Substitute performance and party substitution in a public procurement contract
A party substitution in a contract concluded under the Public Procurement Law is possible if the contracting authority explicitly provided for the possibility of such a change in the contract announcement and specified the conditions for such a change. Whether a contractual provision authorising the contracting authority to entrust the performance of the contract to a third party (substitute performance) can be regarded as a review clause allowing for party substitution is an interesting issue in public procurement practice.
The institution of substitute performance has its source in Art. 480 of the Civil Code. Its essence is the possibility for an obligee to undertake activities aimed at fulfilment of an obligation imposed on the obligor at the obligor’s expense, if the obligor fails to perform its obligation by the specified deadline (Gdańsk Court of Appeal judgment of 4 October 2013, Case I ACa 788/12). Substitute performance may involve a third party performing part of work the original obligor was supposed to perform.
Art. 480 of the Civil Code is applicable only in situations where there are no contractual provisions on this point. It is possible to include an authorisation for substitute performance in the contract excluding the need to seek authorisation from the court, as required by Art. 480. A clause containing an authorisation for the contracting authority to use substitute performance is often included in public procurement contracts. However, such a provision does not change the substance of the institution itself.
Performance by a third party is a surrogate for the original performance; therefore, in such a case, we are dealing with a situation where the original obligor (the contractor) did not perform its obligation. As a result, the obligee (the contracting authority) holds a claim against the original obligor for compensation for damage resulting from the improper performance of the obligation which made it necessary to entrust performance to a third party (Supreme Court of Poland judgment of 7 June 2000, Case III CKN 441/00).
Therefore, entrusting the performance of part of the work to a third party does not result in a change in the parties to the public procurement contract. Only part of the contractor’s obligation is changed; instead of performing itself, the contractor is obliged to cover the costs of third-party performance. Other rights and obligations of the original contractor under the contract, including liability for the proper execution of the contract, remain unchanged.
Party substitution in a public procurement contract
Pursuant to Art. 144(1)(4)(a) of the Public Procurement Law, in the case of contractor substitution, unlike in the use of substitute performance, the essence is a change of the party to the public procurement contract. As a result, all the contractor’s rights and obligations are transferred to a new entity. The rules for transfer of rights and obligations are analogous to those under Art. 509–519 of the Civil Code regulating the change in parties to contractual relationships.
Therefore, in the event of party substitution, the new contractor assumes the legal situation of the existing contractor, defined by both its obligations and its rights related to the existence of the obligation (Supreme Court judgment of 19 September 2007, Case II CSK 236/07), and the existing contractor is released from the obligation to perform the contract. A consequence of the above will be extinguishment of the obligation to pay the original contractor.
Pursuant to Art. 144(1)(1) in conjunction with Art. 144(1)(4)(a), a public procurement contract may be amended only if the review clause is formulated with such precision that there is no doubt as to the scope and circumstances of the amendment.
In its opinion titled “How should contractual clauses be formulated pursuant to Art. 144(1)(1) of the Public Procurement Law?” the Public Procurement Office stressed that a formulation that is too general on the scope and conditions of changes in the contractual terms excludes the possibility for the parties to the contract to apply Art. 144(1)(1). Under that provision, there is a right to make modifications only in the case of a precise description of the circumstances justifying the modification of the contract and a precise definition of the modifications that will occur under those circumstances.
Substitute performance clause does not allow for contractor substitution
As a result, it cannot be accepted that an authorisation in a public contract for the contracting authority to exercise the right to substitute performance constitutes a review clause within the meaning of Art. 144(1)(4)(a) of the Public Procurement Law allowing for substitution of contractors. First of all, such a contractual provision would expressly refer to a legal institution other than party substitution within the meaning of Art. 144 of the act. This, in turn, does not support a finding that at the stage of the offer inquiry the possibility of making a change in the parties was effectively foreseen and could have been taken into account by the bidders.
In addition, the institutions of substitute performance and substitution of contractors differ from each other. In the first case, another entity fulfils only a part of the obligations of the original contractor, while the contractual obligations of the original contractor are maintained, including the obligation to bear the costs of such substitute performance. Party substitution in a contract is related to a comprehensive replacement of the original contractor by a new entity, connected with releasing the original contractor from the obligation to perform the contract.
Mirella Lechna, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners