What about agreements executed under public procurement law act? Potential actions for contractors and contracting authorities
Undoubtedly, we are and will continue to be affected by the COVID-19 (“coronavirus”) pandemic and the state of epidemic threat, introduced in Poland on March 13, 2020. Complications might result from distorted supply chains, employee absences and transport problems. Consequently, there is a high risk of a drop in productivity. It is almost certain that some obligations will not be performed in a timely fashion. This includes obligations arising from agreements executed on the basis of the Public Procurement Law Act (“PPLA”), which might give rise to contractors’ substantial liability and contracting authorities’ problems related to public finance discipline.
The special-purpose act of March 07, 2020, whose article 6 touches upon issues related to public tenders, is not of much help as regards the above. It only points to the possibility to preclude the application of PPLA for orders of goods or services that are necessary to combat coronavirus, under specific conditions:
i. if the disease is highly likely to spread in a fast and uncontrollable manner; or
ii. if required for the purposes of public health protection.
The special-purpose act does not cover problems related (in particular) to the performance of existing agreements, ongoing public procurement procedures and opening of bids.
Below you will find recommended actions for contractors to adequately assess the situation and mitigate/eliminate risks involving liability for (non-)performance of agreements (especially for delays in their performance), as well as recommended actions for contracting authorities, related to ongoing public tenders and existing agreements.
[Limitation / preclusion of liability]
- It is highly advised to conduct a comprehensive analysis of provisions of executed agreements, especially in terms of liability for performance of obligations. We recommend focusing on contractual penalties, liability for damage (incl. its preclusion in case of force majeure), the manner of notifying the contracting authority about circumstances that prevent or hinder agreement performance, and suspension of agreement performance. There is no universal method that would make it possible to globally assess liability resulting from all agreements executed under PPLA. Each case needs to be examined on its own.
- If an agreement does not cover aspects related to liability, amendments or rescission (or contains insufficient provisions in that respect), applicable legal regulations will be used – mostly PPLA and the Civil Code; they offer the possibility to make relevant amendments to agreements.
- If an agreement includes provisions based on which the contractor’s liability is precluded as a result of force majeure, the contractor will be able to invoke such circumstances. In our opinion, the coronavirus outbreak meets the criteria necessary for it to be regarded as an unusual and extraordinary situation that is beyond any control of the contractor (force majeure). Once again, we wish to emphasize that each case will need to be assessed separately, e.g. in terms of whether other circumstances attributable to the contractor had not contributed to the contractor’s delays before the state of epidemic threat was introduced.
- If an agreement does not include provisions related to force majeure or does not preclude the contractor’s liability in case of force majeure events, it will be difficult for contractors to effectively invoke such circumstances to limit/preclude their liability. In such case, it might be necessary for a contractor to file a lawsuit, e.g. on the basis of article 357(1) of the Civil Code (rebus sic stantibus), or to consider rescinding the agreement in order to avoid substantial costs related to its performance.
[Request to amend an agreement]
- It is required to analyze an agreement in terms of the possibility to amend it, e.g. as a result of circumstances that are beyond the parties’ control and could not be foreseen despite exercising due diligence.
- Irrespective of the basis for amendments, specified in the agreement itself, the contractor is entitled to seek amendments pursuant to PPLA. For example, on the basis of article 144 section 1 item 3 of PPLA, it is possible to amend an agreement if this proves necessary due to circumstances that the contracting authority could not expect. In such case, amendments can also apply to the remuneration but cannot change it by more than 50% of the original value – such amendment is independent from the provisions of the agreement itself.
Note: amendments to the agreement require both parties’ consent, meaning that nothing happens automatically here. Also, given the fact that force majeure is not the contracting authority’s fault, there is a potential risk that the contractor will be unable to seek additional remuneration from the contracting authority for periods of downtime (suspension) or for storage of the purchased devices/materials that cannot be installed or used for objective reasons.
As regards the impact of the current situation on the performance of construction works agreements, incl. ones executed on FIDIC templates, please read our legal alert covering the construction sector. Please note that FIDIC draft contracts include some provisions concerning an epidemic or force majeure. Irrespective of such provisions, the situation of each individual contractor always needs to be analyzed in detail.
Summing up, we cannot rule out the possibility that disputes with contracting authorities will arise in relation to delays resulting from the state of epidemic threat. In order to mitigate the risks, we recommend contractors to take the following actions in particular: (i) documenting all actions related to force majeure notifications sent to contracting authorities, and steps taken by contractors to properly perform agreements; (ii) ensuring due diligence in meeting the deadlines for such notices (or submitting the notices promptly).
The current situation may also affect ongoing public contract award procedures handled by contracting authorities. The opening of bids usually entails direct participation of all parties involved.
- Extending the dates of submission and opening of bids (if possible);
- Online streaming of bid opening procedures – this solution allows everyone to learn basic details about the submitted bids in real time.
At the same time, due to potential consequences related to performance of agreements in the future, contracting authorities:
- That are running a public procurement procedure should consider provisions permitting amendments to the agreement in case of force majeure, or suspension of its performance for the period over which a force majeure event persists;
- That have entered into public contracts should analyze their provisions in detail, in terms of potential amendments related to the state of epidemic threat, with a view to eliminating liability for improper performance of obligations arising from the Liability for Breach of Public Finance Discipline Act
– as long as this is in line with their interest.
This legal alert only indicates the potential emergence of certain problems against the background of public procurement laws. We are ready to assist you in evaluating your particular situation.