When to provide a performance bond, and for how long?
Contractors in public procurement who submit a performance bond in the form of a bank guarantee may not be sure when it needs to be provided to the contracting authority or what the duration of the guarantee should be.
If the contracting authority in a public procurement procedure in Poland requires submission of security for proper performance of the contract, the contractor should submit security in one of the forms provided for in Art. 148 of the Public Procurement Law. Security should be provided before the contract is signed. If the security is not provided in cash, a document confirming the security (e.g. a bank guarantee) should be delivered to the contracting authority upon signing of the contract, at the latest.
Failure to provide security by this time means that the contractor forfeits its deposit. Additionally, pursuant to Art. 94(3) of the law, if the contractor whose bid was selected fails to provide the required security, the contracting authority may select the most favourable of the remaining bids, without conducting another review of the bids, unless there are grounds to invalidate the procedure.
Security is designed to protect the contracting authority in case it has claims for non-performance or improper performance by the contractor. Security provided in cash must be returned by the contracting authority within 30 days after performance of the contract and acknowledgement by the contracting authority that it was properly performed, or, in the case of security for claims under the warranty against defects, within 15 days after the end of the warranty period. The contract may provide for shorter periods for return of the security.
Because in practice the deadline for return of the security is different from the deadline for performance of the contract, if the contractor does not submit security in cash, doubts may arise concerning the period for which a guarantee should be issued that will be submitted as security when entering into the contract.
The time for which the contractor should submit a performance bond should be defined as the time between the date of conclusion of the contract and the date provided in the contract as the last date in which the contract is in force. For example, if a contract is concluded on 1 January for a period of 10 months, a bank guarantee submitted to secure contract performance should be issued for the period from 1 January through 31 October. It is irrelevant for this purpose that in the same instance cash security would be returned to the contractor no later than 30 days after proper performance of the procurement—in other words, in practice, perhaps much later, considering delays that may occur or the need to cure defects in the work. By submitting a security document to the contracting authority upon signing of the contract that is valid for the duration provided for the contract, the contractor is properly complying with its obligation to provide security.
However, under the specific circumstances, the contract may not be settled by the parties until later than the deadline for contract completion, and in that case, if the contractor has provided non-cash security, the contracting authority has the right to demand that the contractor provide security for an additional period, through final settlement by the parties. Thus, under the example given, if the contractor did not properly complete the procurement by the contractual deadline of 31 October, the contracting authority may demand security for the additional period from 1 November through final settlement by the parties.
During the course of performance, the contractor may modify the security in one or more of the forms provided for in Art. 148(1) of the Public Procurement Law, so long as security remains in place continuously and the amount is not reduced.
Anna Prigan, Infrastructure, Transport & Public Procurement (PPP) team, Wardyński & Partners