they are also prohibited under existing law. A longstanding line of case law has found that an obligor may not be liable for delays caused by circumstances for which the obligee is responsible (e.g. Supreme Court judgment of 27 September 2013, Case I CSK 748/12).

            Contractual penalties

I also support the second proposal, which would prohibit the inclusion of contractual penalties that are disproportionate to the value of the contract. However, since “disproportionality” is a vague term, it must be appropriately defined by the law or the prohibition will not achieve its intended goal. As mentioned earlier, the requirement of proportionality already applies to all of the contracting authority’s actions (Art. 7 of the Public Procurement Law), but this has not been reflected in current practice regarding critical issues which often form the focal point of conflicts between contracting authorities and contractors. A line of National Appeals Chamber case law has developed which, without apparent legal justification, has held that the protection of public interests justifies the inclusion of severe contractual penalties for contractors in public contracts (e.g. National Appeals Chamber rulings of 23 October 2009 (KIO/UZP 1467/09), 2 November 2009 (KIO/UZP 1485/09), 5 October 2015 (KIO 2038/15), 26 November 2009 (KIO/UZP 1547/09), 23 August 2010 (KIO/UZP 1698/10) and 8 September 2010 (KIO/UZP 1865/10)).

            Effects of unforeseeable circumstances

The third category of proposed forbidden clauses relates to a prohibition on unjust demands that contractors perform obligations resulting from unforeseen circumstances. Above all, it should be noted that all issues of expanding the scope of a procurement’s subject matter should always be analysed in light of the regulations governing amendments to the contract (namely, Art. 144 of the Public Procurement Law). An appropriately developed list of forbidden clauses is intended as a response to the contracting authorities’ incorrect but widely held assumption that the contractors’ ability to estimate such risks and incorporate them into the price of their bid should place the burdens of unforeseeable circumstances exclusively upon the contractors. This incorrect view has formed the basis for numerous court rulings (e.g. Wrocław District Court judgment of 14 April 2008, Case X Ga 67/08). This approach to allocating contractual risks between the parties has an ultimately adverse effect on the public interest, as it may result in either inflated bids or the risk of a contractor abandoning the contract if the circumstances surrounding performance are atypically challenging and exceed the assumptions used in calculating the bid. In certain types of unforeseen circumstances, contractors may find that withdrawing from performance of a contract and paying the resulting contractual penalties to the contracting authority is more profitable than continuing to perform the work under the new circumstances.

This problem, while relevant to all types of public tenders, is most significant in tenders for construction works. These types of contracts carry the highest risk of unforeseeable circumstances. These include weather anomalies and archaeological discoveries, which often result in additional contractor costs and prolongation of the project. In developing the catalogue of forbidden clauses, legislators would do well to seek guidance in the risk allocation mechanisms of the FIDIC model contract conditions, which have a deserved reputation for balancing the rights and obligations of contracting parties in construction projects.

Fee modifications

Another area where the proposed new Public Procurement Law would increase the legislature’s role in determining the wording of contracts is provisions for the modification of the fee rates payable to contractors. Currently, the Public Procurement Law mandates the inclusion of adjustment provisions for contracts with a duration longer than 12 months. Under the present regime, adjustment of fee rates is mandated in specific instances of increased tax and social burdens, including VAT rates, minimum wage requirements and social insurance contributions. The new law will also mandate changes to contractual fee rates in other instances. The mechanisms for such rate adjustments would be introduced into the contract terms based on a specific formula or on the basis of relevant statutory provisions specifically addressing the wording of fee adjustment clauses.

In my judgement, an increased emphasis on the need to modify fee rates in public contracts is a necessary step. Placing the entirety of the risk related to circumstances such as the recent worldwide increase in costs of materials on contractors provides only an illusion of stability in public contracts. The true consequences of such an approach lead to economic instability driven by payment backlogs among entities involved in the public procurement market and a sense of uncertainty as to the ability to continue performance of existing contracts.

Preliminary market consultations

The need to ensure the competitive nature of public tenders arises from the contracting authorities’ obligation to spend public funds in prudently and efficiently. However, it also has the effect of limiting discussions and negotiations between potential parties to public contracts and leads to contracting authorities’ arbitrary decisions on tender conditions and description of the subject of the contract. The proposed new Public Procurement Law provides for the widespread introduction of preliminary market consultations, which are meant to replace the current law’s rarely used technical dialogue mechanism. This is intended to strengthen the partnership-based approach to framing the terms of the contract and other elements of the terms of reference.

Preliminary market consultations are designed to alert the contracting authority to potential errors or omissions in the procurement documentation and allow the parties to achieve compromise solutions addressing their interests. However, it is not certain that this measure will significantly affect the contracting authorities’ approach to framing contracts. Under the current law, contractors already have the right to ask the contracting authority to clarify provisions affecting their bids. Unfortunately, such discussions between the contracting authority and potential contractors often end up being decided by the National Appeals Chamber.

The successful implementation of the preliminary market consultation mechanism will require a change in the way contracting authorities perceive discussions about provisions that are to be included in published tender documentation.

Hanna Drynkorn, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners