Is accession to a contractor’s obligation permissible in the public procurement system?
The ban on changing contractors during performance of a public contract is not absolute: the case law and commentaries admit exceptions. One of them is accession to the contractor’s obligation. But is accession always permissible?
The purpose of proceedings for award of public contracts is to select the contractor that will perform the procurement in the manner best meeting the needs of the contracting authority—not just any contractor. This purpose is furthered by provisions of the Public Procurement Law designed to ensure selection of the most advantageous offer, while maintaining equal treatment and fair competition among bidders.
Restriction on freedom to change contractors
Art. 7(3) of the Public Procurement law requires contracts to be awarded to the contractor selected in compliance with the procedure set forth in the act, which implies that the contractor selected in this way cannot be changed. As held by the Supreme Court of Poland in its oft-cited judgment of 13 January 2004 (Case V CK 97/03), a change in the parties to a contract concluded through a public tender is impermissible.
This applies, among other cases, to legal acts resulting in succession to specific rights and obligations arising under a public contract, such as an assumption of obligations releasing the original obligor or, de facto, an assignment of receivables. (While an assignment of receivables is not expressly covered by Art. 7(3), and is generally permissible unless otherwise agreed by the parties, in practice contracting authorities prohibit it or allow it only upon consent of the contracting authority.)
But assumption of an obligation should be treated differently when it results in joint liability of the contractor and a third party for performance of the contract. Unlike the prohibited form of assumption, it is not intended to release the existing contractor from its obligation. Even though this construction does continue to tie the existing contractor to its obligation, it also results in a change in parties on the side of the contractor, as a third party joins the contract alongside the existing contractor as an obligor equally liable for performance of the contract.
This cumulative assumption of an obligation may occur pursuant to statute (by operation of law) or pursuant to a contract.
Accession to obligation by operation of law
The most frequently cited example of accession to an obligation by operation of law is sale of an enterprise or an organised part of an enterprise. Under Civil Code Art. 551, obligations and encumbrances are not transferred as part of the sale agreement, but the acquirer becomes jointly and severally liable for the obligations together with the seller. This joint and several liability of the acquirer cannot be limited or excluded.
Thus, in the event of sale of the contractor’s enterprise during the course of performance of a public contract, the acquirer accedes to the contractual obligation by operation of law. This type of case, as in other situations of accession to an obligation by operation of law, does not raise any doubts in terms of the permissibility of a change in the parties. It is accepted that this type of change does not violate the rule against changing contractors, as the original contractor is still obligated to perform the contract.
Agreement on accession to obligation
An interesting issue is whether contractual accession to an obligation can be used in the public procurement regime.
An agreement on accession to an obligation is an unclassified type of contract, concluded under general principles of freedom of contract. But the freedom of contract is limited under the Public Procurement Law with respect to the discretion to freely shape the legal relationship, both prior to conclusion of the contract and during the course of performance, which raises the question of whether cumulative accession to an obligation can properly be used in a public procurement context.
Such an agreement might be concluded between the existing obligor and the new obligor, as well as between the creditor and the new obligor, or among all three of these parties.
It is generally accepted that conclusion of an agreement on accession to an obligation is permissible under Public Procurement Law Art. 7(3) (although it should be mentioned that some commentators have taken the view that such an agreement is prohibited under principles of fair competition). The consent of the contracting authority to conclusion of such an agreement is not required (although under general rules the third party should notify the contracting authority), because unlike an assumption releasing the original obligor, the contracting authority’s situation is not worsened. The original contractor is still obliged to perform the contract, and the third party acceding to the obligation serves as a kind of additional security for performance of the contract. Even though there is a change in the relationship between the contracting authority and the contractor, the public contract itself has not been modified, particularly since the accession to the obligation occurs via a separate act.
The effectiveness and validity of the third party’s intervention in the relationship between the contractor and the contracting authority should be assessed pursuant to Art. 58 of the Civil Code, i.e. in terms of whether the accession to the obligation is an attempt at impermissible circumvention of the law. In practice, this boils down to whether the joint and several liability of the acceding obligor can be tied to an appropriate legal basis (e.g. sale of the enterprise). Otherwise there may be doubts surrounding the true intention of the contractor and the third party.
However, in the case of conclusion of an agreement on accession to the obligation between the contracting authority and a third party, or among the contracting authority, the contractor and a third party, the public contract itself is modified. And a change in the entity responsible for performance of the contract by accession to the obligation by a third party is regarded as a material modification. Consequently, accession to the obligation will be permissible only where the contracting authority provided for this possibility in the contract announcement.
This means that if the contracting authority did not provide for the possibility of cumulative accession to the obligation, this effect can be achieved through an agreement between the contractor and the third party acceding to the obligation.
For these reasons, an agreement between the contractor and a third party under which the third party accedes to the obligation should be regarded as permissible. But if the contracting authority also participates in that transaction, the limitations on modifications to public contracts must also be taken into account.
Change in contractors—proposed amendment to Public Procurement Law
A proposed amendment to Art. 144 of the Public Procurement Law would introduce new grounds for amending public contracts. Among the proposed solutions, the contractor could be changed in the following situations:
- When the possibility of replacing the contractor who is awarded the contract with a new contractor was provided for in the contract announcement
- As a result of merger, division, reorganisation, bankruptcy, restructuring or acquisition of the existing contractor or its enterprise, if the new contractor meets the conditions for participation in the procurement procedure, there are no grounds for exclusion of the new contractor, and the change does not entail any other material modifications to the contract
- As a result of the contracting authority’s assumption of the contractor’s obligations to its subcontractors.
Although this proposed amendment to the law refers to a change in contractors—i.e. replacement of the existing contractor by a third party—it would also affect the permissibility of cumulative accession to the contractor’s obligation.
In the case of accession to an obligation by operation of law (sale of the original contractor’s enterprise), it would still be permissible for the existing contractor to remain jointly and severally liable with the acquirer—or for the existing contractor to be replaced by the acquirer of the enterprise, including through amendment of the contract under the proposed new regulations.
With respect to contractual accession to the obligation, it will be permissible to conclude an accession agreement pursuant to Public Procurement Law Art. 7(3). However, the amended Art. 144 would apply to contracts between the contracting authority and the third party acceding to the obligation with respect to the requirement to provide for changes in the contract announcement.
Serom Kim, Infrastructure, Transport and Public Procurement practices, Wardyński & Partners
