Extraordinary circumstances, such as the Covid-19 pandemic or the war in Ukraine, and all that goes with them, including high inflation, which manifests itself in skyrocketing prices for raw materials, other supplies, energy, and labor, prevent contracts from being performed on schedule. Price indexation can effectively restore economic equilibrium for parties to public procurement contracts.
The need to reassess the concept of a public procurement contract, which is seen as an agreement unilaterally imposed by the contracting authority, in which the interests of the contracting authority alone should be secured, was already highlighted in 2018 when the new Public Procurement Law (PPL) was still in the consultation phase. The legislator saw the need for more partnership in the relationship between contracting authorities and economic operators (contractors). As a result, new legal measures were included in the PPL promulgated in 2019, such as a list of prohibited contractual clauses (Article 433), the obligation for the contracting authority and the economic operator to cooperate in the performance of their public contract (Article 431) and the legislator’s clear encouragement of out-of-court settlements of disputes between contracting authorities and economic operators over the performance of public procurement contracts (Articles 591–595).
No turning back from the new trend
The legislator’s move towards greater respect for the interests of both parties to a public procurement contract (including the economic operator), was evident even before the outbreak of Covid-19 and the war in Ukraine, and marks a broader trend from which there now seems to be no turning back. This trend became more pronounced as the legislator took further steps to mitigate the unprecedented impact on public procurement of the Covid-19 epidemic and then Russia’s aggression against Ukraine, which caused so much disruption to supply chains and the availability of raw materials, in addition to triggering high inflation, manifested in soaring costs of raw materials and other supplies, energy, labor and transportation.
Timeline Key events
11 September 2019 -Enactment of a new Public Procurement Law Act (PPL)
March 2020 -Covid-19 outbreak in Poland and enactment of the so-called Covid-19 Special Law
February 2022 – Russia’s invasion of Ukraine
March 2022 – Opinion of the Public Procurement Office titled, “Permissibility of public procurement contract amendments pursuant to Articles 455(1)(1), 455(1)(4) and 455(2) of the PPL”
July 2022 – The General Counsel to the Republic of Poland opinion titled, “Contract amendment due to extraordinary price increase (remuneration indexation) — Recommendations”
October 2022 – Enactment of the so-called Legal Shield
Missing or insufficient contractual clauses
The magnitude of the problems faced by economic operators performing public contracts in the aftermath of the war in Ukraine usually pushes contractual risks above normal levels, leading to economic imbalance between the contracting parties and creating the threat of mass withdrawals by economic operators from ongoing public contracts. The legislator responded to this threat in October 2022 by introducing the so-called Legal Shield, which also applies to contracts concluded under the PPL (Articles 44 and 48 of the Legal Shield).
In addition to requiring indexation clauses in public procurement contracts (which are mandatory in all contracts concluded for a term of more than six months, including supply contracts), the Legal Shield introduces changes that express the legislator’s approval of increases in the economic operator’s remuneration. The existing wording of Article 455(1)(4) PPL, which allows the contract to be amended if circumstances arise which could not have been foreseen by the contracting authority, is supplemented by the clarification that such circumstances ‘include, in particular, changes in prices.’ This is a clear indication of the legislator’s intention to remove any doubt in this regard. There can also be no doubt that the contractor’s remuneration may also be changed pursuant to Article 455(1)(4) of the PPL, provided that certain legal requirements are met, i.e., if the provisions in the contract on contractual modifications — including those providing for changes in the contractor’s remuneration — are insufficient or lacking.
Article 48 of the Legal Shield, which expressly permits the amendment of public procurement contracts due to significant changes in the prices of materials or costs that the contracting authority could not have foreseen, is also an indication of the legislator’s strong will to respond to the market’s need for mechanisms that allow contracts to be adjusted as efficiently as possible to the current circumstances of high inflation and unprecedented increases in the costs of performing public procurement contracts. This is in line with the above-mentioned trend towards a progressive approach to public procurement and is evidence of the recognition that treating economic operators (contractors) as equal partners in a public procurement contract, coupled with appropriate responses to any unforeseen events that may upset the economic balance between the parties, results in a win-win situation that is beneficial to both parties.
The new approach is also reflected in the opinion on permissible contract amendments published by the Public Procurement Office already in March 2022, in which the Office clearly states that contracts adversely affected by the conflict in Ukraine may be amended pursuant to Article 455(1)(4) of the PPL even if they do not contain indexation clauses or if the indexation clauses that do exist are not sufficient to restore the economic balance between the contracting parties. These issues are further elaborated in the opinion of the General Counsel to the Republic of Poland published in July 2022, which also indicates that a refusal to amend the remuneration due to the economic operator, despite the fact that the conditions justifying an amendment of the contract in this respect have been fulfilled in the given circumstances, may indeed be considered an act of economic imprudence on the part of the contracting authority.
From the contracting authority’s viewpoint
Contracting authorities must not view indexation solely through the optic of ‘climate’ or statutory incentives, but must ensure that indexation is consistent with the regulations governing the operations of each contracting authority concerned, paying particular attention to formal compliance with public procurement laws and to keeping indexation in line with the general principles underlying the public finance system.
As mentioned above, the grounds most often invoked when considering annexes to index prices or remuneration of a public contractor or when negotiating settlements include Article 455(1)(1) of the PPL and review clauses in the contract, as well as Article 455(1)(4) of the PPL, which refers to unforeseen circumstances necessitating contract amendments. The Legal Shield now provides more grounds for such amendments — or rather, confirmation of their permissibility.
Nevertheless, the contracting authorities are still concerned or plagued with doubts about the application of specific legal grounds to specific circumstances, pointing out that when they annex public procurement contracts, they will always fear that the authorities in charge of supervising their activities will take a different view of the amendments, especially with regard to the scope and amount of the permissible changes, and the proof and documentation of the circumstances that prompted the given changes.
However, it seems that if the contracting authority acts in good faith and can afford the changes, if it exercises the appropriate degree of care in determining and substantiating its costs of performing the contract, and if at the same time both contracting parties exercise a certain degree of common sense, there should be no problems in proving the reasons and justifications for the annex and reaching an agreement on its wording. In this connection, it is worth mentioning the above-mentioned opinion of the General Counsel to the Republic of Poland, in which it is emphasized, inter alia, that a settlement of a dispute concerning the claims of an economic operator may be considered not only permissible, but even desirable from the point of view of the principles of public funds management, in particular the principle of intention and efficiency of public spending.
Avoiding conflict through settlement agreements
However, if the contracting authority cannot rid itself of doubts as to the legality of the proposed annex and its wording, there are tools that can be used to mitigate the risks involved. First and foremost is the resolution of indexation disputes. If no agreement can be reached on the admissibility of indexation itself or on the wording of the indexation annex, in particular on the amount of the increase in remuneration, the economic operator can always request the increase, demonstrating the increase in the cost of performing the contract and the likely consequences of the refusal to grant the increase, both for the contract in question and for its own operations (such as the inevitable withdrawal from the contract or the bankruptcy of the economic operator). If this is the case, the parties enter into a dispute which may well escalate into a lengthy and costly litigation, the outcome of which is uncertain and which, because of its duration, will effectively freeze the parties’ operations and plans for the future.
Such an escalation can be avoided by entering into a settlement agreement pursuant to Article 917 of the Civil Code, in which the parties make mutual concessions in their relationship, thereby eliminating the element of uncertainty in their respective claims and extinguishing the dispute. It could be said that this is precisely the type of settlement of disputes concerning ongoing public contracts that is not only permitted, but even encouraged by the legislator. The new Public Procurement Law explicitly sets out the permissible ways of amicably resolving disputes over public procurement contracts, leading to a settlement, emphasizing, among other things, the possibility of mediation, and even designating the Court of Arbitration at the Office of the General Counsel to the Republic of Poland as one of the bodies competent to conduct mediation.
Settlements may also be entered into by public finance entities in accordance with the relevant — and unambiguous — provisions of the Public Finance Act, in force since 2017. Pursuant to Article 54a of this Act, public finance entities may enter into settlements in disputes over amounts due under civil law agreements if they conclude that the consequences that the settlement is likely to have for the entity, the State Treasury or the relevant local government authority, as the case may be, are preferable to the likely consequences of court or arbitration proceedings. This provision requires a prior written assessment of the likely consequences of settlement, taking into account the circumstances of the case, including, in particular, the merits of the claims at issue, the feasibility of satisfying those claims, and the likely duration and cost of any court or arbitration proceedings that may be instituted.
A reliable analysis setting out the benefits of settlement and the consequences of non-settlement (the latter being taken in a very broad sense, going well beyond the costs of litigation or other financial consequences to include social and other aspects of public interest) will be difficult to challenge, which means that the settlement reached in reliance on it will also be difficult to undermine.
It should also be noted that Articles 5(4), 11(2) and 15(2) of the Law on Liability for Violation of Public Financial Discipline now exempt from disciplinary liability entities that spend public funds under settlements that bind them.
Contracting authorities may also obtain additional protection by seeking court approval of the settlement under Article 184 of the Code of Civil Procedure, whereby the court confirms the legality of the settlement reached, including its compliance with the applicable public procurement regulations.
Local government sector
The local government sector seems to be particularly susceptible to the ‘paralysis’ caused by the multiplicity of audit institutions and is often affected by the internal and external political environment. Local government bodies are often unaware that they can increase the legal certainty of their operations by seeking the clarifications provided for in Article 13(11) of the Law on Regional Chambers of Accounts. This provision designates the Regional Chambers of Accounts as the authorities competent to provide clarifications in response to requests from local government units concerning the application of public finance regulations, where ‘application of public finance regulations’ is interpreted in a broad sense, referring not only to the Public Finance Act, but also to all the other regulations that make up the public finance regime, which the Regional Chambers of Accounts are competent to audit.
Although the clarifications issued by the Regional Chambers of Accounts are not binding on the Chambers themselves or on other authorities, let alone a source of law, the cases of compliance with the opinions issued by a supervisory authority cannot be overestimated. Such authorities are unlikely to retreat from their positions once stated, and other audit bodies will not be eager to question their competence.
The author’s view
Dialog between contracting authorities and economic operators is essential, especially in these times of galloping inflation and runaway prices for raw materials, other supplies and labor. The growing number of annexes and settlement agreements providing for the adjustment of remuneration and other changes to public procurement contracts signals a change in the previously conservative attitude of contracting authorities and raises hopes that the effects of the emerging crisis will be mitigated for all market participants. It should not be forgotten that public procurement and the decisions made by contracting authorities in this regard have a significant impact on the functioning of the national economy.
Contracting authorities should be very reasonable and rational in their actions, even guided by breadth of vision, rather than limiting their attention to the immediate financial impact. They should always carefully consider the consequences that their refusal to increase contractual remuneration, often by a very small amount, will have on the local market or community, possibly leading to non-performance of the contract or even bankruptcy of the economic operator. In addition, given the current level of inflation and the general market situation, it is unlikely that contracting authorities will be able to negotiate a price as good as the indexed price in any re-tendering process, which would have to be carried out at a later date.
By Aldona Kowalczyk, Partner and Sylwester Kuchnio, Counsel, Dentons