Tales from the National Appeal Chamber: Proper calculation of the three-year exclusion period for breach of an earlier contract
An optional ground for exclusion from procurement proceedings, breach of an earlier public contract, is limited to three years after occurrence of the event that is basis for the exclusion. But a problem arising in practice is which event should be considered when calculating the three-year period. Termination of the contract by the contractor? Repudiation of the contract by the contracting authority? Or perhaps entry of a judgment for damages for breach of the earlier contract? The answer can be found in the ruling by the National Appeal Chamber of 26 August 2020 (case no. KIO 1781/20).
State of facts
In a procedure for award of a public contract, after reviewing the offers filed, the contracting authority excluded one of the bidders from the procedure. In the justification for its decision, the contracting authority stated that the contractor had to be excluded from the procedure under Art. 24(5)(4) of the Polish Public Procurement Law, as in the contracting authority’s view it had failed to perform an earlier public contract, concluded with the previous contracting authority, to a serious degree and at the contractor’s fault. According to the contracting authority, the three-year period for exclusion of a contractor for breach of an earlier contract, referred to in Art. 24(7)(3) of the act, should be counted from the date on which damages were awarded against the contractor, i.e. the date of issuance of a judgment assessing a contractual penalty. That three-year period had not yet lapsed, and thus the contractor had to be excluded.
The excluded contractor did not agree with this decision, and appealed to the National Appeal Chamber (KIO). In the appellant’s view, the three-year period specified in Art. 24(7)(3) ran from the date of the breach of the earlier contract (in this case, when the contractor ceased to perform the contract), i.e. 15 November 2016, or possibly, at the latest, from the date when the contracting authority repudiated the contract, 21 November 2016, which was the date the contract was terminated. Regardless of which of these two dates was recognised as the start of the running of the three-year exclusion period, the contractor claimed it was undisputed that the period had already expired. The contractor also argued that the date of issuance of the judgment awarding a contractual penalty could not be accepted as the date of commencement of the exclusion period, because that would greatly prolong the period during which contractors could be excluded for earlier breaches.
Exclusion for breach of earlier contract
Apart from the mandatory grounds for exclusion from contract award procedures, set forth in Art. 24(1) of the Public Procurement Law, the law also provides for optional grounds, which can be the basis for exclusion if the contracting authority so provides in the contract announcement or the terms of reference for the procurement. In this case, the contracting authority had exercised this possibility and included in the procurement documentation the ground set forth in Art. 24(5)(4), under which the contracting authority may exclude from a contract award procedure a contractor which, for reasons attributable to the contractor, failed to perform, or improperly performed, to a significant degree, an earlier public procurement contract or concession contract with a contracting authority referred to in Art. 3(1)(1)–(4) of the act, resulting in termination of the earlier contract or an award of damages. Art. 24(7)(3) is also closely connected with this provision. It states that the exclusion of a contractor shall occur in instances referred to in Art. 24(1) (18) and (20), or Art. 5 (2) and (4), if less than three years has passed since the occurrence of the event that is the basis for the exclusion.
Referring to these provisions and the facts in the case, the National Appeal Chamber upheld the contractor’s appeal and overruled the contracting authority’s decision excluding the contractor. In the chamber’s view, both of the actions, whether done by the appellant (giving notice of termination of the contract) or done by the contracting authority (repudiating the contract), fell within the wording of the provision in question, as they constituted the final result referred to in that provision—namely, these actions led to termination of the earlier contract. Consequently, the three-year period of exclusion for breach of an earlier contract should be counted from that moment.
Why did the chamber reach this conclusion?
First, the chamber examined the last section of Art. 24(5)(4) of the Public Procurement Law, which provides for three possible interpretations because of the use of the disjunctive (“or”). In the chamber’s opinion, the wording of this provision admits the following solutions for the sanction of exclusion of the contractor from the procedure:
- Exclusion of a contractor which for reasons attributable to the contractor (etc) …, which led to termination of the contract
- Exclusion of a contractor which for reasons attributable to the contractor (etc) …, which led to an award of damages
- Exclusion of a contractor which for reasons attributable to the contractor (etc) …, which led to termination of the contract and an award of damages.
Second, in comparing Art. 24(5)(4) with Art. 24(7)(3), the chamber concluded: “The three-year period should be counted from the first event that is the basis for exclusion, within the three aforementioned events (termination of the contract, award of damages, or termination of the contract and award of damages). Calculating this period otherwise could create uncertainty on the part of the contractor as to the period in which it could be excluded from procurement procedures.” In sum, the last section of Art. 24(5)(4) admits three possibilities which could constitute the effect of breach of an earlier public contract. However, the contracting authority cannot arbitrarily select the effect and count the three-year exclusion period from the occurrence of that event. Rather, the chamber held, when exercising this optional ground of exclusion, the contracting authority must count the three-year period from the earliest event that would be the basis for exclusion. Otherwise, in practical terms, the duration of the grounds for exclusion specified in Art. 24(5)(4) of the act would be prolonged, to the contractor’s detriment.
The contractor was right
Applying this analysis to the case before it, the chamber found that the event referred to Art. 24(7)(3) of the act was repudiation of the earlier contract, as demonstrated by the judgment in that matter by the Grodzisk Wielkopolski District Court of 19 December 2018 (case no. I C 571/18), which upheld the effectiveness of repudiation of the earlier contract by the contracting authority, while at the same time awarding a contractual penalty for repudiation of the contract. Thus the appellant could be excluded from procurement procedures for three years from the date of repudiation of the earlier contract by the contracting authority, i.e. from 21 November 2016. The chamber rejected the contracting authority’s position that this period should be calculated from the date of issuance of a legally final judgment ordering payment of the contractual penalty, because that was not the first event providing a basis for excluding the appellant from procurement procedures.
As the chamber also pointed out, “The sanction of exclusion of a contractor from a procurement procedure is one of the most serious sanctions a contractor can face, and therefore it must also be interpreted narrowly, without leaving any room for misinterpretation.” Otherwise, a situation could arise in which a contractor would bear responsibility resulting in exclusion from procedures for a period longer than three years, for example if court proceedings in the earlier matter were prolonged, and the Public Procurement Law does not provide for that sanction.
But the event that is the basis for exclusion under Art. 24(5)(4) will not always be termination of the earlier contract. As the National Appeal Chamber pointed out, “A situation may arise where, for example, the contractor improperly performed an earlier contract, to a significant degree, but the contract was never terminated, and only after completion of execution of the contract did the contracting authority decide to seek damages against the contractor. In that case, the relevant event would be the legally final judgment of the court.”
Thus contracting authorities applying Art. 24(5)(4) should always determine which of the three events that are a basis for exclusion (termination of the contract, award of damages, or termination of the contract and award of damages) was the first, and calculate the three-year exclusion period under Art. 24(7)(3) of the Public Procurement Law from that date.
Cyprian Herl, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners