Defence contract disputes and risk allocation in Poland

Disputes and risk allocation

How are disputes between the government and defence contractor resolved?

Disputes stemming from proceedings based on the PPL are resolved by the National Appeals Chamber, a state entity (quasi-court) that specialises in such disputes. The PPL contains specific remedies that provide legal protection to contractors if they have or have had an interest in being awarded a contract and suffered or may suffer damage as a result of a violation of the PPL. Contractors can appeal actions not compliant with the PPL performed by the contracting entity in the course of the contract award procedure or the contracting entity’s failure to act while being bound to perform under the PPL. The ruling issued by the National Appeals Chamber may be appealed to the regional court competent for the seat of the contracting entity. The validity of a contract can be questioned based on the relevant provisions of the PPL, as well as on the basis of the general provisions of the Polish Civil Code.

In the procurement proceedings conducted on the basis of exemption from the PPL, mostly governed by Decision 367, disputes related to the procurement process are resolved by courts of general jurisdiction. At the stage of contract performance, disputes are typically subject to resolution by the court of general jurisdiction competent for the seat of a contracting entity. In practice, only offset contracts (separately described below) can contain an arbitration clause.

To what extent is alternative dispute resolution used to resolve conflicts? What is typical for this jurisdiction?

Mandatory resolution of disputes related to the procurement process under the PPL by the National Appeals Chamber is often considered to be a form of alternative dispute resolution, although the Chamber is a state body formed under the statutory provisions of the PPL. At the stage of contract performance, the parties may confer disputes to arbitration. However, the MoD usually does not agree to include arbitration clauses in contracts.

The manner of resolving disputes between the prime contractor and a subcontractor is entirely within the discretion of the parties and can involve ADR within the boundaries of applicable law.

What limits exist on the government’s ability to indemnify the contractor in this jurisdiction and must the contractor indemnify the government in a defence procurement?

The procurement regulations do not modify the general rules of Polish civil law governing contractual liability, pursuant to which (under article 471 of the Polish Civil Code) the contractor bears contractual liability if all of the following elements are in place:

• it fails to perform or improperly performs the contract;
• the contracting entity suffers damage;
• the damage suffered constitutes a normal (typical) consequence of the contractor’s conduct; and
• the failure to perform or improper performance of the obligation results from circumstances within the contractor’s control (ie, it is attributable to its fault).

The procurement regulations also do not modify general tort liability. Pursuant to article 415 of the Polish Civil Code, whoever through his or her own fault causes damage to another person is obliged to redress it.

In practice, it is very common for the contracting entity to require contractors to show proof of civil liability insurance.

Can the government agree to limit the contractor’s liability under the contract? Are there limits to the contractor’s potential recovery against the government for breach?

In the absence of a different provision of statutory law or provision in the contract, the redress of damage covers the losses as well as the benefits that could have been obtained but for the action or inaction causing the damage. The amount of compensation may not be in excess of the damage suffered (no punitive damages).

The general rules governing liability (both contractual and in tort) may be modified by a statute or contract. However, contractual modifications are often subject to certain limitations (eg, the tortious liability of the possessor of a mechanical vehicle, liability for the operation of an enterprise by the person running such enterprise or liability for damage caused by intentional fault).

Therefore, as a matter of law, contractor liability can be limited. Contracts typically include provisions on the payment of liquidated damages, which may either result in the elimination of further liability by the payment of an amount stipulated in advance in a contract or take the form of a non-liquidating contractual penalty. The latter form of liquidated damages does not eliminate liability in excess of the amount stipulated in the contract and is only possible when a contract explicitly allows damages to be claimed exceeding the amount of the contractually stipulated liquidated damages.

In practice, contractors are obliged to present a performance bond, which eases potential enforcement by the MoD.

There are no specific limits on the contracting entity’s liability towards contractors. In general, contractors can claim recovery in the amount of damage suffered. However, considering that the principal obligation of the contracting entity is limited to payment of the agreed consideration, the damages would usually encompass such consideration (for performed deliveries or advances due) and applicable interest (if not contractually indicated, then statutory interest rates apply).

At the stage of procurement proceedings, it is common practice to require contractors to submit a bid bond, which is returned upon the selection of an offer or kept by the contracting entity if the contractor avoids the execution of the contract. If the contracting entity avoids the execution of the contract, the contractor may either ask for the return of double the amount of the security (ie, return of the bid bond and a lump sum of the amount of the bid bond) or damages.

Is there risk of non-payment when the government enters into a contract but does not ensure there are adequate funds to meet the contractual obligations?

The contracting entity needs to observe not only the procurement regulations, but also the Act on Public Finances, pursuant to which it can only undertake obligations that are within its budget. Moreover, the MoD conducts most of its major procurements in line with the Polish armed forces development programmes. These are financed from the state budget, as well as from a special armed forces modernisation fund.

A multiyear programme, ‘Priority Tasks of Technical Modernisation of the Polish Armed Forces within the Operational Programs’, which was in force between 17 September 2013 and 1 November 2017 (the Programme), laid down the amounts set aside for the purchase of equipment within the 14 main operational programmes for the years 2014 to 2022 and limited the MoD’s ability to shift funds between such operational programmes. After the cancellation of the Programme, the MoD gained greater flexibility in spending funds allocated for defence needs. Currently, the MoD operates under an updated ‘Plan for Technical Modernisation of the Polish Armed Forces’ for the years 2018 to 2022 (the Plan), adopted on the basis of the Act on Reconstruction, Technical Modernisation and Financing of the Polish Armed Forces of 2001 (the Act on Modernisation). Under the Plan, the MoD is entitled to conclude multiyear contracts with flexible budgets, not strictly constrained by annual breakdowns.

Pursuant to the latest amendment of the Act on Modernisation, the GDP rate intended to cover expenditures related to the defence needs of Poland is envisaged to systematically grow from the current 2 per cent to 2.5 per cent in 2030 and subsequent years (see ‘Update and trends’).

Under what circumstances must a contractor provide a parent guarantee?

There is no obligation to provide a parent guarantee. The contracting entity may require a security of performance of the contract and, for large contracts, it is customary. The procurement regulations contain a list of forms in which security of performance of the contract should be provided. These include primarily bank guarantees and insurance guarantees (performance bond).

For offset contracts, the submission of a performance bond is mandatory.

A parent guarantee may sometimes be accepted (usually, however, with another security instrument).