When (part of) a consortium wants to go to court | In Principle

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When (part of) a consortium wants to go to court

For many years, the consortium has been a familiar form of cooperation between businesses pursuing public contracts. But this construction still raises legal questions, especially when a dispute arises and goes to court. Because this structure is deceptively similar to an ordinary partnership, sometimes it is unclear which members of a consortium may participate in court proceedings. The Supreme Court of Poland examined this issue in its judgment of 30 June 2021 (case no. III CSKP 75/21).

What the case was about

In this judgment, the Supreme Court analysed a situation in which only one of the two members of a consortium demanded payment of a fee for construction works from the contracting authority (in a public procurement). The courts of first and second instance held that the claim should be dismissed as an individual member of the consortium does not have legal standing, i.e. cannot bring such a claim itself. The reasoning was that the provisions on ordinary partnerships, including the regulations on joint property, should apply as relevant to a consortium. Based on its analysis of the consortium agreement, the Supreme Court rejected that conclusion and remanded the case for reconsideration.

This judgment well illustrates typical litigation problems associated with the construction of a consortium.

Where do consortia come from?

The main reason for the problems is the flexibility of the “consortium” form. In Poland, there are no separate regulations governing the institution of the consortium. It is a product of practice, especially in the public procurement market, where cooperation between several entities is sometimes necessary to meet the requirements of the contracting authority, for example regarding relevant experience or resources. It has become customary to refer to a number of businesses cooperating in performance of a contract (especially a construction contract) as a “consortium,” even though this term may cover quite different structures, depending on what the consortium members agree to.

Ultimately, the source of any consortium is the agreement between its members. This defines the characteristics of the relationship the parties call a “consortium,” and in the event of a dispute the court will be guided by the wording of the agreement to determine the legal relationships between the consortium members, and between them and the contracting authority or subcontractors. In the absence of provisions directly regulating the consortium relationship, the courts rely on provisions concerning other relationships, especially those most similar in nature to an ordinary partnership (e.g. Supreme Court judgment of 23 September 2016, case no. II CSK 27/16, and order of 6 March 2015, case no. III CZP 113/14), but in this process, we should avoid schematic thinking, and especially avoid the temptation to hastily equate a consortium with an ordinary partnership (spółka cywilna).

This was also the main reasoning behind the Supreme Court judgment of 30 June 2021 in case no. III CSKP 75/21.

A consortium—meaning what?

Although the number of possible variants for the consortium agreement is in principle unlimited, two issues are of fundamental importance from the perspective of the ability to participate in court proceedings (legal standing).

First, who was to be the party to the contract for which the consortium was formed. This is a question of whether the consortium has effects only internally (between its members) or also externally, in relations with third parties.

Most often, a consortium is at least partially external. The contract with the contracting authority is usually concluded by all members of the consortium, represented at signing by the consortium leader. But it may work differently. The consortium leader might enter into a contract with the contracting authority only on its own behalf, and the other members will only cooperate with the leader during execution. Also, consortium agreements with subcontractors and suppliers of materials and services may be entered into either by all consortium members together, or separately by each consortium member with its own partners.

Second, whether joint ownership of any assets (including claims) was to be created between the members of the consortium, a feature typical of an ordinary partnership. Consortium agreements (as well as other business agreements) often explicitly stipulate that they do not create a partnership, but if there is no such stipulation, the issue depends on the court’s interpretation of the agreement. The court should be guided by the parties’ intention, rather than the literal wording of the contract (Civil Code Art. 65 §2).

Who can go to court?

The answers to the questions discussed above largely determine who among the members of the consortium may appear in court in potential disputes concerning the joint undertaking.

If the contract with the contracting authority has been concluded only by the consortium leader on its own behalf, then only the leader has the right to raise claims against the contracting authority arising directly from the contract (e.g. for payment of the fee). The other members of the consortium have no right to appear as a party in such proceedings. On the other hand, only the leader of the consortium may be the subject of the contracting authority’s own claims, e.g. for contractual penalties or removal of defects in the work.

The same applies to disputes with subcontractors or suppliers. If only one member of the consortium concluded agreements with them, only that member holds claims under the contract, and suppliers and subcontractors may address claims only against that member.

The matter becomes somewhat complicated if agreements were concluded jointly by all members of the consortium, so that each of them was an obligor and obligee of the contracting authority (or of the subcontractor or supplier, as the case may be). In particular, a problem may arise when not all consortium members are willing or able to cooperate in the proceedings against the contracting authority. This was the situation in the Supreme Court judgment of 30 June 2021.

As in the case of an obligation to pay a fee, if there are multiple obligees under one divisible obligation, the obligation is divided into as many parts as there are obligees (Civil Code Art. 379 §1). As a rule, the apportionment should be equal, unless otherwise provided in the agreement between the obligees and the obligor.

For example, if PLN 150 million is due under a construction contract entered into by a consortium of three companies, the claim for payment is normally divided into three parts of PLN 50 million each. As a result, each of the consortium members has an individual right, without the consent of others, to demand payment of PLN 50 million directly from the contracting authority. The cooperation of all consortium members would be necessary only if the demand were to cover the entire amount of PLN 150 million.

The case will be different if it is assumed that the consortium was actually a partnership or a similar form, as in such a case joint ownership of the consortium’s (partnership’s) assets is established between the consortium members (partners), which also includes claims for the fee. In turn, a special feature of joint ownership is its indivisibility (for as long as the partnership lasts), which means that all co-owners, i.e. partners in an ordinary partnership, must jointly file jointly-owned claims in court. This view is well established in the case law (e.g. Supreme Court judgment of 9 February 2011, case no. III CZP 130/10).

A consortium is (usually) not a partnership

In the judgment of 30 June 2021, the Supreme Court did not question this view, but it criticised the superficial reasoning of the courts of both instances. From the start, the lower courts had assumed that the regulations on partnerships, including Civil Code Art. 863 on partners’ joint property, should apply to the consortium, without more deeply analysing the consortium agreement.

The Supreme Court aptly observed that it is often appropriate to refer to the regulations on partnership agreements when evaluating a consortium agreement, but only insofar as the specific consortium agreement actually resembles a partnership agreement. In this case, the consortium agreement did not indicate that the consortium was intended to have any joint assets. Moreover, the court treated as a denial of such a possibility the stipulation, often encountered in practice, that it was the leader’s duty to collect benefits from the contracting authority, and then distribute the benefits (in an appropriate proportion) to the consortium members. For these reasons, the Supreme Court remanded the judgment for reconsideration, which arguably should lead the court of appeal to determine what portion of the fee the consortium member which filed the claim was independently entitled to.

In this ruling, the observations made by the Supreme Court are most appropriate. Moreover, the contract practice indicates that consortium members most often assume that their contract does not create joint property. If there are no provisions to this effect in the consortium agreement, it is generally because it is taken for granted. It is more difficult to assess cases where the consortium members have made provision for the creation of some pool of shared resources (e.g. construction containers, formwork, back-up facilities or machinery) for the purpose of contract performance. Ultimately, in light of the circumstances of the case and industry custom, interpretation of the parties’ intent will always be the deciding factor.

Is the leader allowed more?

A related problem, which the Supreme Court did not consider in detail in its judgment, is the potential independent powers of the consortium leader, who is usually entrusted by the consortium agreement with the right to represent the consortium vis-à-vis the contracting authority or to collect from it the fee due to all consortium members. In effect, this or similar wording may raise a question whether the consortium leader also effectively has the right to litigate on its own the claims of all consortium members.

Generally, the answer is negative, although with some reservations.

Contractual provisions authorising the leader to “represent” the consortium cannot, in principle, constitute authorisation to represent the consortium in litigation, for the simple reason that Civil Procedure Code Art. 87 permits only natural persons who meet certain criteria, e.g. advocates and attorneys-at-law, a party’s employees or regular contractors, or asset managers, to be legal representatives in litigation. If the consortium leader is a corporation, the corporation cannot serve at all as a legal representative in litigation. If the consortium leader is a natural person (a sole trader), then theoretically this situation can be imagined, but the court would have to find that, as the consortium leader, that person has a “continuing relationship of commission” with the other consortium members, or is their “asset manager.”

On the other hand, the consortium leader’s independent legal standing may potentially arise if the provisions of the consortium agreement are interpreted as an assignment of the consortium members’ future claims (Civil Code Art. 509 and following) or an assignment of the claims due to each member from the contracting authority to the consortium leader as the remittee of the assignment (Civil Code Art. 9211 and following), which was accepted by the contracting authority.

However, an effective assignment may be impeded primarily by a ban on assignments, common in public procurement contracts (as was the case in the judgment under discussion). And for the assignment to result in a separate obligation between the contracting authority (as the remitter) and the consortium leader (as the remittee), a statement of acceptance of the assignment by the remitter (contracting authority) is required.

Although the form of such a declaration is arbitrary, the case law is cautious in determining whether acceptance of the assignment has occurred, which is otherwise understandable, since (in the absence of other reservations) acceptance of an assignment creates an abstract obligation, independent of the basis for the claim of the assigned benefit, or even its existence. Thus, for example, in its judgment of 2 December 2015 (case no. I ACa 774/15), the Łódź Court of Appeal held that the mere mention of an assignment in the documentation submitted in a bid, which the contracting authority eventually accepted, does not constitute a declaration of acceptance of the assignment by the contracting authority. The submission of a consortium agreement to the contracting authority should be evaluated similarly. In any event, we should bear in mind the short one-year statute of limitations for claims by the remittee of an assignment against the remitter (Civil Code Art. 9212 §3).

What if there is no consent?

In any event, the complications described above may not matter if there is an agreement between the consortium members to pursue claims against the contracting authority. However, disputes are inevitable, so it is worth including in the consortium agreement specific rules for cooperation in judicial (or arbitration) proceedings against the contracting authority or other consortium counterparties. It is essential that a groundless refusal to cooperate (e.g. to grant a power-of-attorney) be linked to the consortium member’s liability for potential loss of part of the claims due to the consortium.

If, despite everything, it is not possible to induce the consortium members to cooperate, the question of legal standing should be analysed carefully before going to court, as mistakes in this area carry very high risks and are difficult to reverse, especially if, in the course of a poorly planned litigation, the claims become time-barred.

Maciej Zych, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners