Will construction companies have an easier way to reach settlements with public investors in Poland?

By Joanna Łagowska and Łukasz Gembiś, K&L Gates, Warsaw

In Poland, for years now we have seen a steady increase in the number of commercial disputes referred to the common courts. According to the information provided in April 2016 by Undersecretary of the Ministry of Infrastructure and Construction, Jerzy Szmit, the value of the claims that contractors brought to the court, or intend to bring, amounted to approximately €2.5 billion, covering 5000 cases (only regarding road construction disputes).

Although the efficiency of the Polish courts has improved in the last few years, the average duration of court proceedings in Poland is still very long. Amicable dispute resolution is one method to deal with the resulting delays (for example by way of conciliation or mediation procedures etc.). However, unfortunately, despite various initiatives to promote such methods by both the Ministry of Justice and the Ministry of Development, government bodies and state budgetary units only occasionally make use of procedures for the amicable settlement of disputes arising under civil law. It appears that the main factor preventing public investors from wider use of such amicable dispute resolution methods is a fear of incurring liability for breach of public finance discipline.

An analysis of rules on redemption of liabilities arising from monetary claims of civil law attached to state budget envisaged in the Public Finance Act, shows that de lege lata there is no clear legal regulation of the conditions of concluding settlements on receivables under civil law attributable to a public investor. However, under Polish Civil Code, it is a requirement of concessions resulting from the nature of the settlement that a public investor must make (for example, through redemption of part of the receivables falling under contractual penalties). In the absence of clear regulations on the conditions of concluding settlements in the Public Finance Act, the risk related to liability for breach of discipline of public finances by public investors will remain.

Under Article 5 paragraph 1 of the Public Finance Act concerning liability for violation of public finance discipline, the liability provided for in this Act may be incurred for, amongst other things, irregularities committed in determining and redemption monetary claims. Responsibility for violation of public finance discipline is potentially borne by a very wide range of persons, for example by managers of public sector financial entities or persons acting on behalf of an entity not regarded as the public finance sector, but which was give the right to use or dispose of public funds. This could include the representatives of the largest public investors on the infrastructure market in Poland.

The case law, unfortunately, does not provide any greater clarity in terms of the criteria that should be taken into account by public sector bodies when settling disputes.

In the absence of a system of standards which would define the appropriate conditions for an amicable settlement on enforcing recovery of receivables under civil law by public entities, various draft amendments are being proposed. These have been prepared by the Ministry of Development as part of the package: “100 changes for companies – Package of facilitation for businesses”, a planned amendment to the Public Finance Act.

The new proposed Article 54a of the Public Finance Act would  oblige public bodies to consider whether it would be more favorable, from a legal and financial point of view, to conduct litigation or reach an amicable settlement. A public entity would also be obliged to take account of the circumstances of the case, the legitimacy of disputed claims (for example, by analyzing court decisions in similar factual and legal situation) and the probability of settling them and the anticipated costs of the proceedings. This proposal seeks to rationalize the expenditure covered by public funds. It may also result in a shortening the term of receipt of payment by contractors from the debtor being the public investor.

These amendments, although on the whole positive, do not completely solve the risk to public investors of possible charges of violation of public finance discipline in the event of a settlement. Changing this state of affairs seems to be impossible without a simultaneous adaptation of provisions of the law on breach of public finance discipline (which still give much room for accusations of violation of public finance discipline) or the introduction of additional mechanisms to minimize the risk of exposing representatives of public entities to such liability.

If these amendments are ultimately effected, their actual impact on public entities’ concluding of settlements will only become clear over the next few years. However, if they do  actually increase the amount of settlement agreements concluded by public investors and contractors, this is likely to have a very positive effect on the ability of parties in the  construction industry to enforce payment of contractual receivables. This will improve the financial condition of these companies, while at the same time partially ‘unblocking’ the judicial system in Poland.

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