In this article, we will attempt to address the issue of (non-)compliance with contractual agreements, specifically contractual penalties and sanctions in connection with Section 18 of Act No. 343/2015 Coll. on public procurement, which regulates the regime and individual conditions for the possibility of changing a contract without further public procurement.
Section 18 is a long-debated provision that has been the subject of extensive decision-making and methodological activity by the Public Procurement Office, general courts, and, last but not least, the European Court of Justice. The provision in question has been the focus of attention recently during the war in Ukraine and the COVID-19 pandemic, but in this case we will focus exclusively on the application of contractual terms after the successful tenderer has been selected and the possibility of changing the contract by action or inaction, which many public procurers may not even be aware of. inaction, which many public contractors may not be aware of at all.
It is well known from extensive case law that the preparation of tender documents and draft contractual terms and conditions is the sole responsibility of the contracting authority, and the Office significantly limits its activities in relation to contractual terms and conditions to assessing them through the prism of public procurement principles, i.e. it does not interfere in any way with the contractual terms, even if they are extremely strict, but not contrary to the principles of public procurement.
However, contracting authorities should be cautious, as this essentially very advantageous position and the possibility of largely unilaterally determining the conditions for their future contractual partners also means that they must comply with these conditions in the future, otherwise they may violate the Public Procurement Act.
On 5 April 2023, the Office published an article on its website entitled “The need to comply with contractual terms, including the application of contractual penalties”, in which it examined Section 222( 1 of Act No. 134/2016 Coll., on Public Procurement (equivalent to Section 18 of the Public Procurement Act) in connection with the recent judgment of the Supreme Administrative Court of the Czech Republic (NSS ČR) ref. no. 8 Afs 159/2021-33 of 30. 03. 2023.
Following the above article, the Office also received an inquiry from a private company referring to the aforementioned article, which resulted in Methodological Guideline No. 13692-5000/2023 of 25. 10. 2023, in which the question was raised whether it is possible for the customer to claim a contractual penalty for the contractor's delay in paying the performance guarantee for more than 300 days in full and whether such action would violate Section 18 of Act No. No. 343/2015 Coll. on Public Procurement.
First, it is therefore appropriate to consider the judgment of the Supreme Administrative Court of the Czech Republic, which de facto sparked a professional discussion on this topic and prompted the Office to publish the article.
It follows from the judgment in question that the court considered it important that, if the contracting authority has set a deadline for the performance of the work, which it secures by a contractual penalty, it is necessary, from the point of view of potential suppliers, to take into account the fact that potential suppliers consider, before submitting their bids, whether they will be able to complete the work within the set deadline, especially in view of the contractual penalty. When preparing a qualified bid, a potential supplier must also consider, even if only hypothetically, that circumstances may arise that will delay the completion of the construction work, and it is reasonable for potential suppliers to assume that the conditions set out, including the contractual penalty, apply as as stated in the tender documentation. Contractors who are unable to complete the work within the specified time limit (e.g. due to insufficient capacity, qualifications, facilities, etc.) therefore either do not bid for the contract at all or take into account the risk of delay associated with the application of a contractual penalty in their bid.
It follows from the above that, if the contracting authority does not subsequently require the successful tenderer to pay a contractual penalty, it acts in a manner significantly different from that indicated in the tender documents, and this could have deterred potential tenderers who, had they been aware of such a public procurement procedure, would have submitted a bid or would not have taken the delay in submitting the bid into account at all. The above applies mutatis mutandis if the contracting authority subsequently decides to apply a contractual penalty after a certain period of time, i.e. acts with a long time lag, with the result that the successful tenderer has to pay the contractual penalty considerably later than was indicated in the tender documents – "In view of the time value of money (in particular opportunity costs and inflation), a significant delay in the application of a contractual penalty may in itself give an advantage to the successful tenderer. Another potential supplier could have decided not to participate in the procurement procedure because, in the event of a delay, it would not have been able to pay the contractual penalty at the time it became due, but perhaps only later, given its cash flow."
Of course, it is always necessary to assess each case individually, as in different cases the non-enforcement of certain obligations and penalties may be justified by certain objective circumstances. In this regard, the Supreme Administrative Court of the Czech Republic added in its judgment: "(...) the above cannot be generalized to mean that any immediate non-enforcement of the contracting authority's right would always constitute a substantial change in the obligation (...) A reason for reasonable delay may be, for example, that the contracting authority is still assessing the claims, that the claims are uncertain or disputed, that the contracting authority is gathering evidence in relation to them, that the contracting authority is conducting negotiations with the supplier on the payment or other settlement of these claims, and so on."
A similar case was dealt with by the Public Procurement Office in proceedings No. 10946-6000/2021-OD/7, which was reviewed by the Office's Council in appeal proceedings No. 5909-9000/2022. In this case, the Office found that the audited party had violated the Public Procurement Act by changing the concluded purchase contract during the performance of the contract, which consisted precisely in waiving the application of contractual provisions on contractual penalties in the event of a delay in the delivery of the subject of performance, and at the same time constituted a change in the originally agreed deadline for the performance of the contract, which in this case was a substantial change to the purchase contract that altered the economic balance in favor of the supplier in a manner not provided for in the original contract.
It follows from the above that the Office considered the actual situation – the non-application of penalties – to be a change to the contract, without the contracting parties actually amending the contract by way of an addendum.
So what is the conclusion?
The contractual terms and conditions are part of the tender documentation on the basis of which potential tenderers decide whether to participate in public procurement. Contractual terms and conditions, which also include contractual penalties, must be duly fulfilled and complied with, otherwise failure to comply with certain conditions that could have influenced the decisions of potential suppliers (in this case contractual penalties) to participate in the public procurement procedure may be classified as a substantial change to the contract in violation of the law, specifically Section 18 of the Public Procurement Act.
At the same time, however, it should be borne in mind that individual circumstances are also important in each case and that any postponement or non-application of a contractual penalty does not automatically constitute a violation of the law. Only after a thorough assessment of the wording of the contracts and the specific features of each individual case can a conclusion be reached as to whether the contracting authority's conduct was in accordance with the law.
In this regard, we can conclude by recommending that, in case of doubt or the need to analyze a specific situation, including in light of the above decisions and guidelines, you contact us, as we believe that we will be able to assist you thanks to our extensive experience in legal services in the field of public procurement.
