New wave of disputes on infrastructure investments
As in the years 2012-2015, the number of disputes between construction companies and public institutions responsible for the construction or modernization of public infrastructure is growing again. Losses on contracts are so great that many companies abandon the construction site and enter into litigation, and in some cases it results in restructuring / bankruptcy of construction companies.
Current situation
Newspapers report daily on new cases of termination of infrastructure contracts, where either public institutions responsible for modernizing infrastructure in Poland (e.g.: General Directorate for National Roads and Motorways (GDDKiA), PKP Polskie Linie Kolejowe S.A. - PLK) or construction companies terminate contracts (the so-called “escape from the construction site”). For example, in June 2019, the Italian company Toto left the construction site shortly before the opening of the S5 route from Poznań to Wroc?aw. In May, GDDKiA terminated contracts with Rubau, a company which built the S7 expressway near Warsaw and the first section of Via Baltica in the direction of Mazuria Region and Lithuania. At the same time NDI, a company which was to modernize the railway line from Malbork to Gardea, left the construction site.
A similar wave of disputes took place in the years 2012 - 2015 and ended with spectacular restructuring of several of the largest construction companies in Poland. According to stock exchange announcements, construction companies already report losses of several dozen million PLN on infrastructure contracts. For example, Erbud recorded a consolidated net loss of PLN 20.38 million attributable to shareholders of the parent company in 2018 versus a profit of PLN 22.56 million a year earlier. In 2018, Budimex generated a profit that was lower by PLN 160 million than in the previous year and that year was considered one of the most difficult years in a 50-year history of the company. The President of the Management Board of Planeta Sp. z o.o. explains that the company had to contribute PLN 20 million to the construction of the Kalwaria bypass, using the profits generated at other construction sites, which in turn translates into difficulties in starting new, already contracted, investments.
The most common subject matter of disputes
The current disputes focus on:
- demands of contractors to increase remuneration due to the increase in the prices of construction materials - according to the data of Statistics Poland (GUS), the prices of construction materials in the entire 2018, as compared to 2017, increased in 19 product groups: OSB boards increased by 27.9%, wall and chimney construction materials by 13.5%, thermal insulation by 8.6%, as well as an increase in labour prices - it is estimated that in 2018 the increase amounted to approx. 6.5% as compared to 2017,
- claims for payment of remuneration for additional works (not covered by the basic contract) - the above mentioned NDI estimates that PLK owes it almost PLN 12 million for additional works,
- liquidated damages imposed by public entities for delays in construction or for withdrawal from the contract due to the fault of the contractor.
The demand to increase the remuneration is particularly interesting - the Polish law allows to demand in court proceedings an amendment to the terms and conditions of contract performance by specifying a different method of contract performance, a change in the amount of performance or even termination of the contract. The basis is the extraordinary change of relations clause, i.e. the rebus sic stantibus clause in Polish civil law expressed in Article 3571 of the Civil Code. Its application is possible if, due to an extraordinary change in relations (e.g. sudden increase in prices of raw materials, unforeseen changes in law, fundamental and surprising changes in tax or customs rates), the performance of the service is combined with excessive difficulties or threatens one of the parties with a gross loss which the parties did not foresee at the time of concluding the contract.
It is also worth mentioning that there is a possibility introduced a few months ago to renegotiate remuneration by public procurement companies which will implement employee equity plans (PPK). PPK is a voluntary and fully private system of long-term savings for employees, which is supposed to increase the financial security of Poles. Due to the significant costs to which employers introducing this new saving mechanism may be exposed, the legislator has provided for the possibility of changing the remuneration for already contracted investments or even withdrawing from them.
Przemys?aw Wierzbicki
Advocate / Partner / Insolvency Officer