Will public entities be more willing to settle disputes?

The “Creditors’ Package,” an overhaul of numerous acts, entered into force on 1 June 2017. Among other changes, it authorises public finance units to conclude settlements when certain conditions are fulfilled. This creates the hope for a more flexible attitude of public entities, open to dialogue with the private sector. But will this actually be achieved?

The problem: lack of legal grounds

The justification for the amendment accurately diagnoses (it’s tempting to ask why so late?) the existing problem in resolving civil disputes between public and private entities, consisting of a strong and entrenched aversion on the part of public entities to resolving disputes amicably, particularly through settlement.

The main reason for this state of affairs was also correctly identified: the lack of any express legal basis for concluding settlements by units in the public finance sector. Moreover, Art. 5 of the Act on Liability for Violation of Public Finance Discipline expressly stated that it is a violation to fail to enforce receivables owed to a public finance unit, to enforce receivables in a lesser amount than owed, or to schedule the payment of receivables in instalments—all of which are typical concessions agreed in settlements.

This wording of the regulations generated in many public officials the concern that the very fact of concluding a settlement (even when it is entirely justified in the specific instance), and consequently waiving enforcement of receivables owed to the unit (or other concessions in the settlement), would expose the individual to an allegation of exceeding his authority and violating the rules for handling of public funds. This in turn would potentially open the way to liability for public finance discipline or even criminal charges (e.g. Art. 231 and 296 of the Criminal Code).

Even if from the legal side these concerns were not warranted, according to the current case law (Chief Adjudicatory Commission ruling of 28 June 2007, DF/GKO-4900-26/30/07/18), in purely human terms they were entirely understandable. In the face of the literal wording of the regulations and the serious consequences of violating them, relying on a functional interpretation or case law perhaps required more courage than can be expected of a public servant.

Whatever the cause, the current state of affairs often led public finance units to take irrational decisions, such as ruthless enforcement (typically by withholding from fee payments) of clearly inflated or highly doubtful contractual penalties, sometimes leading to a loss in litigation, generating needless costs on both sides and interest for late payment. Paradoxically, concern for the well-being of public finances has ended up injuring them. On top of that there is the negative impact that the existing state of affairs has had on the atmosphere of public/private cooperation, as businesses involved with public entities have had to assume (at least as a precaution) that if any problems arise they cannot count on reaching any compromise but must prepare for litigation.

It should be pointed out, however, that this has not always been the case, and amicable resolution of disputes with public entities (although not necessarily in the legal form of a settlement agreement) was possible under prior law, but it required a great deal of good faith on the public side as well as extreme caution.

The remedy: amendment

The response to this problem from the Ministry of Development, which drafted this amendment, was aimed directly at the source, as the amendment has introduced express statutory authority to conclude settlements by units from the public finance sector. It is found in the newly added Art. 54a of the Public Finance Act:

“1. A unit of the public finance sector may conclude a settlement in a case of disputed civil receivable if an assessment finds that the effects of the settlement are more beneficial to the unit or the State Treasury respectively, or the budget of the territorial government authority, than the likely result of a judicial or arbitration proceeding.

“2. The assessment of the effects of a settlement shall be made in writing, reflecting the circumstances of the case, in particular the justification for the disputed claims, the possibilities for satisfying them, and the anticipated duration and costs of a judicial or arbitration proceeding.”

Similarly, the amended Act on Liability for Violation of Public Finance Discipline expressly states that disposing of public funds in performance of a lawfully concluded settlement is not a violation of public finance discipline.

The potential of the new regulations is great. Notably, in weighing the benefits of a settlement the public entity is not limited to purely financial criteria, but may consider the effects of the settlement broadly for the unit or for the budget (Public Finance Act Art. 54a(1)). This is confirmed by use of the open-ended phrase “the circumstances of the case” which the entity shall consider when assessing the consequences of a settlement. The act specifically points to circumstances involving the anticipated course and result of litigation, but also indicates that these are only examples (Art. 54a(2)).

Restrictions on public procurement unchanged

It should be pointed out here that the new regulations do not exclude application of the Public Procurement Law (particularly Art. 144) with respect to the conditions when it is permissible to modify a contract concluded under the public procurement regime. Thus if a settlement in a given case would result in modification of a public procurement contract (a notion understood differently in these regulations than in civil law generally), the statutory conditions permitting modification of the contract would also have to be met (for example, modification is possible when the modification is not material, the value does not exceed certain threshold amounts, and the possibility of modification was provided for in the contract announcement or terms of reference).

The practice will tell

Despite the encouraging wording of the amended provisions—even considering the unchanged restrictions under the Public Procurement Law—their effectiveness will depend on the practice of interpreting and applying them.

It should first be stressed that use of a settlement will still be linked to the possibility of legal liability. When it is found that objectively (or in practical terms, in the view of the authority examining the decision to conclude the settlement) the conditions set forth in Public Finance Act Art. 54a were not fulfilled, but a settlement was nonetheless concluded, dispositions made under the settlement may constitute a violation of public finance discipline. Instances of serious mismanagement, not to mention intentional misapplication of public funds, would give rise to criminal liability.

Thus the practice followed when evaluating the consequences of settlements, as referred to in Art. 54a(2), will be vital. Considering that directors of public sector units are generally not required to have extensive qualifications in civil law, not to mention qualifications specific to litigation (or other fields of law other than administration and finance), this assessment should be made based on the opinion of qualified counsel.

Thus basing the evaluation of the consequences of a settlement in terms of the probable course and result of potential litigation on a professional opinion may demonstrate that the director of the unit has taken due care for purposes of the regulations on public finance discipline (Art. 19(2) of the act) as well as standards of civil and criminal liability.

But only the practice will show how such cases actually go.

Maciej Zych, Dispute Resolution & Arbitration practice, Wardyński & Partners