The public procurement market doesn’t need a special act for Covid or the Ukraine crisis | In Principle

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The public procurement market doesn’t need a special act for Covid or the Ukraine crisis

Special acts introduced in isolation from existing solutions distort good law. This can be seen in how the public procurement market in Poland has been affected by successive amendments to the Covid Special Act. Today a special act is unnecessary, and force majeure provisions will suffice. Instead, it would be useful to amend the provision governing claims for a change in the amount or method of payment for public contracts.

Two years ago, the world found itself in an unprecedented position. In response to the emergence of the novel coronavirus, governments, legislative bodies and international organisations took steps to adapt the existing economic processes and transactions to unforeseen circumstances. This also applied to the public procurement market. In the face of the pandemic, the Polish parliament decided to support the relationships between contracting authorities and contractors by introducing a number of regulations concerning public procurement. But, after several amendments to the Covid Special Act (Act of 2 March 2020 on Special Solutions for Preventing, Counteracting and Combating Covid-19, Other Infectious Diseases and Crises Caused by Them), the unavoidable conclusion is that in public procurement as well, it would be better to follow the fundamental Hippocratic principle “First, do no harm.”

There is no doubt that the situation in which the Covid Special Act was drafted was unprecedented, and the parliament was guided primarily by pragmatism. Also, the need for a state response to the traditionally difficult relationship between parties to public procurement contracts is understandable. However, tools intended to solve an immediate problem of a temporary nature were introduced in isolation from solutions that have existed in the legal system for years. The level of detail and casuistic nature of the special provisions indicated that they should function as guidance for contracting authorities and other participants in the public procurement market in the given situation, not as universally binding law with the rank of a statute. There is a risk that even if the intended short-term effect in response to disruptions in contract performance has been achieved, the new provisions will deform Polish law, becoming a permanent feature and creating mechanisms that will shape the future practice in the area of public procurement.

This perspective, which the authors have developed over two years, would probably remain purely theoretical if the current reality were not forcing parties to public procurement contracts to face new external and unpredictable circumstances requiring further adaptations of current transactions to dynamic changes. Not only the still-ongoing pandemic, but also war and embargo have ceased to be abstract examples of force majeure phenomena taught in law school, but have become an actual risk affecting public procurement today. The market is now calling for another special act.

Below we explain why we believe that the public procurement market does not need a special regulation to adequately respond to the changes currently taking place. We will also point out a systemic approach that could solve the problem of price fluctuations on the market for goods and services—changes that could occur regardless of the war in Ukraine, although probably not to such a drastic extent.

The rules on contractual liability in the Covid Special Act threaten to permanently alter the allocation of contractual risk, to the disadvantage of contractors

Public procurement contracts are civil contracts. In view of the special characteristic of the entity awarding the contract, consisting in expenditure of public funds, in addition to the relevant provisions of the Civil Code, the Public Procurement Law also applies to public contracts, and as a more specific law it may exclude the application of standard civil regulations.

Most strongly, this interference occurs at the stage of concluding a contract, i.e. in the process of selecting a counterparty for a public entity. This procedure is intended to identify the most advantageous bid, most suitable to the contracting authority, while respecting the principles of fair competition, equal treatment and transparency. But essentially, this is where the special role of the Public Procurement Law ends. The law does specify certain additional elements that a public procurement contract must contain, such as a performance bond, and also addresses the permissibility of modifying or terminating such contracts, but undoubtedly, at this stage the contract does not differ from other civil transactions to the extent that it does as at the time of conclusion of the contract.

Excluding the obligation to provide security for performance of the contract, the liability of the parties to a public procurement contract is subject to the same rules as the liability of counterparties concluding a civil contract not subject to the Public Procurement Law regime. The fundamental principle is liability on the basis of fault, i.e. for failure to exercise due care (Civil Code Art. 471–472).

The issue of liability rules for a public procurement contractor has been debated for years. In the course of legislative work on the new Public Procurement Law (of 11 September 2019), it was recognised that it was necessary to introduce restrictions on the previously unfettered power of contracting authorities to dictate the wording of the contract in this respect. This direction arose from the obvious abuse of the position of contracting authorities as the host of the proceedings, and in general the adhesive nature of public procurement contracts. As a result, under the new Art. 433 of the Public Procurement Law, a public contract should provide that, in principle, a contractor is liable only for failure to complete a contract on time for which the contractor is at fault.

The contractor’s liability may be extended (Civil Code Art. 473). Court decisions recognise that Civil Code Art. 473 §1 allows for the contractual extension of the obligor’s liability to designated circumstances for which it is not liable by operation of law. Further, according to the legal literature and the case law, the obligor may have to bear liability even for force majeure, as stated for example by the Supreme Court of Poland in the judgment of 29 November 2012, case no. IV CKN 1553/00: “The contract may provide that the obligor is to be liable for non-performance or improper performance of an obligation due to strictly defined fortuitous circumstances, or even for force majeure, but a general statement of full liability without specifying those grounds is insufficient.”

Therefore, it is clear that the introduction of the obligor’s liability in a public procurement contract beyond fault, let alone including force majeure, would have to be clearly and unmistakably articulated in the contract. Otherwise, as held by the Supreme Court, disregarding cases where the obligor assumes the risk of its actions and cases of absolute liability, in general, force majeure constitutes a limit on liability for damages. This is clearly stated in Civil Code Art. 433, 435, 436 and 846 §1. By regulating strict liability, these provisions reserve the possibility for the obligor to be relieved of liability by proving that the injury was caused by force majeure (Supreme Court judgment of 11 January 2001, case no. IV CKN 150/00).

Until now, contracting authorities have been unlikely to propose contractual wording assigning force majeure liability to contractors. However, it is common to see attempts to extend contractors’ liability in the area of improper contract performance when, for example, contractual penalties are introduced for “delay” or “failure to meet a deadline,” and on this basis it is alleged that the contractor is liable regardless of why the delay or failure to meet a deadline occurred.

As indicated, the case law resists such attempts. For example, in the judgment cited above in case no. IV CKN 1553/00, the Supreme Court pointed out, “When the term ‘contractual penalties’ is used in a contract, a presumption arises straightaway that it is a construction under Art. 483–484 of the Civil Code, with all the consequences, including the obligor’s fault as a premise for payment of contractual penalties. Thus, if the parties use the term ‘contractual penalties,’ they must additionally indicate what events require payment of contractual penalties, other than those arising from circumstances for which the debtor is at fault, and such extension must be beyond doubt.” In its judgment of 27 September 2013, case no. I CSK 748/12, the Supreme Court took the same position, adding that those “other circumstances than those arising from the act for which the obligor is to be held liable cannot be the type that are borne by the obligee.” In the same judgment, the court states that on the basis of Civil Code Art. 473 §1, when extending the liability of an obligor for contractual penalties (Art. 483 §1), the parties must clearly specify in the contract for which circumstances, other than those arising from the code, the obligor is to be liable.

Against this backdrop, Art. 15r(1)–(6) of the Covid Special Act (discussed in detail below) raises doubts whether the parliament had a proper understanding of the scope of the contractor’s liability in a public procurement contract. This is due to the introduction of a statutory regulation which in its content (but not its construction, as discussed below) corresponds effectively to a typical force majeure clause. Notably, the intention behind these provisions was explained by the proponents as follows: “Possible breaches by contractors of their contractual obligations, e.g. with respect to the deadline for performance, may be treated by the contracting authorities as non-performance or improper performance of the contract. This may mean assigning to contractors liability for damages, authorising, for example, enforcement of contractual penalties provided for, in a situation where improper performance of the contract was caused by circumstances directly related to the occurrence of Covid-19, and therefore independent of and external to the contractor.”

If the Covid Special Act had not been adopted, could the responsibility for the impact of the Covid-19 outbreak on the performance of public contracts have been attributed to contractors? Well, no. The civil law contradicts this approach. How, then, to explain the idea of introducing this provision in the Covid Special Act? Was it merely to confirm the rules of liability expressed in the civil law? This calls into question the need for adopting it as a parallel regulation to that already existing in civil law. Or was the Covid Special Act a necessary intervention in the relations in the public procurement market to properly regulate the rules of liability for external events? But in that case, it means that the problem lies elsewhere, i.e. in the lack of a proper standard for application of the civil law in contractual relations with public entities. Then, by proposing a one-off solution, the Covid Special Act only perpetuates this anomaly. Therefore, the negative effect of a special regulation may be such that in any case of unprecedented impact of external circumstances, the contractual imbalance in public procurement will persist. This implies that unless an exceptional regulation is adopted, contractors’ rights under civil law or institutions regarding the distribution of contractual liability will not apply.

The Covid Special Act: in the interest of contractors or contracting authorities?

Art. 15r(1)–(3) of the Covid Special Act imposed an information obligation on the parties to a public procurement contract, where each party should promptly provide the other party with information and documents relating to the potential impact of Covid-19 on the due performance of the contract. It is reasonable to believe that the purpose of this regulation was to affirm the right of each party to present its position to the counterparty as to whether or not, in its opinion, Covid-19 was affecting performance of the contract. But such a right, or even obligation, arises from the general provisions of civil law, if only in connection with Civil Code Art. 471, and most often also from the provisions of the public procurement contract. Thus, even without a special statute, the parties to a procurement contract would have had to share such positions on the impact of Covid-19 on contract performance.

Pursuant to Art. 15r(6) of the Covid Special Act, in its position regarding the impact of Covid-19 on the performance of the contract, a party should also explain whether these circumstances affect the reasonableness or amount of contractual penalties or compensation. Introduction of this obligation presupposes that the occurrence of Covid-19 may affect the reasonableness or amount of contractual penalties; otherwise this provision would be redundant. This is a fair assumption, as a contractor who fails to meet a contractual deadline must, to rebut the presumption of fault (Civil Code Art. 471), show that this occurred for reasons for which the contractor is not responsible—for example due to the pandemic. If the solution contained in this provision is understood this way, it formulates an additional information obligation on the contractor’s part, in relation to the generally applicable provisions of civil law.

Art. 15r(4) of the Covid Special Act relates to the case where the contracting authority has assessed that the pandemic has affected or may affect performance of the contract. The Covid Special Act provides for the possibility of adapting the contract in terms of the date, method or amount of performance, and also temporary suspension of performance of the contract. On the other hand, pursuant to Art. 15r(5) of the Covid Special Act, contractual provisions more favourable to the contractor than those included in Art. 15r(1)–(4) take precedence, but—crucially—the circumstances related to the occurrence of Covid-19 cannot constitute an independent basis for exercising the contractual right of withdrawal from the contract. Therefore, if public procurement contracts contained clauses regulating force majeure and allowing the parties to withdraw from the contract or terminate the contract in a situation of a prolonged state of force majeure, the Covid Special Act rendered such provisions ineffective.

Thus, in any event, Art. 15r(1)–(6) of the Covid Special Act has not improved contractors’ legal situation. Without the consent of the contracting authority, it has not become possible to amend the contract, and the proposed procedure of amending the contract duplicated the regulation from the Public Procurement Law regarding amendments due to circumstances that the contracting authority could not have foreseen.

Under these circumstances, the fact that the contractor’s right to withdraw from the contract became ineffective due to a prolonged state of force majeure in the form of the pandemic, provided that the contractor had such a right under the contract, clearly makes it necessary to regard the Covid Special Act as a regulation adopted in the interest of contracting authorities. It did not bring any significant substantive legal change for contractors, but at the same time limited their rights.

If not a special act, then what?

Currently, contracting authorities are receiving notifications of the occurrence of force majeure in the form of hostilities in Ukraine and economic sanctions imposed on Russia. These events constitute force majeure (as we discuss in the article “War as force majeure”). The non-performance or improper performance of public procurement due to their occurrence does not allow liability for damages to be attributed to contractors and cannot lead to imposition of contractual penalties. The events resulting from the war in Ukraine, such as disruptions in supply chains, unavailability of materials and commodities, the departure of Ukrainian members of the workforce, and increased prices for materials and labour, constitute circumstances that the contracting authority, acting with due diligence, could not have foreseen. Therefore, if their occurrence forces a change in the content of the existing contract, it is allowed under Art. 455(1)(4) of the Public Procurement Law (former Art. 144(1)(3)) and should be introduced in order to restore the economic balance of the parties to a public contract.

As the experience gained so far with the Covid Special Act confirms that it has not changed the rules of liability of the parties to public procurement contracts, which is governed by the Civil Code and based on the principle of fault, efforts to introduce another special act for the purpose of regulating the legal situation of the parties to public procurement contracts due to the impact of the war in Ukraine on the performance of public procurement are misplaced.

The current situation is characterised by much greater dynamics and unpredictability of the changes, and this all the more justifies application of the institution of force majeure. In the first place, invocation of force majeure constitutes a contractor’s defence against liability for non-performance or improper performance of a public contract.

Also, the institution of force majeure allows for temporary suspension of performance, which may be appropriate for certain contracts, where only after achieving relative stabilisation of the political and economic situation will it be possible to reasonably foresee the scope of the necessary changes that will be required to complete the contract on market terms (in particular with respect to deadlines and costs), i.e. on the basis of an equivalent exchange of consideration (Civil Code Art. 487 §2).

It cannot be ruled out that some public contracts will not be performed. Indeed, if force majeure constitutes a permanent obstacle to performance of the contract, this may lead to termination of the obligation. If, on the other hand, the force majeure is prolonged, then the parties to the procurement contract should have the unfettered ability to exercise their contractual right to rescind the contract, if such a right exists under the contract. It should be remembered that the possibility of modifying a public procurement contract is limited, also in a situation where the changes are due to external circumstances. Therefore, when modification of a public procurement contract would be significant, within the meaning of the Public Procurement Law, it will be appropriate to complete performance of the contract only after it is subjected to competition on the market again, when the conditions for performance of the contract and bids of contractors are formulated under the new political and economic circumstances.

Indexation: the law exists, but it is imperfect

As a result of the war in Ukraine, the market also fears unprecedented inflation. This is an aspect of the current situation for which contractors cannot find an adequate legal solution. Art. 439 of the Public Procurement Law or contractual indexation clauses were designed in the interest of contracting authorities, as evidenced by the fact that they consistently fail to keep up with market changes. As a result, in principle, contractors in the public procurement market cannot count on obtaining an appropriate adjustment of their fees. However, this issue should not be regulated individually by a special act and solely in connection with the ongoing war in Ukraine.

A right to claim indexation of public procurement contractors’ fees should be awarded to contractors systematically, as well as the claim to amend the contract in the event of an extraordinary change in relations as per Art. 3571 of the Civil Code.

In accordance with Art. 3581 of the Civil Code, in the event of a significant change in the purchasing power of money after the obligation has arisen, the parties to the contract have the right to claim a change in the amount or method of monetary performance, even if it was agreed in the contract. However, under current law, a party operating a business is deprived of this claim if the consideration is related to operation of the business. As a result, contractors cannot take advantage of this regulation. And it is precisely the tool of a claim for a real change resulting from a decline in the purchasing power of money that would allow contractors to seek proper compensation, whether through amicable negotiations or litigation. Therefore, we would call for repeal of Art. 3581 §4 of the Civil Code, which would constitute a claim extending beyond clauses included in public procurement contracts under Art. 439 of the Public Procurement Law, analogous to Art. 3571 of the Civil Code, which operates in public procurement alongside Art. 455 of the Public Procurement Law (Art. 144 of the former act).

Mirella Lechna-Marchewka, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners

Dr Marcin Lemkowski, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners