For some time now, our law firm has been observing with concern the market trend of rapidly increasing prices for most construction materials. This phenomenon is particularly affecting materials and raw materials crucial for infrastructure investments, such as liquid fuels, aggregates, concrete, asphalt, and aluminum. A prime example of these market trends is the soaring prices of steel, whose levels are no longer predictable, not only over a period of months, but even days.
Following our recent article, in which we signaled the government's response to the sharp increase in the prices of building materials [ Here ], in today's alert we will provide you with more information on this very important issue for the construction industry.
Our goal is to present you with a mechanism for applying indexation of contractor remuneration by the State Treasury or other public entities.
First, it should be noted that indexation occurs when, due to rising material prices or other costs necessary to complete the contract, a significant economic imbalance arises between the parties. Currently, the construction industry is facing numerous challenges caused by the pandemic, the war in Ukraine, and rapidly rising inflation. For these reasons, the Council of Ministers decided to enter into amendments to construction contracts, increasing the indexation limit to 10% of the Accepted Contract Amount.
In our opinion, the introduction of indexation of the contractor's remuneration will certainly allow the parties to restore economic balance, but will also protect the contracting authority from negative consequences, i.e., less favorable results than an appropriate amendment to the contract.
Under civil law, we emphasize that the indexation in question is legally justified because we are dealing with an extraordinary situation. This situation is caused by a price increase that goes beyond the usual contractual risk and has a negative impact. Therefore, indexation may occur in cases where the contract does not contain an indexation clause, or to the extent that indexation based on the indexation clause contained in the contract in its current wording is insufficient.
If remuneration indexation requires an amendment to a public procurement contract, the permissibility of the amendment under public procurement law must first be determined. However, it should be remembered that for contracts concluded before January 1, 2021, Article 144 of the Act of January 29, 2004, "dPZP," applies, while for contracts concluded from January 1, 2021, Articles 454 and 455 of the Act of September 11, 2019, "nPZP." According to the recommendations of the Office of the General Counsel to the Republic of Poland, the most important conditions are those provided for in Article 455, paragraph 1, item 4 of the nPZP (Article 144, paragraph 1, item 3 of the dPZP). The Public Procurement Office explicitly indicates this condition as applicable in the event of a sharp increase in the prices of materials and costs necessary to perform the contract.
Importantly, to conclude an annex permissible under Article 455, Section 1, Item 4 of the nPZP (Article 144, Section 1, Item 3 of the dPZP), the contracting authority does not need to seek any basis in the Civil Code other than Article 3531 of the Civil Code. The contractor has the right to request amendments to the contract and pursue this right in court, but there are no obstacles to introducing such changes by way of an annex, without engaging in legal proceedings. Therefore, there is no need to invoke the provisions indicated in Article 3571 or Article 632, Section 2 of the Civil Code. Accordingly, an annex that increases the contractor's lump-sum remuneration will not have to rely on the rebus sic stantibus clause.
It is also possible to amend the contract by introducing a revaluation clause (either new or modifying existing provisions) providing for periodic revaluation of the remuneration. This will be justified if, at the time of amending the contract pursuant to Article 455, Section 1, Item 4, of the nPZP (Article 144, Section 1, Item 3, of the dPZP), it can be foreseen that further price fluctuations are likely due to this previously unforeseen circumstance.
Pursuant to Article 455, Section 1, Item 4 of the Public Procurement Law, indexation is possible when the following conditions are met: (i) a price increase caused by circumstances that the contracting authority, acting with due diligence, could not have foreseen; (ii) the resulting need to amend the contract, i.e., the impact of the aforementioned price increase on the actual costs of contract execution, provided that the price increase caused by each subsequent change cannot exceed 50% of the value of the original contract. Explaining the significance of the above conditions, we clarify that the circumstances necessitating amendments to the public procurement contract must exceed the standard risks associated with contract execution, and a necessary amendment is a change required for the proper performance of the contract, in accordance with its original objectives and assumptions, or to remove a significant economic imbalance between the parties, affected by the occurrence of new circumstances.
According to the Public Procurement Office, "the purpose of applying Article 455 paragraph 1 item 4 of the Public Procurement Law is not to compensate for any losses incurred by the contractor, but to take into account external circumstances within the framework of the binding contractual relationship if they affect its performance, taking into account the contractual risks that rested with the contractor."
Due to the introduced mechanism of contractual changes in the scope of remuneration indexation, the costs of the risk of unforeseeable increase in the prices of materials and costs necessary to perform the contract will not be evenly distributed between both parties, but the entire risk will certainly not be transferred solely to the ordering party.
The mechanism for amending the remuneration indexation was introduced as a result of the rapid changes in the prices of construction materials and works, exceeding previous market trends. The amended Public Procurement Law, pursuant to Article 455, Section 1, Item 4 of the Public Procurement Law, allows for contract amendments in this regard. We remind you that the value of each subsequent contract amendment cannot exceed 50% of the initial contract value. Furthermore, contract amendments may include changes to the contractor's remuneration by introducing an indexation clause into the contract, as well as amending the existing clause and increasing the previously adopted indexation limit. It should also be emphasized that the remuneration amendment mechanism will be available to the contracting authority, which, although already has an indexation clause in its contract, has suffered significant losses related to contract performance due to the current, unforeseen circumstances.
We would like to point out, however, that the indexation mechanism in no way relieves contractors from the obligation to analyze risks and accurately evaluate their bids. According to the General Directorate for National Roads and Motorways (GDDKiA), "only proper valuation of services guarantees the stable implementation of a given contract. Thanks to this, all work carried out on investments and maintenance will be completed on time and to the appropriate quality." This is a crucial statement, as the increased indexation limit to 10% also applies to contractors who have recently signed contracts, as well as those who submitted bids in 2021 and are awaiting the selection of the most advantageous offer or the signing of the contract.
This alert is for informational purposes only and does not constitute legal advice.
