Public procurement law – limits on contractual penalties

The draft amendment to the public procurement law prepared by the Ministry of Development has just been submitted for public consultations. The amendment is to enter into force on 1 January 2021 and will introduce an aggregate maximum of contractual penalties that a party to a public contract (i.e. contracting authority or contractor) may claim, which will be no more than 20% of the net value of the contract.

Revolutionary change versus current regulations

The draft amendment is a revolutionary change because the existing provisions of the public procurement law, apart from specific isolated instances which will be discussed below, do not provide for separate regulations on contractual penalties. Therefore, pursuant to the references contained in Article 14 paragraph 1 and 139 paragraph 1 of the Public Procurement Law, the provisions of the Civil Code should apply in these matters.

A provision directly related to contractual penalties is Article 143d paragraph 1 subparagraph 7. It imposes an obligation on the contracting authority to specify the amount of contractual penalties in the contract for construction works in the following instances:

• non-payment or untimely payment of remuneration due to subcontractors or further subcontractors,
• failure to submit to contracting authority for acceptance a draft of subcontract, having works as its subject matter, or the draft of its amendment,
• failure to submit a certified true copy of a subcontract or its amendment,
• lack of amendment to the subcontract with respect to time limit for payment.

This provision, according to the view expressed by the National Chamber of Appeals (KIO) in resolution of 8 June 2015 (case file no: 31/15), should be understood as introducing an absolute obligation to include in the contract for construction works the provisions stipulating contractual penalties in the above instances and determine their amount, while the contracting authority may specify the amount of contractual penalties. The amount of contractual penalties must therefore be obligatorily specified in the contract, although, so far, the lawmakers have not forced or limited their amount or (percentage) value.

This is confirmed by the KIO’s view expressed in the judgment of 10 May 2016, case file no. 654/16, which indicated that contractual penalties cannot be separated from the purpose of the public contract. This was the basis for challenging the amount of the contractual penalty before the court and at pre-court stage (according to the opinion of the Court of Appeals in Katowice of 22 June 2017, case file no. V AGa 167/18), with the help of the concept of mitigating contractual penalties provided for in Article 484 § 2 Civil Code. To date, it has been the only regulation which made it possible to challenge excessive contractual penalties.

The above reflected the civil character of contractual penalties, and thus – allowed the parties to the contract to freely determine their amount. Contracting authorities, i.e. stronger party in the public procurement law, often abused this right, often introducing disproportionately high contractual penalties in the model contracts they used.

Learn more: Directive on the posting of workers to EU countries came into force

Application of contractual penalties and the draft amendment

The “Report on the application of contractual penalties in public contracts” published in 2018 by the Public Procurement Office, which analyzed public contracts in 2015-2017, indicates that:

• two out of three contracting authorities applied contractual penalties,
• penalties were most often stipulated for late performance of a public procurement contract. In supply contracts, it was the reason for imposition of penalty in 83% of cases, in construction works contracts – 59% of cases, and for service contracts – in 50%,
• most penalties for non-performance of the contract (41%) were imposed on service providers,
• the fact that vast majority of penalties result from failure to meet the deadline may indicate that contracting authorities set too short deadlines for contract performance,
• in contracts for construction works and services, in about two out of five cases the contractor paid contractual penalties in response to the contracting authority’s call, however in the case of construction works this was the case in 36% of cases, in the case of services in 39% of cases and in the case of supplies in 58 % of cases,
• where the contractor evaded the contractual penalty (from 6% to 2% of cases depending on the type of contract), contracting authorities rarely used the possibility of bringing lawsuits to the court,
• overly repressive rules on liability for contractual penalties may discourage bidding and may be the cause of low interest of contractors,
• Public Procurement Office receives signals indicating the application of excessive, from the contractors’ point of view, contractual penalties in public procurement.

On the basis of the above-mentioned report, the legislator introduced former amendment to the public procurement law. Article 436 paragraph 3 of the amendment provided that the public procurement contract must specify an aggregate maximum of contractual penalties that the parties may claim.

In practice, however, this did not solve the problem of imposing penalties by the contracting authority which were disproportionate or even exceeded the value of the contract. Thus, another intervention of the legislator, introducing a hard limit of contractual penalties was necessary, and it should be assessed positively.

Moreover, in addition to the provision in question, the draft amendment contains a provision stipulating that the contracting authority and the contractor must cooperate in the performance of the public procurement contract in order to properly implement it. A similar regulation has been functioning for a long time in relations regulated by the Civil Code and undoubtedly, it will not only positively affect the correct and timely implementation of public contracts, but will also constitute a reliable protection for contractors. Therefore, one should keep an eye on how works on the draft will proceed and hope that its assumptions will not change significantly.

Author: 

Katarzyna Zarzycka
Foreigners’ consultant
TGC Corporate Lawyers

Civil Code – see how we can help: