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.
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:
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.
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:
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.
TGC Corporate Lawyers
Civil Code – see how we can help: