A revolution in the required content of public contracts | In Principle

The draft of the new Public Procurement Law can be called a revolution, if only because the law has never before addressed to such a degree the content of the contract. Although the draft needs to be fine-tuned, it already provides a number of appropriate solutions.

Proportionality is the guiding principle of the new rules on the content of public contracts, and one of the most important principles in EU law. Regarding public procurement, it was laid down in the Classic Directive in 2004, and in Poland was included by the amendment of 2016 in Art. 7 of the Public Procurement Law. Although it is not limited to the stage of awarding the contract, contracting authorities are not used to considering proportionality when drafting the terms of the contract. The authors of the draft seem to have noticed this, and emphasise the importance of proportionality precisely in relation to the content of the contract under the proposed new law.

Regulations in favour of SMEs

The new provisions are intended to protect not only the immediate contractors, but also further links in the process of contract performance. Therefore, the draft responds to calls from the market and aims to strengthen the position of players in the SME sector. Among other things, a number of provisions protecting the interests of subcontractors serve this purpose. For example, a provision in the proposed new Art. 492 would prohibit less-favourable solutions in contracts with subcontractors than in the principal public procurement contract regarding contractual penalties and conditions for payment of the subcontractor’s fee.

Among other things, the provision requiring appropriate adjustment to the subcontractor’s fee (in contracts for longer than 6 months) in the event of a change in the contract between the contracting authority and the main contractor has a similar meaning. Advances and partial payments, which under the proposed new Art. 471 would have to be paid during the performance of contracts for longer than 12 months, will certainly also help SMEs.

Proportionate rights and obligations

The proposed new Art. 462 would prohibit gross disproportion in the provisions of the contract in relation to the type of procurement and the risks associated with its performance. This provision is intended to enshrine the principle of proportionality in the formulation of contracts. But it will only fulfil this role if the final version upholds this principle without restricting it to situations where it is grossly violated. Since proportionality is a principle of public procurement, there is no reason to ban only “gross” disproportionality in contracts.

Upholding proportionality in specific cases will often be an issue of evaluation. Therefore, as always, common sense in application of the rules should prevail. An advantage of the current draft is that, in a sense, it defines gross disproportionality by indicating situations that will be considered as such. It gives the contractors assurance that at least the sorts of provisions mentioned in the draft will not be included in contracts. This is already a big step, especially as the situations mentioned in the draft provision reflect contractors’ most frequent complaints. These certainly include unfair assessment of contractual penalties for delays for which the contractor is not responsible, penalties for behaviour unrelated to the contract or its proper execution, and imposition of grossly excessive penalties. All these actions will now be prohibited. Under the current legal framework, grossly excessive penalties, as defined in the Civil Code, may be mitigated by the court, but that generates unnecessary costs and time commitments for both parties to the contract. Under the proposed new Public Procurement Law, such proceedings would be unnecessary because such provisions would be banned from contracts.

Escalation

The introduction of mandatory adjustment in fees for contracts for construction works and services concluded for more than 12 months is also a response to problems occurring on the market. The aim is to ensure flexibility of the contract in relation to changing prices of materials or costs essential for performance of the contract. It has been noted that a change in the conditions of contract performance is a natural phenomenon affecting long-term contracts and should not burden contractors, who are forced to declare a price at the time of submitting a bid. Thus this appears to be a rational solution.

The proposed Art. 468 of the new law contains a broad regulation concerning the provisions that must be included in the contract for an appropriate escalation of fees to be effective. In particular, there would be an obligation to adjust the contract price if the contract is concluded more than 180 days after the deadline for submission of bids. Often, lengthy procurement procedures have discouraged contractors from bidding (due to the impossibility of predicting prices so far in advance) or have led to an unrealistic valuation of bids.

Options

It is very good that option rights have been clearly regulated in the draft of the new Public Procurement Law. The current act refers to this only marginally in indicating the method of determining the value of the procurement of services or supplies (Art. 34(5) PPL). Both the legal literature and the decisions of the National Appeal Chamber raised doubts as to whether options can be provided for only in contracts of this kind, or also in contracts for construction works. The second solution was mainly supported by a pro-European interpretation.

The EU’s procurement directives undoubtedly do not limit the possibility of using options on the basis of the subject of the procurement. However, this also needs to be clearly stated in the national legislation. In line with the wording of Art. 72 of Directive 2014/24/EU, Art. 470 of the proposed new Public Procurement Law provides the same requirements for options as for price revision clauses.

New type of notices and contract performance report

The proposed new act introduces a new type of notice: a notice on the performance of a contract. It will be published in the Public Procurement Bulletin immediately after completion of a contract. In addition, the contracting authority will have to prepare a report on the performance of the contract if complications specified in the Art. 475 occurred during performance. These are related to a specified increase in the contractor’s fee, assessment of contractual penalties, significant delays, or withdrawal from the contract by one of the parties.

These additional obligations on the part of the contracting authority are intended to raise awareness among contracting authorities themselves and other participants in the public procurement market on the causes and consequences of failure to execute the contract as originally foreseen. Such evaluation is intended to prevent similar situations in the future. Certainly, contracting authorities will raise the argument of excessive bureaucracy in this context, as it will undoubtedly increase the amount of documentation. However, such actions will not only gather information on unplanned circumstances during the performance of contracts, but will also increase the transparency of the contracts.

Nonetheless, with the complexity of a large proportion of contracts, especially for construction works, the obligation to prepare a performance report appears excessively burdensome. The multiplicity of circumstances affecting the final effect of the construction works and the existence of competitive reasons, for example, will also make it impossible to draw clear conclusions from such reports. It would suffice if the terms of the contract were properly drafted, so that each of the parties bears the responsibility for the circumstances they cause. Sanctioning particular behaviours should sufficiently mobilise the parties to complete the contract in accordance with the original plans. An analysis of the course of the project should remain an internal matter for each of the entities involved in the execution of the project.

To secure a contract

The new act (Art. 481(2)) would set the security for contract performance at no higher than 5% of the total price stated in the bid (currently 10%). However, the contracting authority could require security up to 10%, but this would have to be justified in each case. This is to prevent an unthinking, automatic establishment of security of 10% even in situations where it is not necessary. However, if the contracting authority demonstrates that the specifics of a particular contract requires security of more than 5%, it could request more. This once more stresses the principle of proportionality, which permits actions appropriate to the subject of the procurement. This is a very positive signal to contractors. Smaller entities, for whom obtaining collateral from financial institutions involves heavy commitments if it is possible at all, will certainly be most affected by the change. The change in the rules may remove one of the barriers to their participation in proceedings for award of public contracts.

Withdrawal from a contract

The current law regulates separately the grounds for withdrawal from a contract and termination of a contract. In the implementation of the directives from 2014, the premises for termination of a contract by the contracting authority were introduced without much thought. Such a distinction is unnecessary. In fact, the European Parliament used the notion “termination of a public contract” by the contracting authority (in the Polish version rozwiązanie), leaving this institution to be adapted to national laws while preserving its meaning. Unfortunately, the Polish Parliament stuck with the literal word rozwiązanie from the Polish version of the directive, which does not conform to the Polish tradition under the Civil Code, where rozwiązanie refers rather to “dissolution” of a contract by mutual consent of the parties (e.g. in Civil Code Art. 77 §§2–3), not unilateral termination. The drafters of the new law noticed this mistake. Therefore, the new provision on grounds for withdrawal brings order to this area, correctly including the existing grounds for withdrawal and termination of the contract in one provision.

However, the new regulation also introduces a provision that appears redundant. The proposed Art. 486(2) states that the contracting authority may withdraw from the contract, in whole or in part, in the event of an amendment to the contract not in accordance with the provisions of the law.

Considerations of equity justify limiting the right of the contracting authority to withdraw only from the part of the contract that was introduced by an amendment to the original contract, and not the entire contract. This interpretation is in line with the aim of Directive 2014/24/EU, which states in recital 112 that member states should “ensure that contracting authorities have the possibility, under the conditions determined by national law, to terminate a public contract during its term if so required by Union law.” Termination should therefore aim at removing the consequences of a defective act and not termination of the entire contract, which before the amendment was a contract that fully complied with the relevant provisions. The principle of proportionality stressed above supports this interpretation of EU law. Such an understanding of the possibility of termination by the contracting authority is also supported by the internal consistency of the proposal. The proposed Art. 486(2) (current Art. 144(2) PPL) provides that a contract term that has been amended contrary to the rules for amending contracts is subject to invalidation. Therefore, it is difficult to find a justification for the position that on the basis of Art. 144(2) PPL the court would only invalidate provisions covered by an amendment to a contract made in breach of the law, while under the current Art. 145a(1) PPL the contracting authority would have the right to annihilate the entire contract.

Hence the conclusion that the provision on the possibility of withdrawing from the whole contract is misleading. But if there were no such provision, the correct interpretation of the scope of the possible right of withdrawal from the contract could be gleaned from a broader perspective on the public procurement regime.

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