When the contracting authority unreasonably refuses to extend the delivery deadline | In Principle

Can the parties to a public contract be obliged to modify the contract when the contractual prerequisite for amendment has been met? And can a party agree only to the beneficial consequences of a change in economic realities?

The answer can be found in the judgment of the Warsaw Court of Appeal of 13 February 2019 (case no. I ACa 517/18) on the supply of equipment under a public contract. The terms of reference specified the parameters of the equipment to be delivered. During execution of the contract, the contractor learned that the manufacturer of the equipment had discontinued the production of a particular model (3G modem) in favour of a higher-performance model (modem with LTE wireless technology). Immediately, the contractor communicated this to the contracting authority, informing it that the contractor would thus provide equipment with higher parameters (without changing the price), but this would entail extending the completion date by several days. The contracting authority determined that the revised equipment model was compatible with its other equipment, and therefore it would allow the change. However, it did not extend the contractor’s performance deadline due to formal deficiencies in the contractor’s request.

Liquidated damages for delay

Eventually, the contractor completed performance several days late. After the contractor invoiced for the equipment, the contracting authority issued two debit notes to the contractor as liquidated damages for missing the equipment delivery deadline. Then the contracting authority deducted the liquidated damages from the contractor’s fee.

The evidence showed that the contracting authority passed the equipment on to the relevant units for their use many months after performance of the contract, and the delay did not affect the project accounting and obtaining European funding for the project.

The court found that under the wording of the contract, amendments to the contract concerning the deadline, manner or scope of performance were permitted, among other things, when, after conclusion of the contract:

• The manufacturer of equipment or standard software introduces new versions, differing from the specifications or standard software indicated in the contractor’s offer (but meeting higher or better parameters), and the contractor reports its readiness to provide the equipment without a fee increase
• A significant technological change affecting the deadline, manner or scope of contract performance has occurred.

The case came before the court when the contractor demanded payment of the shortfall in its fee due to the setoff of liquidated damages. In this regard, the courts of both instances conducted an in-depth analysis of the institution of liquidated damages, primarily taking into account the absence of injury on the part of the contracting authority.

Evaluation of the contracting authority’s behaviour

From a public procurement perspective, it is particularly interesting to see how the courts of both instances assessed the behaviour of the contracting authority, which had refused to sign an annex to the contract.

The courts concluded that because the contracting authority agreed to the change in the technology, in principle the aforementioned provision of the contract obliged it to sign an annex.

According to the court of appeal, the contracting authority responsible for execution of the contract should behave consistently. As it agreed to the equipment change, that consent should also apply to revising the delivery deadline. The contracting authority could not choose just the technological change more favourable to it, when it was informed from the beginning that the change also required it to wait a bit longer for the better equipment.

The regional court went even further in its deliberations, as it had to deal with the defendant’s claim that fulfilment of the prerequisites for amending the contract by extending the deadline only opened up the possibility of such an amendment. The defendant pointed out that the decision in this regard was ultimately up to it, and consent was a right on its part, not an obligation. The court found that as all the prerequisites set forth in the contract between the claimant and the defendant for extending the deadline for execution of the contract were met, the contracting authority’s failure to extend the deadline should be rejected as contrary to public policy. In the court’s opinion, Civil Code Art. 5 could exclude the effectiveness of a claim for liquidated damages if, in light of the specific factual findings, the claim would constitute abuse of a subjective right.

However, the court of appeal did uphold the contracting authority’s allegation that the regional court had unnecessarily applied Civil Code Art. 5, as the contractor was afforded sufficient protection under Civil Code Art. 484 §2, and assessment of the circumstances surrounding the efforts to sign an annex to the contract.

Review clauses

Contract review clauses are intended to safeguard contract performance in a changing economic environment. The wording relevant to the specific contract allows the contractor to price into its fee the risks associated with the contract performance process, to a degree reflecting, among other things, the permissible scope of changes. The contracting authority’s experience should guide the wording of review clauses, so it will be permissible to adapt the contract to changing realities.

In practice, contract review clauses are almost never drafted to provide for an express obligation to amend the contract (although such wording is not prohibited). Art. 455(1) of the Public Procurement Law indicates that one of the conditions that a legally effective contract review clause must meet is to specify the type of amendment. In the legal literature and the case law, a position has developed confirming that the type of change includes determining, among other things, whether the change will be automatic or will require specific action by the parties (e.g. negotiations).

Thus, in theory, it is possible to imagine a situation where a clause on amendment of a public contract with additional conditions (i.e. provisions going further than those necessary under the Public Procurement Law) gives rise to an affirmative claim for amendment. But in that case, the automatic nature of the revision consists in the absence of any requirement for the parties to take additional actions (e.g. submit declarations of intent to this effect).

However, this does not raise any doubts that a “basic” contract review clause containing only the minimum provisions necessary for recognition under the Public Procurement Law does not give rise to any claims. Applying this analysis to the ruling in question, in my own view the contractual clause cited in the ruling did not create a claim on the contractor’s part. But that was not the subject of the analysis by the courts of both instances. The notion that “in principle” there was an “obligation to sign an annex,” cited by the courts, was invoked for the purpose of determining the totality of the circumstances under which the liquidated damages were charged. Among other things, this involved determining whether breach of its obligation was due to circumstances for which the contractor was not responsible. One of the circumstances speaking in the contractor’s favour was that, acting in good faith and in reliance on the contracting authority, the contractor could have expected to conclude an annex.

It is in this context that the court pointed to an “obligation” to conclude an annex. In the court’s opinion, all the prerequisites set forth in the contract aimed at extending the delivery deadline were met, and the contracting authority’s refusal to consent to extension of the deadline would not in itself justify imposing the contractual penalty.

Thus, the judgment is not groundbreaking in terms of the existence of an affirmative claim for modification of a public contract, but it is an interesting case study. It creates room for examining the scope of permissible contract amendments when the contractor challenges liquidated damages assessed by the contracting authority. In this particular case, the contract review clause, which could have been applied but was not, solely for reasons attributable to the contracting authority, was one of the circumstances relieving the contractor of liability for late performance of the contract, and thus relieving it of the obligation to pay liquidated damages.

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