Valorisation of contractor salaries in construction works

In the Polish legal order there are legal institutions that can help entities in difficulty. This is undoubtedly the case with the pandemic, followed by the outbreak of war.

This article describes the possibility of a contractual valorisation of the contractor's remuneration, and in the next part the possibility of a judicial valorisation of the remuneration. Issues of significant importance for public procurement contractors were raised.

This information should also be of interest to representatives of the public investor, the contracting authority.

Undoubtedly, we are living in a time when international order has ended and the supply chain of raw materials and materials used in industry has been distorted. The result is a significant increase in the prices of raw materials, building materials and construction costs.

Meanwhile, the construction sector plays a significant role in the Polish economy, acting as 7.4% GDP[1]. Almost every construction investment requires the involvement of a sufficiently large human and capital and material resource.

Thus, the question of the possibility of valorising the remuneration of the contractor of the construction works is important not only economic but also social.

Many contractors concluded contracts at a time when it was possible to predict an increase in the prices of building materials and services, while no one was prepared for the situation in which we are currently in.

This is an extraordinary situation, because for decades there has been no armed conflict right at the Polish border, and the economic links between countries have never been so great.

Meanwhile, closing one The economic market, or even the reduction of its efficiency through sanctions, has a huge impact on the macro- and micro-economic situation of other economic operators.

The economic phenomenon expressed by a significant increase in the prices of building materials, raw materials and construction costs has also been noticed by representatives of the executive and legislative authorities[2]. This shows that we are faced with a serious economic problem that not only puts the profitability of individual companies at risk, but also the entire economic sector.

Preparation to submit an offer – what should you remember?

In the Polish legal order, construction investments involving a public entity in most cases require a limited or unlimited tender. Since the tendering procedures have been regulated by the Act of 11 September 2019 Public Procurement Law (hereinafter ‘the Act on Public Procurement’), the whole project needs to be properly prepared by the contractor.

First, the contractor should, before submitting his offer, conduct an internal analysis of whether the undertaking will benefit him financially. To this end, it should draw up cost estimates containing the valuation of material prices, labour costs and taking into account additional construction costs. After doing so, the contractor should have knowledge of the expected profit and possible loss on that contract.

Valorisation clause Article 439 Act on pzp

Works contracts awarded under public contracts for a period exceeding 12 months should include valuation clauses[3], Whereas contracts concluded for a shorter period may contain only provisions relating to the valorisation of remuneration.

The Public Procurement Office, having taken into account the possibility of external influence on the content, amount and equivalence of benefits, issued a communication on the valorisation clause in the light of the regulation of the Act on Public Procurement.

Under point 1 The notice entitled ‘valorisation obligation’ states: ‘The task of contractual valorisation is therefore to correct the contractor’s remuneration in the event of changes in the price of materials or costs associated with the performance of the public contract.

It is also worth noting that this mechanism for the remuneration of the contractor according to circumstances (increase or decrease in prices or costs) concerns both increases and reductions in remuneration. It thus ensures equality between the parties or the correct distribution of contractual risks.

Contracting clauses are gaining importance especially in the current economic situation, where we observe, among others, a significant increase in the prices of materials and construction works, staff and equipment shortages, cessation of the supply of products, product components or materials, difficulties in access to equipment or delivery of transport services.

For example, external factors have an impact on the cost-effectiveness of the contract and may significantly reduce the liquidity of enterprises, and therefore it is extremely important for participants in the public procurement market to properly shape and apply contractual valorisation.

A valuation clause formulated in a precise manner, respecting the interests of the parties to the public contact, will protect the financial interests of the contractor, while the contracting authority will ensure the proper, timely and secure execution of the public contract."[4].

The conclusions made by the Public Procurement Office in the document under consideration should be considered correct: ‘(...) a properly constructed valuation clause: it is an instrument conducive to increasing the competitiveness of public procurement procedures; it is part of an adequate distribution of contractual risks; it promotes the efficient execution of investments; it must be appropriate to the market situation; it must not constitute a remedy for the under-calculation of the tender price’[5].

Despite the positive aspects of the above-mentioned contractual provisions, some entities with the participation of the Treasury do not apply valuation clauses and thus expose the Treasury to additional costs associated with judicial proceedings, as it is easy to imagine, contractors, after the exhaustion of contractual and statutory capabilities, enter into litigation with the contracting authority[6].

Option to change the contract on the basis of Article 455(1)(4) Act on pzp

The Polish legislator predicted that: ‘it is permissible to change the contract without carrying out a new public procurement procedure, inter alia, where the need to amend the contract is due to circumstances which the contracting authority, acting with due care, could not foresee unless the change modifies the general nature of the contract and the price increase due to each subsequent amendment does not exceed 50% the value of the initial contract’ (Article 455(1)(4) Act on pzp).

Unforeseeable circumstances should be understood to mean: ‘Consequently by the inability to foresee at the time of the conclusion of the contract the circumstances resulting in the need to make changes to it should not be understood as an event unforeseen by the parties, but an event which was unlikely to occur in the normal course of things, while the impossibility of the predictability of certain events by the contracting authority should be determined objectively.

This finding should lead to the conclusion that the contracting authority, when preparing for the initiation of the procedure, analysed its needs for the subject matter of the provision of its scope and the conditions for implementation.

Circumstances resulting in the need to amend the contract for the performance of a public contract within the scope of the conditions in question must be in a nature exceeding the standard risks associated with the performance of a contract of a defined nature.

In principle, it is not predictable and independent of the parties to the agreement that external economic phenomena should be considered, among other things, to the parties to the contract and fully independent of them, such as: rapid deconiction, limiting the availability of raw materials, significant increases in material prices.

However, it should be pointed out that these examples justifying the amendment of the contract, i.e.

The rapid deconiction, the limitation of the availability of raw materials, the substantial increase in material prices must be of such an extraordinary nature that the contracting authority, with due care, could not objectively foresee their occurrence or their scale.

They must arise from circumstances which do not have their justification in normal economic relations, in particular the observed price fluctuations on the market of certain goods, inflationary changes, etc.

Where certain social, financial or economic events have been or are observed in the economy and are characterised by a certain continuity or cyclicality, they shall be included under the contractual clauses in question.

Under Article 455(1)(1) Pzp, the application of which allows to restore the imbalance of these events in the connecting agreement of the parties’[7].

It may also be helpful to rely on Union legislation according to which: ‘The concept of improbable circumstances refers to circumstances which could not have been foreseen despite the careful preparation of the initial procurement procedure by the contracting authority, taking into account the resources available to it, the nature and characteristics of this particular project, the good practices in the field and the need to ensure an appropriate relationship between the resources used to prepare the procedure and its foreseeable value’[8]. It must be borne in mind that the change in the content of the contract in accordance with the above-mentioned EU Directive: ‘It must not apply in situations where the modification results in a change in the nature of the entire contract, for example by replacing the works, supplies or services procured with other subject-matter of the contract or by a change in the nature of the contract in full, since in such a situation a hypothetical effect can be assumed’[9].

In writing, the following position is moved: "... There is no doubt that the concept of ‘contract character’ covers in particular the scope of the contract in question. In assessing the nature of the contract, account shall be taken of its essential elements, including, in particular, whether we are dealing with the replacement of the works ordered, with the change of supplies or services or with any other subject matter of the contract or with a complete change of type of contract, since a hypothetical effect on the outcome of the procedure can be assumed in such a case. An example of a change in the nature of the contract may be:

• 1) change the subject matter of the contract from services to works,
• 2) the change of fixed-term contract to an indefinite-term contract,
• 3) modification of the public contract to the concession,
• 4) replacing the subject matter of the main benefit with another object which was not previously provided for,
• 5) amendment of the provisions leading to a different assessment of the nature of the contract (e.g. change of the lease to the sale contract)’[10].

The change of contract in the subject matter described may take place at the request of the contractor addressed to the contracting authority and justified in exhaustive The way.

This means not only a description of the situation of the contractor but also relying on evidence in the form of invoices, purchase lists, information from producers, suppliers with an increase in product prices or a lack of specific elements of the contract.

An application for a change of contract only because of inflation or war in Ukraine may not be sufficient for the contracting authority or for the court examining the case.

Courtary valorisation of remuneration

Where, despite the actions taken, the contractor has failed to reach agreement with the contracting authority and there has been no change in remuneration, the step to defend his rights is to bring the lawsuit to court. Getting into a court dispute should be preceded by appropriate action i.e.

preparing all the evidence that can be used in the course of legal proceedings, such as requests sent to manufacturers regarding availability of materials, availability deadlines, correspondence between the contractor and the contracting authority, construction costs.

It should be borne in mind that in court proceedings concerning the valorisation of remuneration we can obtain remuneration for work which has not yet been done. But if some of the work has been done, we can claim compensation. This will be an indication of another legal basis for our action.

Although the court examining the case is not bound by the legal basis of the claim in question, it is accepted in court practice that a well-prepared procedural document contains, in addition to the argument concerning the facts, also an indication of the legal basis of the claim.

Furthermore, in court proceedings, it will be necessary for the court to carry out evidence in the form of an expert opinion in the field of construction or an expert in the cost estimate of construction works.

The expert's opinion will be an important element of evidence and, if it is detrimental to the contractor, convincing the court to the contractor's position may prove very difficult and even impossible.

It is also clear that each party to the proceedings has the power to challenge the expert’s opinion, which, however, entails additional costs related to the issuing of the supplementary opinion and additional time to prepare it.

The Polish legislature provided for the possibility of judicial valorisation of remuneration based on Article 632 Civil code or o Article 3571 Civil code.

first It refers to a situation in which we are dealing with a ‘normal’ market change and states: ‘However, if, as a result of a change in relations which could not be foreseen, the performance of the work would threaten the customer with a gross loss, the court may increase the lump sum or terminate the contract[11].

The literature points out that: “In fact, a change in relations does not have to be extraordinary, but only an unexpected change that is not predictable under normal circumstances (objectively) and not one that the parties to a particular agreement could not foresee.

The grounds for unpredictability should therefore be objected and referred to a larger scale of economic impact of the change. For example, in case law, for amendments justifying application Article 632(2) a surprising increase in VAT and a sharp increase in prices for construction materials (...)”[12].

In the correct assessment of the procedural situation of the contractor, it may be helpful to consult the Supreme Court ruling cited below:

„ (…) If In the first the situation is about changing the content of the bond relationship, including the element of fairness (consideration of the interests of the parties and principles of social coexistence), in the situation second The economic factor is essential, i.e. maintaining a relative, adequate balance between the provision of non-monetary works by the contractor and the level of flat-rate remuneration due to him (relationship of ‘size or costs of work’ and set out in the flat-rate agreement). In the case under examination, the price level of materials, which increased, has been decided on by the Commission. In 2007, i.e. in the course of the performance of the contract concluded two years earlier. Already an element of the scale of this increase (23.87%, of which - inflation in building materials 7.8%, price increases above inflation by 16%), the scope of the growth (the vast majority of building materials in relation to the boom recorded on the construction market) and the period (tempo) of the growth in question could objectively demonstrate a significant change in relations within the meaning of Article 632(2) k.c. There was an increase in building materials at a certain time with the right 1/4 their level at the time of the construction contract. It is noted that the Supreme Court’s case law has expressed the view that the sharp increase in the prices of construction materials and services at close 10-year the period of their stabilisation may be considered as an emergency and unforeseeable situation at the time of the conclusion of the contract (justification of the Supreme Court’s judgment) dated 20 November 2008, III CSK 184/08, not publ.; justification for Supreme Court judgment dated 12 April 2013, IV CSK 568/12, OSNC-ZD 2014, z. 1, item 18)”.

The Supreme Court further argued:

„(…) Even a carefully calculating construction entrepreneur is not always able to predict a sudden increase in the price of material of a significant scale, despite certain previous developments on the construction market. There is no reason to suggest that these are predictable cyclical changes. The adoption of cost estimates lower than the average domestic prices during the contract procedure may be taken into account in determining the scale of the ‘injurious loss’ incurred by the contractor reserving the flat-rate remuneration in the works contract. However, it is not related to the predictability of significant changes in relations. (...)’[13].

Without doubt, a legal argument based on the authority of the Supreme Court and the representatives of literature, combined with a well-defined factual state of affairs, may result in a positive settlement for the contractor. However, it should be borne in mind that certain works contracts exclude the possibility of applying Article 632(2) Civil code. Thus, our argument should be built on Article 357 1 Civil code. Provision Article 357 1 the Civil Code refers to emergency situations and should be applied in exceptional situations. In the opinion of the writer, such an extraordinary situation may be, for example, the war in Ukraine or the closure of the stock exchange on one of the key markets. Each of these situations is an exceptional event and a result of the closure of the supply chain, a concern on the global commodity market, which could cause a dynamic increase in construction materials prices. This provision will be applied when the following conditions are materialised:

• 1) an extraordinary change in relations;
• 2) excessive difficulty in fulfilling the benefit or threat of gross loss to one of the parties;
• 3) the causal link between the change in relations and the difficulties in the performance of the undertaking or the threat of loss;
• 4) Unforeseen by the parties when concluding an agreement, the effect of changes in relations on the performance of the undertaking.

In view of the complexity of the issues in question, it is highly appropriate to use judicial caselaw, which provides guidance for a proper argument on the case.

And so, for an extraordinary change in relations, judicial jurisprudence takes the view: “(...) such a state of affairs that rarely happens, and at the same time is unusual, extraordinary, unique, normally unusual...

The extraordinary nature should be attributed, among other things, to changes in relations such as hyperinflation, economic crisis, rapid change in price levels in a particular market, long-term paralysis of means of transport or communications, or change in the political and socio-economic system of the state"[14].

In writings, it is argued that: “Macroeconomic events (e.g. sharp GDP decline) generally do not have any relevance to the application Article 3571. On the other hand, their impact on the conditions directly linked to the performance of the undertaking (e.g. sharp decline in supply or demand and the corresponding price change of the goods or services concerned) may be of such importance.”[15] and:

„However, given modern realities, in which thanks to new technologies we are able to compensate for the effects of infertility, natural disasters or other extraordinary events, and often we can even predict and prevent them – a strict understanding of the rebus clause sic stantibus will make it impossible to apply at all. In the present day, economic changes will primarily result in the execution of the undertaking according to its original content having the effect of damage or excessive difficulties for one of the parties excessive difficulties’ 16.

Fulfillment of the condition from Article 357 1 k.c. requires that there is an excessive difficulty in fulfilling the benefit or gross loss as a result of an extraordinary change in relations.

The change in circumstances should therefore lead to a significant imbalance in the contractual balance, to contest the economic meaning of the benefits and to nullify the objectives which the parties assumed by concluding the contract.

It should be noted that the institution rebus sic stantibus serves to ‘re-establish the contractual balance’ not only in the case of reciprocal agreements.

The market circumstances following the conclusion of the contract result in an excessive difficulty in performance of the service and, moreover, may also entail a gross loss to the contractor, as there is a need to incur significantly higher costs associated with the implementation of the works contract.

Excessive difficulties in writing are considered to be, inter alia, circumstances related to technical, economic reasons, such as withdrawal from the sale or production of certain materials[17]. On the other hand, an increase in supply prices may be considered a danger of gross loss.[18].

Thus, the cost catalogue, which creates a danger of gross loss, should include, for example, increased costs of around-construction, such as earthworks or demolition works. There can be no doubt that the gross loss “should be assessed in the context of a specific commitment.

For this purpose, it is necessary to compare the current and initial value of the benefits and to assess the overall effect of the performance of the undertaking on the assets of the party, taking into account the objective of the undertaking and what benefits the party might have expected from its performance.’[19].

According to the jurisprudence of the Supreme Court and the General Court, ‘The current loss does not have to be a loss that would affect the financial condition of the contractor, but a simple gross transactional loss, independent of the financial result of the entire activity of the contractor’ will suffice.[20].

The next condition will be met when there is a correlation between the extraordinary change of relations and the difficulties in the performance of the undertaking or the threat of loss.

As a result of the instability in the prices of construction materials and due to the difficulties in purchasing goods from the manufacturer, there may be a real threat of loss to the contractor.

Increase in raw material prices by almost 200% over a period of several months, it may be considered as a causal link between the increase in raw material prices and the loss suffered.[21].

These circumstances, although based on judicial jurisprudence and the views of the literary representatives, must be reflected in the precise facts of the case. Therefore, it is so important that the contractor has adequate cost estimates related to the execution of construction works.

Finally, the last condition will be fulfilled if: “No party at the time of the conclusion of the contract constituting the undertaking provided for the effect on their legal relationship of changing circumstances.

The application of the rebus sic stantibus clause does not therefore exclude the fact that the parties provided for an extraordinary change in relations if they did not foresee its impact on the undertaking.

Contrary to strict interpretation of the provision, and based on functional considerations, it is appropriate in doctrine and jurisprudence that the grounds for its application are not only that the parties do not in fact foresee the importance of changing relations for their obligation, but that this could not be foreseen with due diligence."[22].

The element of unpredictability is important for the whole case, and it comes down to the fact that neither party to the agreement was able to foresee a situation where there were unusual and even extraordinary events, such as the largest increase in raw materials prices from 2007

In conclusion, the current economic situation is largely unpredictable for economic operators, in particular those implementing large construction projects. During the implementation of the investment, problems related to the completion of the work may arise, for example due to the sharp increase in the price of construction materials, and then it will be necessary to value remuneration – contractual or judicial valorization.

Almost every case concerning the implementation of works contracts, despite the apparent similarity, contains derogations to determine whether a favourable settlement can be obtained in the form of a validation of remuneration, or the opposite situation will take place and, unfortunately, it will not be possible to obtain a validated remuneration. Appropriate preparation for talks with the investor should consist in collecting all the documentation related to the implementation of the construction project – contracts, agreements, e-mails from counterparties with information that, for example, product prices are constantly increasing, there are shortcomings in the domestic market, the Community it

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1 https://raportroczny.budimex.pl/2021/ 2 Ministry of Development and Technology Response from 7 February 2022 for Senator Kazimierz Kleina's statement (sign of the case DDR-VI.054-1.2022) [3] Article 439 Act on pzp 4 https://www.uzp.gov.pl/__data/assets/pdf_file/0014/52151/KLAUZULA-WALORYZACYJNA-W-USTAWIE-PRAWO-ZAMoWIEn-PUBLICZNYCH.pdf [5] Ibid 6 NIK Report 10 June 2021 ‘Security of the State Treasury's interest in valorisation and joint and several liability of the investor in the contracts for the implementation of linear infrastructure facilities’, registration number Regulation (EU) 29/2021/P/20/031/KIN 7 „Public procurement law.

Commentary", Public Procurement Office, Warsaw 2021 8 Theme 109 Directive 2014/24 to 26 February 2014 [9] Ibid 10 „Public procurement law. Commentary", Public Procurement Office, Warsaw 2021 [11] Article 632(2) Civil code 12 „Public procurement contracts in outline”, prof.

Ryszard Szostak, Public Procurement Office, Warsaw 2018 13 Supreme Court Judgment dated 29 October 2015, I CSK signature 901/14. 14 judgment of the Court of Appeal in Katowice dated 6 March 2015, I ACa signature 564/14. 15 K. Osajda (ed.), Civil Code. Commentary, Wyd. 29, Warsaw 2021 16 K. Pietrzykowski (ed.), Civil Code. Tom I. Comment.

Article 1-44910, Wyd. 10, Warsaw 2020 [17] Ibid [18] Ibid 19 K. Osajda (ed.), Civil Code. Commentary, Wyd.

29, Warsaw 2021 20 Supreme Court Judgment dated 15 November 2006 Signature V CSK Regulation (EU) 251/2006 and dated 9 August 2012 V CSK Regulation (EU) 366/2011 – non-publ; judgment of the Court of Appeal in Łódź dated 20 December 2016, I ACa signature 769/16; 21 Judgment of the Court of Appeal in Warsaw 25 September 2013, VI ACa signature 71/13 22 E.

Anger (ed.), Civil Code, Commentary, Wyd.10, Warsaw 2021