Major changes in public procurement law, limits on contractual penalties.

As of 1 January 2021, an amendment to the Public Procurement Law is scheduled to come into force. Currently, the Ministry of Development’s draft is at the stage of public consultations. One of the planned changes is the specification of the maximum amount of contractual penalties. These are to be no more than 20% of the net value of the contract.

Let us recall that under the current legal framework, there are no special regulations governing the amount of contractual penalties in public procurement. The provisions merely refer to the Civil Code, which emphasises the parties’ freedom to determine the amount of penalties. The rationale of the new law is to counteract the problem of contracting authorities inflating penalties, who often set sanctions disproportionate to the damage incurred.

In 2018, the Public Procurement Office prepared a report which showed that two-thirds of contracting authorities use contractual penalties, and contractors are most often penalised for delays. The report highlighted that overly harsh liability rules for contractual penalties may discourage the submission of bids and cause a lack of interest from contractors. Previous regulations even allowed for penalties exceeding the value of the contract. The amendment to the Public Procurement Law aims to resolve this issue.

According to the new wording of Article 436 point 3 of the Public Procurement Law, the contract is to specify the total maximum amount of contractual penalties that the parties may claim, with their total amount not exceeding 20% of the net value of the contract.

Moreover, the new Article 431 of the Act provides that the contracting authority and the contractor are obliged to cooperate in the performance of the public procurement contract in order to properly execute the contract. The introduction of a statutory cap on penalties is intended to ensure balance in this cooperation.

It should be emphasised, however, that there is no guarantee the Act will come into force in its current wording. The draft may be modified in subsequent stages of the legislative process. These potential changes raise concerns within the legal community, which almost unanimously supports the draft proposed by the Ministry of Development in its current form.

Aside from the issue of contractual penalties, the amendment includes changes regarding contract terms. The new Article 434 of the Public Procurement Law no longer contains the 4-year maximum term for which a contract may be concluded. It only requires the contract to be concluded for a specified period, which, according to the draft’s justification, will apply primarily to multi-year contracts for construction works.

The amendment also modifies the rules on indexation of remuneration in contracts for construction works or services specified in Article 439 paragraph 3 of the Public Procurement Law. Under the planned changes, where a contract was concluded after 180 days from the expiry of the deadline for submitting bids, the initial date for determining the change in remuneration is the date of bid opening.