Prohibited provisions in subcontracts in public procurement
Contractors often take advantage of their stronger negotiating position by imposing terms in subcontracts. The new Public Procurement Law includes Art. 463 to protect subcontractors from unfairly framed contractual obligations. Will subcontractors benefit from the new regulation?
Why do subcontractors need additional protection?
Practice has shown that subcontractors, which are typically small and medium-sized enterprises, are often burdened with excessive duties or responsibilities. Additionally, the allocation of risks in subcontracts often differs from the allocation agreed in the principal contract with the contracting authority.
This phenomenon will probably be limited in subcontracts concluded under public contracts awarded in procedures initiated after 1 January 2021. Pursuant to Art. 463 of the new Public Procurement Law, a subcontract cannot contain provisions framing the rights and obligations of the subcontractor with respect to contractual penalties and payment terms less favourably for the subcontractor than the rights and obligations of the contractor as framed in the principal contract between the contracting authority and the contractor.
Introduction of this provision was supposed to increase the protection of subcontractors and give them an appropriate tool to demand equal allocation of rights and obligations in subcontracts. The contracting authority will still be able to regulate the requirements for subcontracts through the wording of the terms of reference, but these requirements must not provide less protection than under Art. 463 of the act. Thus contracting authorities will not be able to limit the application of this provision, but only introduce more far-reaching safeguards of subcontractor’ interests within public procurement.
Who can benefit from the protection provided for in Art. 463?
Art. 463 of the Public Procurement Law applies to subcontracts under all types of public procurement contracts (construction works, services or supplies).
In addition to direct subcontractors of part of a public contract, in many cases Art. 463 will also be applicable to further subcontractors on the same terms. According to Art. 7(27) of the Public Procurement Law, a subcontract is an agreement concluded between a contractor and a subcontractor, and in the case of a contract for construction works other than a contract in the field of defence and security, also between a subcontractor and a further subcontractor and between further subcontractors. In other words, within the meaning of the Public Procurement Law, subcontracts include all agreements within the procurement for construction works (with the exception of defence/security works) and agreements between a contractor and a subcontractor (only level I subcontracting) under procurements for construction works for defence/security and procurements for services or supplies of goods.
Obviously, in sub-subcontracts, the party acting as the sub-subcontractor within the given agreement will be protected. In such situation, the subcontractor subcontracting further work to a sub-sub assumes, in a sense, the role of the principal contractor for part of the procurement, and ceases to be a subcontractor within the meaning of Art. 463 for purposes of the subcontracting agreement. Therefore, in relation to the general contractor, the subcontractor will enjoy the full protection provided for in Art. 463, but will not be entitled to such protection in relation to the sub-subcontractor. Then, only the sub-subcontractor will be able to take advantage of the benefits of Art. 463. An analogous rule should apply to contracts entered into by further subcontractors in cases where they are subject to protection (as discussed above).
Regardless of whether we are dealing with a subcontract or a sub-subcontract, the touchstone for assessing the “favourability” of the contractual provisions will be the public procurement contract between the general contractor and the contracting authority. As a result, when challenging the provisions of a sub-subcontract, sub-subs will also rely on the terms of the principal public procurement contract.
Which provisions are prohibited?
Pursuant to Art. 463 of the Public Procurement Law, it is prohibited to include in subcontracts provisions framing the rights and obligations of the subcontractor in relation to contractual penalties and payment terms in a way less favourable for the subcontractor than the rights and obligations of the principal contractor in the main contract. The parties cannot modify or limit the application of this provision. Therefore, it should be concluded that Art. 463 is mandatorily binding in nature and constitutes an exception to the principle of freedom of contract enshrined in Art. 3531 of the Civil Code.
As pointed out, the provision in question establishes a ban only with respect to provisions concerning payment terms and contractual penalties less favourable to the subcontractor, so other issues can still be freely regulated by the parties to subcontracts and sub-subcontracts (within the limits allowed by the terms of reference, and subject to the time limit required by law). This applies for example to provisions concerning contract termination or the handover procedure.
The expression “in a manner less favourable to the subcontractor” raises significant problems in interpretation. The question arises how the advantage or burden of a provision should be assessed, since many provisions in public procurement contracts and subcontracts differ substantially. For example, the parties may specify contractual penalties as a percentage or as a fixed amount, so it will not always be easy to judge which provision is less favourable.
Art. 463 also presents other practical difficulties arising from the need to compare two contracts in the “favourability” of their terms. In this respect, doubts were not dispelled by the position of the Public Procurement Office indicating only that “in a less favourable way” means that the conditions for fee payment may not be “worse” than those provided for in the principal public procurement contract. This explanation has no practical value in the context of the various differences that may arise between procurement contracts and subcontracts. It is difficult to find a common denominator to compare such contracts.
With regard to contractual penalties and payment terms, the subcontract may contain provisions partly or entirely different than those in the main contract. After all, the parties to a subcontract do not necessarily have to introduce provisions analogous to those in the main contract. Therefore, it may turn out that only part of the contractual penalties in a subcontract overlap with the contractual penalties in the main contract. How then to assess the benefit of a given provision in the broader context of the entire agreement? And how to treat a situation where one contractual penalty in a subcontract is harsher than in the main contract, but others are more favourable? Or what if the list of contractual penalties in the subcontract is shorter than in the main contract, but the penalties are set at a higher level?
In each case, a given provision must be assessed in a broader context of other contractual provisions, as only a comprehensive analysis of the agreement gives a picture of how beneficial it is for each of the parties. At the contract drafting stage, this means that it will often be difficult to assess whether a given provision is more or less advantageous for the subcontractor. In addition, in many cases, this assessment will not be unambiguous and will leave room for argument both for prohibiting the inclusion of certain clauses in the subcontracting agreement, as well permitting their inclusion in the contract. It is also not unlikely that the practice will shape a formalistic approach to the application of Art. 463, and the provisions of the subcontract and the main contract will be compared “one to one” without taking into account the broader context. Such a simplistic comparison would allow for elimination of any provisions less favourable to subcontractors, but this approach seems too restrictive from the perspective of the contractors’ interests, as other provisions of the subcontract might compensate the subcontractor for this “disadvantage” in contractual penalties or payment terms.
How can subcontractors exercise their rights to protection under Art. 463?
Subcontracts referred to in Art. 463 of the Public Procurement Law are not concluded under the public procurement regime, and therefore are not subject to review by the National Appeal Chamber, and the wording of draft subcontracts cannot be tested by the chamber. Therefore, a subcontractor cannot challenge draft contractual provisions before the National Appeal Chamber, unlike a contractor bidding for a procurement, who has such a right (Art. 513(1) in connection with Art. 505 of the Public Procurement Law).
First, after reviewing the draft subcontract, the subcontractor should point out to the contractor that prohibited provisions have been proposed. If the subcontract is nonetheless not amended, and is submitted to the contracting authority as part of its review of subcontracts, the contracting authority should reject it as not complying with the act. But it should be noted here that not all subcontracts not complying with Art. 463 of the act will be “blocked” by the contracting authority as part of inspection of such agreements, as the contracting authority’s control of draft subcontracts is limited, and fully applicable only to subcontracting in public procurement for construction works contracts.
Pursuant to Art. 464(1) of the Public Procurement Law, a contractor, subcontractor or sub-subcontractor of a public contract for construction works intending to conclude a subcontract the subject matter of which is construction works is obliged, in the course of contract execution, to submit a draft of the subcontract to the contracting authority. Subsequently, the contracting authority may raise (necessarily in writing) objections to the draft subcontract, if its subject matter is construction works, in the event that:
- It does not meet the requirements set out in the procurement documents
- It provides for a payment term longer than specified in Art. 464(2) of the act, or
- It contains provisions inconsistent with Art. 463 of the act.
As Art. 464(1) refers only to construction works, the parties to a subcontract the subject matter of which is supplies of goods or services benefit from a limited scope of control provided for in Art. 464(10). This control extends solely to payment terms. As a result, some subcontractors will be deprived of the possibility to effectively enforce their rights under Art. 463.
Thus the only practical solution for subcontractors of contracts other than contracts for construction works will be to initiate proceedings before the common court, alleging non-compliance with Art. 463 of the Public Procurement Law. It is generally accepted in the legal literature that provisions specified in Art. 463 nonetheless included in a subcontract will be invalid under Art. 58 of the Civil Code as contrary to law. Unlike Art. 433 of the Public Procurement Law, the protection provided in Art. 463 will have a more severe effect on contractual obligations, as failure to challenge them at the stage of the draft contract will not effectively validate the prohibited clauses (as is the case with provisions prohibited under Art. 433). As a result, it will be possible to challenge them at the stage of performance of the subcontract.
The burden of proof in court proceedings will rest on the subcontractor, as it is the subcontractor who will derive legal effect from the claim (Civil Code Art. 6). While assertion of Art. 463 of the Public Procurement Law by subcontractors who are cooperating well with the general contractor may work to their disadvantage, this provision may become a useful tool if the relationship deteriorates and one of the parties fails to perform its contractual obligations. Therefore, at the stage of concluding a subcontract, in practice it may happen that subcontractors are aware of the unacceptability of certain provisions but for business reasons decide to go ahead and sign the subcontract, with the knowledge that at a later stage of cooperation they could challenge the correctness of certain provisions under Art. 463. This attitude could be particularly disadvantageous for contractors, who may not notice an infringement of Art. 463 until claims are asserted by the subcontractor.
Summary
The introduction of Art. 463 of the Public Procurement Law reflects the tendency to extend greater protection to subcontractors. This direction is certainly the right one, as it fosters the development of small and medium-sized enterprises, who predominate among public procurement subcontractors, and equalizes the chances for SMEs to participate in public projects. But given the specific nature of this provision, as well as doubts related to its construction, only the practice of its application will determine its fitness for purpose. At the same time, it should be borne in mind that the way the provision is worded may cause instability in legal relations or infringe principles of public policy due to the possibility of challenging contractual provisions throughout the entire period of performance of the subcontract. Therefore, this provision will require particular attention from the drafters of subcontracts to ensure the certainty of the arrangements between the parties.
Dr Hanna Drynkorn, attorney-at-law, Cyprian Herl, Infrastructure, Transport, Public Procurement & PPP Practice, Wardyński & Partners
