Lower limit of maximum contractual penalties – new Polish public procurement case law

Polish public procurement law requires contracting authorities to specify in contracts the maximum total amount of contractual penalties.

However, the law does not explicitly prevent contracting authorities from setting a very high limit. The National Appeals Chamber (“NAC”) in its new judgments prevents such actions on the part contracting authorities.

What’s the problem?

The absence of clear limit has led to abuse by some contracting authorities in Poland. There have been cases where a contracting authority has set a penalty limit of up to 100% of the contract value.

In order to prevent such situations, the legislator has attempted to limit the maximum amount of contractual penalties to 20% of the net contract value in a draft amendment presented on 20 June 2020. However, the above amendment was abandoned due to opposition from contracting authorities.

The NAC has relied on a literal interpretation of the law, which leaves this power to the contracting authority. It has not infrequently pointed out that some limits are indeed very high, but that they are nevertheless lawful.

As a result, contractors could only assert their rights before the courts, which mitigated penalties after the penalties had in fact been incurred.

NAC tries to solve the problem

In its most recent judgements, the NAC decided to reduce the amount of maximum contractual penalties set by contracting authorities in model contracts. The NAC is thus revising its previous case law.

In its judgement of 16 January 2023 (KIO 3451/22), it reduced the maximum limit from 80% of gross contract value to 40%. Similarly, in its judgement of 22 August 2023 (KIO 2327/23), it reduced the limit from 100% of the net contract value to 30% of the gross contract value.

The NAC emphasises that it is up to the contracting authority to set limits. However, it should consider the principle of proportionality and fair competition. The limit must not be grossly excessive in relation to the risks of non-performance of a contract and the extent of possible damage.

This would otherwise result in the unjust enrichment of the contracting authority at the expense of the contractor. Such practices would constitute an abuse of a contracting authority's dominant position and would be contrary to the principles of social fairness.

Why is it so important?

Contractors include the risk associated with penalties in the tender price. This artificially inflates the prices paid by contracting authorities. As a result, the public procurement objective of obtaining the most advantageous tender is compromised.

High contractual penalties can act as a deterrent to potential contractors, particularly smaller ones, who may fear the financial risk associated with the possibility of such a penalty. This in turn reduces competition and choice for contracting authorities.

High penalties can be difficult to enforce, particularly if they are considered disproportionate to the value of the contract or the loss suffered by the contracting authority. In many cases, the courts find that the penalties imposed are disproportionate and reduce them.

In other words, a limit that allows the imposition of exorbitant penalties is in most cases ineffective, leads to overpayment by contracting authorities and has a negative impact on the public procurement system.

What should contractors do?

Contractors faced with a high limit for penalties in the terms and conditions of the public procurement should make these issues clear to the contracting authority at the stage of submitting questions to the terms.

The above judgments will certainly help to convince contracting authorities, even if they do not yet constitute a line in case law.

If you would like to know more, please get in contact with us.

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