As of 10 November 2022, the obligation to use indexation clauses in public contracts has been significantly expanded, and the legislator has also confirmed that the amount of remuneration and other contractual obligations established in existing contracts may be revised if the prices of materials or other costs affecting the performance of the contract increased significantly.

In today's market, the need for robust and effective indexation clauses in public contracts is greater than ever. It goes without saying that most of these contracts are of considerable value and have great social significance. As of 2021, there is a normative consensus that indexation clauses belong in contracts for works and services concluded for a period of more than 12 months. Another consequence of the Covid-19 pandemic and Russia's attack on Ukraine is that many contracts now require review clauses and a reassessment of the contractual relationship they create due to changes in circumstances that neither the contractors nor the contracting authorities could have anticipated in the normal course of business.

Changing regulations

In the wake of one economic turbulence after another, and with inflation running rampant (as both consumer and production statistics clearly show), it has become apparent in practice that the available legal remedies are not sufficient to effectively promote efforts to restore economic balance in the relationship between parties to public procurement contracts.

This issue was addressed by the Act of 7 October 2022 on amending certain acts to simplify administrative procedures for citizens and businesses (Journal of Laws, item 2185). As of 10 November 2022, the legal obligation to include indexation clauses in public procurement contracts has been significantly expanded, and as regards amendments to existing contracts, the legislator has expressly confirmed that the amount of remuneration and other contractual obligations stipulated therein may be revised if the prices of materials or other costs affecting the performance of the contract have increased significantly and unexpectedly.

It is worth recalling the important advantages of indexation clauses, in particular:

• restoring the economic equilibrium between the parties to the contract and the equivalence of their respective performances under the contract (to reflect the situation at the time the bid was submitted);
• adjustment of remuneration to realistic levels that reflect the rising cost of performing the contract, as well as changes in currency purchasing power and risk allocation, all of which are beyond the control of the parties;
• mitigating the adverse effects on contracting authorities;
• counteracting flaws in the prices offered by bidders (underestimation, overestimation) due to unstable external circumstances.

Drafting guidelines

Currently, all contracts for works, supplies or services concluded for a period of more than six months should provide for a mechanism for adjusting the amount of remuneration due to the contractor in the event of changes in the prices of materials or the costs of performance of the contract. This does not apply to procurement procedures initiated before 10 November 2022 and still ongoing, which will remain subject to the previously applicable rules that are less stringent with regard to mandatory indexation.

Guidelines for the wording of the indexation clause are provided in the Public Procurement Law (PPL). These are, of course, of a framework nature, which means that the substantive content of each such clause will depend on the specific circumstances it is intended to reflect, including, but not limited to, the nature of the contract and the timeframe of its performance, the market situation specific to the industry concerned, the cost structure of the performance of the contract, and the resources available to the contracting authority. Irrespective of these circumstances, lege artis, all contracts for works, supplies or services concluded for a period of more than six months must provide for the adjustment of remuneration rules.

Not to be overlooked are the possible additional contractual obligations that may, in practice, extend the duration of the contract (such as various types of after-sales services, technical assistance, etc.). The rules apply only to changes in the price of materials or the cost of performing the contract, which may either increase or decrease.

The indexation clause in public procurement contracts should specify in particular:

• the minimum degree of change in material prices or costs;
• the first date of determination of the remuneration (e.g. the date of the opening of the bids or an earlier date, the date of the execution of the contract, etc.);
• the method of adjusting the remuneration:
  • on the basis of an index, such as the Consumer Price Index published by the Polish Statistical Office (GUS);
  • other indicators (e.g. a list of types of materials/costs).
• the frequency of adjustments;
• the method of determining the impact of changes in the prices of materials/costs on the cost of performing the contract;
• a cap on the remuneration adjustment.

Contractors are also required, where appropriate, to reflect indexation clauses in agreements with their subcontractors, as they are legally required to make reasonable adjustments to the remuneration they pay to their subcontractors where indexation is provided for in the prime contract.

Avoiding mistakes

Contracting authorities must exercise due diligence at the tender preparation stage and draft an appropriate indexation clause. For their part, contractors, who must act professionally, should review the draft contract with this clause in mind and, if they see anything that gives them cause for concern, they should respond by requesting that the relevant provisions of the proposed contract be amended. Another important tool for shaping future contracts and, more generally, appropriate standards and practical solutions, is appeals to the National Appeals Chamber (KIO). Contractors have the right to appeal to the KIO against provisions in the draft contract which they consider to be inconsistent with the PPL, including the draft indexation clause.

It should be noted that for an indexation clause to be reasonable, it must be:

• formally consistent with the PPL, i.e. it must contain all the elements required by the PPL, and,
• substantively in accordance with the principles of the PPL, including the principles of equal treatment of contractors, fair competition, transparency, proportionality and effectiveness, which means that the clause should be tailored to the given market situation and the subject matter of the contract and fairly allocate the identified contractual risks.

For example, the indexation clause may be found to be inconsistent with the principle of equal treatment if it unduly favors only one of several permissible methods of contract performance that suits a particular contractor. Other problems encountered in practice include apparent indexation, indexation that is inconsistent with the cost structure of contract performance, and inadequate indexation, i.e., indexation that is too low, applied too late, or subject to an excessively high threshold.

Contractors sometimes also object to the so-called indexation periods. Examples of clauses that may be considered unlawful include those that provide for the first adjustment of remuneration only three years into the term of a long-term contract, or those that limit indexation to a few percent of the contractor's remuneration. In all cases, it is important to keep in mind how the burden of proof is distributed among the parties to the appeal process, and that evidence must be provided to substantiate claims that the annual indexation caps are too low, that the indexes used are incorrect, that the thresholds for indexation are too high, or that indexation needs to occur more frequently than proposed, to name just a few objections.

Claims for contract amendment

Other issues that may arise in practice include the automaticity of the compensation adjustment versus the obligation to execute a confirmation annex, and the demonstration in the adjustment request of the circumstances justifying the change in remuneration. Regardless of the solution adopted (the choice of which may depend on a number of circumstances, such as the indexation method chosen), it must be borne in mind that, if the grounds for indexation set out in the contract arise, the beneficiary will be entitled to claim its remuneration adjustment. Thus, any provision that allows a contracting authority to adjust or not adjust remuneration at its discretion, despite the existence of the circumstances provided for in the adjustment clause, will be considered unfair.

Transitional provisions

The legal protection mechanism discussed here includes specific transitional provisions applicable to contracts already in force on 10 November 2022. These expressly allow certain modifications to be made to public contracts concluded prior to that date, provided — and this is an important point — that these modifications are caused by "significant" changes in the prices of materials or costs of performance of the contract that the contracting authority, acting with due diligence, could not have foreseen. The application of these provisions is not limited by law to contracts concluded under the PPL, but extends to all public contracts.

Existing contracts may be amended, in particular, in order to:

• change the amount of remuneration;
• add an indexation clause to the contract;
• reword the indexation clause (e.g., to the extent that it sets the ceiling for the adjustment of the remuneration);
• change the subject matter of the contract, such as the scope of the services to be provided under the contract, the method of invoicing the services, the deadline for performing the contract, or temporary suspensions of performance.

When a contract is modified, the remuneration may not be adjusted by more than 50 percent of the value of the contract, whether the contract is adjusted directly or indirectly (under an indexation clause), and the adjustment should be agreed upon with the parties equitably sharing the increased cost of performing the contract. The method of adjustment may be chosen in a simplified procedure by reference to the relevant index reflecting changes in material prices or costs (e.g. published by GUS) and must be adequately reflected in existing agreements with subcontractors.

The author’s view

The legal solutions discussed above, which allow certain contracts to be amended, are to be seen as a reiteration and more detailed restatement of the earlier regulations (which remain in force), which allow contracts to be amended whenever this is justified by circumstances that the contracting authority could not have foreseen by exercising due diligence, provided that the amendment does not change the general nature of the contract and that the value of the originally concluded contract does not change by more than 50 percent with each successive amendment. This means that contracts entered into after 10 November 2022, under procedures initiated before that date, shall also enjoy legal protection. Although the new rules on indexation clauses do not apply to this latter category of contracts, the general conditions for amending contractual provisions still apply to them, in particular the aforementioned general rule on unforeseen circumstances.

The use of indexation and revision clauses during the implementation phase of a public procurement contract requires due care on the part of both parties — the contractor and the contracting authority — who must, above all, work together to ensure the proper performance of their contract. Circumstances may also require appropriate monitoring, record keeping, countermeasures and reporting of situations that warrant the application of adjustment mechanisms.

In conclusion, while the legal tools to address new and unforeseen market challenges are already in place, their proper application is still evolving and taking shape. The times we live in require that departures from the principle of nominalism be allowed within reasonable limits. It is worth recalling that already in 2014, the Supreme Court ruled that an indexation clause does not in fact alter a contract, but only serves to promote the original intention of the parties at the time of the conclusion of the contract, by restoring the original economic balance of the parties' respective performances and thereby preventing damage to one of the parties to the contractual relationship (case no. II CSK 773/13).