When indexation of contractual fees is not enough | In Principle

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When indexation of contractual fees is not enough

What can a public procurement contractor do if contractual indexation does not make the amount of the contractual fee realistic, or if no indexation clause is provided for in the contract? In such a case, is modification of the contract an obligation or a right of the contracting authority?

Art. 455 of the Polish Public Procurement Law addresses the grounds for when it is permissible to modify a public contract without the need to conduct a new contract award procedure. This provision is particularly important for contractors who have painfully felt the economic consequences of the outbreak of war in Ukraine.

Contractual provisions

Most public contracts have clauses providing an independent basis for requesting modification of the contract, including adjustment of the contractor’s fee. Under Art. 455(1)(1) of the Public Procurement Law, modification of the contract is permissible, regardless of the value of the modification, if it is provided for in the contract notice or the contract documents, in the form of clear, precise and unambiguous contractual provisions, which may include provisions concerning the rules for introducing price changes.

The vast majority of such contractual provisions allow for changes to the contract, but do not impose such an obligation. Depending on the wording of the specific contract, meeting the conditions provided in the contract based on Art. 455(1)(1) only opens the door to discussions between the contractor and the contracting authority. In essence, the strength of the arguments the contractor employs, and whether they meet the legal standard or contractual provision which is the basis for the contract modification, will determine whether the modification is introduced.

Indexation clauses

We attribute a different significance to indexation clauses included in public contracts under Art. 436(4)(b) and 439 of the Public Procurement Law (the latter applies to contracts for works or services concluded for a period of more than 12 months). They are almost automatic, since a change in the contractual fee based on them is in principle mandatory and not merely allowed.

It should be remembered that, in particular, Art. 439 defines the framework for indexation clauses, within which the contracting authority may freely shape the individual indexation provisions, due to the need to take into account the specifics of each procurement. In practice, this means that despite the existence of a general statutory provision (Art. 439), a change to the contractual fee based on these clauses requires consideration of the individual wording of the specific contract. When the conditions of the indexation provision are met, the fee change should be made under the terms specified in the contract.

Force majeure

The contract may also be amended in respect of the fee on the basis of provisions governing the occurrence of an event meeting the criteria of force majeure. We write more extensively on this topic in the article “War as force majeure.” It is only worth pointing out that force majeure, including the effect of its occurrence on a public contract, need not be contractually regulated. This means that force majeure and its impact on a particular public contract will depend on the wording of the contract and the impact of the force majeure event on its performance. There is no doubt that the mere occurrence of a force majeure event does not result in automatic modification of the contract (in terms of the price or the performance deadline). To modify the contract, the contractor must demonstrate that, in the given factual state, the process of performing the contract as originally intended is not possible as a result of force majeure.

Unforeseen circumstances

So what is left for contractors who have been impacted by, among other things, the aggression of the Russian Federation in Ukraine, but whose contracts do not contain indexation clauses? And what can contractors do when an indexation clause included in a contract based on Art. 439 of the Public Procurement Law only makes it possible to partially offset the effects of the war, and the contracting authority sees no legal grounds to grant a request for further-reaching changes (even if economically justified)?

In such a case, Art. 455(1)(4) of the Public Procurement Law comes to the aid of contractors. It provides that modification of a contract is permissible if the need to modify the contract is caused by circumstances which the contracting authority, acting with due diligence, could not have foreseen, provided that the modification does not alter the general nature of the contract and the price increase caused by each subsequent modification does not exceed 50% of the original value of the contract.

Art. 455(1)(4) constitutes a basis for amending the contract, independent of Art. 455(1)(1), and thus, independent of what the contractor and the contracting authority provided for in the contract. Thus it may be concluded, pursuant to Art. 455(1)(4), that an amendment to the contract (at least with respect to the contractual fee) is permissible, among other situations, when:

  • The contract contains an indexation clause or specific clauses allowing the contract to be amended based on Art. 455(1)(1), but they are not sufficient to mitigate the effects of new circumstances which the contracting authority could not have foreseen, or
  • The parties to the public contract have not included provisions in the contract in the form of indexation or modification clauses.

The mere fact of occurrence of circumstances that could not have been foreseen by the contracting authority acting with due diligence is not sufficient to effectively carry out modification of the contract. As a condition of amending the contract, it must be objectively established that the unforeseen circumstances make the modification necessary. It is assumed that these circumstances should exceed the standard risks related to performance of a contract of the given type.

Therefore, an amendment to the contract based on Art. 455(1)(4) of the Public Procurement Law is possible when justified by the occurrence of new circumstances, unforeseen at the time of initiating the contract award procedure, and at the same time:

  • Modification of the contract is necessary for proper performance in accordance with the original purposes and objectives of the contract, or
  • It is justified for restoring the economic balance of the parties, upset by the occurrence of the new circumstances.

The opinion of the Public Procurement Office

On 24 March 2022, an opinion entitled “The admissibility of amendments to a public procurement contract under Art. 455 (1) (1) and (4) and Art. 455 (2) of the Public Procurement Law” was published on the website of the Polish Public Procurement Office. It confirms that, in principle, the impact of the military action in Ukraine, “manifested for example by interruption of the supply chain, unavailability of materials, increase in prices of materials and labour costs, as well as departure from Poland of workers who are Ukrainian citizens,” can qualify as an external phenomenon that could not have been foreseen, despite the exercise of due diligence, and thus falls within the orbit of Art. 455(1)(4) of the Public Procurement Law. And if its occurrence has a real, objective impact on the performance of the public contract, then amendment of the contract is possible.

Despite the generality of this opinion, it does refer to the currently changing conditions for performance of public contracts caused by external factors such as the war in Ukraine. It also recognises the problematic market consequences of these events from the point of view of implementation of contracts, e.g. increases in prices of materials and labour, disruption of the supply chain, restrictions in the availability of products and materials, and departure of Ukrainian workers from Poland. Thus, the opinion furthers the view that the war in Ukraine and its cross-border economic effects constitute grounds for modifying public contracts under certain circumstances.

Karolina Parcheniak, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners