Smluvní pokuty ve veřejných zakázkách: Jak se bránit nárokům správce konsorcia a nastavit férové smluvní vztahy

Hidden Risks of Consortia in Public Procurement: Who is Really Liable for Errors?

This is where the fundamental problem lies – joint and several liability. This principle means that the contracting authority can demand the fulfillment of the entire obligation, including the payment of 100% of the contractual penalty, from any member of the consortium. It does not matter which member actually caused the error or what their share in the contract was.

Imagine you are part of a three-member consortium for the construction of a highway section. Your share is 20% and you perform it flawlessly. However, the partner responsible for 60% of the project falls into delay. The contracting authority applies a contractual penalty in the tens of millions of CZK. Because your partner is in insolvency, the contracting authority turns directly to you and demands the entire amount. Unfortunately, this scenario is not theoretical, but is based on practice confirmed by the case law of the Supreme Administrative Court, which stated that in the event of non-performance by one member, the entire association can be sanctioned.

In the public procurement environment, this risk is also dramatically higher than in standard commercial relationships. While in the private sector it is possible to commercially negotiate the waiver or reduction of a penalty, a public contracting authority is bound by the duty of due managerial care and the Act on Public Procurement (ZZVZ) under Czech legislation. According to Section 222 of the ZZVZ, waiving a contractual penalty is considered an impermissible material modification of the commitment, which could have influenced the original range of suppliers. Thus, there is no easy solution for consortium members, and they are fully exposed to the consequences of their partners' errors.

Anatomy of a Contractual Penalty: A Tool of Motivation and a Threat

A contractual penalty, defined in Section 2048 of the Civil Code under Czech legislation, serves as an effective tool to reinforce contractual obligations. It fulfills several functions: preventive (motivating proper performance), punitive (punishing breach), and compensatory, where it acts as liquidated damages. Crucially, the entitlement to it arises from the breach of obligation itself, regardless of whether the creditor actually suffered any damage.

For a valid agreement on a contractual penalty, it is essential to precisely define the reinforced obligation and determine the amount of the penalty or at least the method of its calculation.  Although the law does not require a written form, it is absolutely crucial for legal certainty. Unless agreed otherwise in the contract, payment of the contractual penalty does not affect the creditor's claim for damages exceeding the penalty.

As already mentioned, a public contracting authority cannot arbitrarily waive a contractual penalty. It is bound by the duty of due managerial care and laws regulating the management of public property. Furthermore, the case law of the Supreme Administrative Court suggests that even applying a contractual penalty too late can be considered an impermissible advantage to the supplier and a material modification of the commitment.

Your Defense Against Disproportionate Claims: Modern Strategies and Case Law

If you are already facing a claim for payment of a contractual penalty, several defense strategies exist. Classic ones include the objection of indefiniteness of the contractual provision, delay on the part of the contracting authority, or conflict with good morals. However, a fundamental shift in this area was brought about by a landmark judgment of the Grand Chamber of the Supreme Court, Case No. 31 Cdo 2273/2022.

This decision introduced a new, fairer approach to assessing the proportionality of contractual penalties, known as the "three-step test", which gives debtors much broader scope for defense.

The Supreme Court's Three-Step Test in Practice

1. Determining the function of the contractual penalty: The court first examines what the actual purpose of the agreed penalty was. Was it intended to primarily fulfill a preventive or punitive function, or was it meant to compensate for potential damage on a flat-rate basis (compensatory function)?

2. Assessing the (dis)proportionality of the specific claim: The court no longer evaluates only the contractual provision itself, but assesses the proportionality of the specific claim that has arisen. In doing so, it takes into account all circumstances – not only those known at the time of signing the contract, but also those that occurred during and after the breach of obligation. Crucially, what was the actual impact of the breach on the protected interests of the contracting authority.

3. Reduction (moderation) of the contractual penalty: Only if the court finds the claim for the contractual penalty to be disproportionate in the given situation will it proceed to reduce it to a fair amount. The limit for reduction is the amount of damage actually incurred by the contracting authority up to the time of the court's decision.

This new approach of the courts enables an effective defense based on proving that the actual impact of the error (often by another consortium member) on the contracting authority was minimal or non-existent. However, this requires precise legal analysis and evidence, which is precisely the service that our Prague-based legal team at ARROWS daily provides to our clients among the largest Czech companies.

The Key to Protection: A Bulletproof Consortium Agreement

The best remedy is prevention. While joint and several liability towards the contracting authority cannot be excluded, a high-quality consortium agreement (legally correctly a partnership agreement) is the only tool to internally transfer the risk to the actual culprit. Without detailed contractual regulation, a recourse claim against the partner at fault is very difficult to prove.

What Must Not Be Missing in Your Consortium Agreement?

• Lead Partner: Precise definition of the role, powers, and responsibility of the member who will communicate with the contracting authority on behalf of the consortium.

• Division of tasks and responsibility: Detailed and unambiguous division of the public contract performance among individual members.

• Internal liability for penalties: A key provision establishing that the member who causes a breach of obligation leading to a contractual penalty by the contracting authority is obliged to reimburse this penalty to the other members who paid it on their behalf.

• Recourse claim: Contractual anchoring of the right of a member who performed on behalf of another to demand full compensation from the culprit.

• Dispute resolution: A clear mechanism for resolving internal disputes, whether through mediation or by determining the jurisdiction of a court or arbitrator.

In the case of projects with foreign partners, it is also crucial to correctly set the choice of governing law and the forum for dispute resolution. Thanks to our international network ARROWS International, built over ten years, we ensure legal certainty even in complex cross-border projects, which we handle practically on a daily basis. Correctly setting up contractual relationships is the foundation of success, not only in the field of public procurement but also in Corporate Law and M&A. You can find more about this service on our website.

Disputes over penalties often start with an unmanaged contract modification during performance. In the video, we show how to set up modifications to commitments so that they hold up. https://www.youtube.com/watch?v=pUt5X2nozpQ

How ARROWS Ensures Your Safety in Public Procurement Projects

At ARROWS, we understand the complexity of public procurement and the risks associated with participating in a consortium. Our experience from long-term cooperation with more than 150 joint-stock companies and 250 limited liability companies allows us to provide fast and high-quality solutions.

Claims by the Contracting Authority and Their Resolution

Internal Disputes and Recourse Claims within a Consortium

Joint and several liability is a real risk, but it can be defended against and effectively prevented. A proactive legal approach and high-quality contractual documentation are not an expense, but an investment in protecting your profit and reputation.

Do not wait for a problem to arise. Whether you are dealing with an ongoing dispute or preparing a new project, turn to us. Our Czech legal team at ARROWS is ready to assess your situation and propose a tailored solution. Contact us for a non-binding consultation at consultation@arws.cz.