Is there an upper limit on contractual penalties in public procurement law?

Publication / 31.08.2023

The National Appeals Chamber in August 2023, in the case ref. no. KIO 2327/23, leaned on an interesting issue, namely how an ordering party should specify in draft contractual provisions the limit of contractual penalties charged to the contractor.

Although the Public Procurement Law does not introduce a specific limit, and the ordering parties have a certain freedom to include in the contract provisions limiting the calculation of contractual penalties at any level, the Chamber found that in the case under review, setting the limit of contractual penalties at the level of the contractor’s net remuneration, constitutes an abuse by the ordering party of its right to unilaterally shape the provisions of the public procurement contract, and constitutes an action contrary to the principles of social harmony.

In the factual situation in question, the contractor’s objection referred to the provision of § 11 sec. 5 of the draft agreement, according to which: “The total maximum value of contractual penalties to which the Contracting Authority is entitled is equal to the net value of the Contract referred to in § 3 sec. 1″.

In the justification for the judgment in question, the Chamber referred to the Supreme Court’s jurisprudence, according to which the reservation of a contractual penalty in the event of non-performance or improper performance of an obligation does not release the debtor from the obligation to pay it if it is demonstrated that the creditor has not suffered damage (in particular, to the resolution of the Panel of Seven Judges of the Supreme Court of November 6, 2003, Case No. III CZP 61/03, which has the force of law).

Moreover, according to the Chamber, contractual penalties must not lead to enrichment of the ordering party at the expense of the contractor, hence the legislator introduced in Article 436(3) of the Public Procurement Law an obligation to include in the contract the total maximum amount of contractual penalties that may be claimed by the parties.

According to the Chamber, the maximum amount of penalties must not be set at a level that can be treated as grossly excessive in relation to the amount of remuneration or possible risks associated with non-performance or improper performance of the contract, including the possibility of the occurrence or extent of damage, and, in addition, the disciplinary function of contractual penalties must not lead to the recognition of the inexpediency of contract performance.

In the case at hand, the Chamber upheld the contractor’s allegation as to ordering the contracting authority to amend the provisions of the terms of reference of the contract in terms of the draft contract, and ordered the contracting authority to reduce the maximum limit of contractual penalties to a level not exceeding 30% of the value of the contractor’s gross remuneration.